Whether you’re living to work, drowning in debt, struggling to save, overspending, or existing from paycheck to paycheck, you’re all too familiar with the invisible chains of financial stress. The answer, of course, is financial freedom, but with so many bills and so little money left over at the end of the month, how could anyone get from here to there?
Grant Sabatier — a self-made millionaire and golden child of the FIRE movement — has created a roadmap that he says can bridge the gap between financial servitude and financial independence. There are seven levels, and if Sabatier is right that most Americans are already at the second level, you only have six more rungs to climb.
GOBankingRates asked the experts for the best ways to level up. Check it out.
Step one is to assess and clarify. It’s time to take inventory of where you are financially and develop a clear picture of where you’d like to be. That means checking your credit and revisiting your bank and credit card accounts. You’ll also have to do the unpleasant job of gathering your bills and tabulating your monthly expenses.
You do have to do it, but if you keep up with it after that, you’ll only have to do it once.
“In order to take control of your finances during these changing times, as well as get a hold of your spending and investments, it’s important to create a financial plan,” said Radu Tyrsina, CEO and founder of Windows Report and Reflector Media. “To successfully manage your financial progress you need to be able to track your net worth, spending, and investments in order to get a larger view of where you stand.”
When you clear this level, you’re standing on your own two feet. You’ve moved out of your parents’ house and you’re off any public assistance you’d been relying on to get by.
It’s important to note that self-sufficiency and financial independence are two different things. At level 2, you’ll probably be living paycheck to paycheck, struggling with debt, or both, but you’re no longer dependent. Although it might not feel like it, you’re finally in control of your own destiny.
This level is where you break the cycle of paycheck-to-paycheck living and all the anxiety that comes with it by finally building up some savings.
“Having breathing room right now with inflation at a record high in the past 41 years is imperative,” said Adrienne Taylor-Wells, an accredited financial counselor with Tailored WealthSaver.
If you reach level 4, you’ve made it — you are officially financially stable. That means having six months’ worth of savings in the bank and no toxic debt.
If you’re still living one paycheck away from disaster, saving six months’ worth of expenses might feel like an impossible hill to climb. The keys are consistency and patience.
“Automate your savings so that 10-20% of everything you earn is automatically saved and invested,” said entrepreneur, author and financial advisor David Delisle, who wrote The Golden Quest to get kids interested in money. “This way you never see the money and don’t even miss it. The habit is automatic.”
Once you’ve established a healthy emergency fund, you’ll divert some of your income to investments instead of savings. It works the same way — by doing it slowly, steadily and automatically, a little will eventually become a lot.
Over time you’ll reach level five. That’s when you have at least two years’ worth of expenses banked, which gives you the flexibility to take a year off of work if you choose to travel, spend more time with your family or finally write that novel.
For Kris Fothergill, CPA and founder of the Diagno accounting firm, flexibility meant buying a yacht and running his business from the sea. It’s a dream worth working toward.
“Living on a boat has provided our family with many unforgettable memories,” said Fothergill. “We have been blessed to surf world-class waves, visit remote villages that are often unheard of, frolic in crystal clear waters and explore some of the biggest cities in the world, all from our humble floating home.”
This is the step where you get to quit your very last job and live off the income that your investments generate, maybe from stock dividends or rental income. If you make it here, you have achieved the holy grail of personal finance — financial independence.
Real estate investor Brian Davis, founder of Spark Rental, advises people to measure their progress to financial independence by tracking their FI ratio.
“Your financial independence (FI) ratio is the percentage of your living expenses that you can cover with passive income from investments,” said Davis. “For example, if your monthly living expenses come to $4,000, and you have $1,000 in average passive income each month, you have an FI ratio of 25%. When you reach 100%, you’ve reached financial independence. You can quit your job and retire if you want. It’s the one financial goal that every adult shares, but it also serves as a good measuring tool for financial benchmarks.”
This one’s simple — you’re rich. You can now eat at high-end restaurants without looking at the right side of the menu and jet-set around the world on a moment’s notice. You’re officially in the 1%. Enjoy it — and reach down to help the lower 99 whenever you can.
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