Your Ultimate Guide to The 7 Levels of Financial Freedom, from a Self-Made Millionaire.
The Millennial Money Man believes that money is infinite, but time is not.
Grant Sabatier, a self-made millionaire, and creator of The Millennial Money Man believes that money is infinite, but time is not.
Instead of viewing money as a way to buy things, Grant believes money gives you choices about how you can live your life. And as a prominent member of the FIRE (financial independence retire early) community, Grant is on a mission to help millennials achieve financial freedom in their lives. His view is simple: master your money to master your time.
Here are Grant’s 7 Levels of Financial Freedom:
1. Clarity: you figure out where you are financially and where you want to go.
Level 1 on the path to financial freedom is clarity.
Clarity involves gaining awareness of your current financial situation and where you want to go from here. One of the best ways to achieve clarity is this simple two-step process:
Calculate your net worth.
Define your ‘why’ of FI (financial independence.)
To calculate your net worth, I recommend using a free net worth tracker like Personal Capital (this is what I use) or Mint. These programs allow you to link your financial accounts, including bank accounts, investment accounts, credit cards, auto, mortgage, and student loans. This should give you a high-level view of your current financial situation.
From there, define your ‘why’ of FI.
Your ‘why’ of FI is the reason you want financial independence. For me, it’s all about spending as much time with my wife and daughter as possible. For others, it might be traveling the world for months at a time. Whatever the case, take some time to think about it and write out your why.
This will be your guiding light on your FI journey — a beacon of where you want to go.
2. Self-Sufficiency: you’ve moved out of your mom and dad’s and can cover your expenses.
Level 2 is achieving self-sufficiency, even if you’re living paycheck-to-paycheck.
CNBC writes that most working Americans (roughly 50%) are on Level 2, living paycheck-to-paycheck. And Grant says many people on Level 2 take out loans or carry credit card balances to make ends meet.
There are two levers you can focus on to move beyond Level 2.
Increase your income.
Decrease your expenses.
First, focus your efforts on increasing your income. This may mean making some investments in yourself through professional certifications or additional schooling. While it may cost you time and money in the short run, the payoffs can be immense if you receive a raise or land a higher-paying job. In addition, many in the FIRE community choose to take on a side hustle or pursue an entrepreneurial venture to increase their income.
Remember, there’s no limit to increasing your income, so focus your efforts there first.
Next, consider your expenses to identify any opportunities to cut back. Unlike your income, there’s a limit to how much you can reduce your expenses, so the impact might be limited. But most people will be able to identify at least a few ways to save money each month.
Start with the big 3: housing, transportation, and food.
The big 3 make up almost 2/3rds of the average American’s budget, so they’re a great place to start. Many people in the FIRE community have identified ways to reduce their housing expenses through house hacks — either renting out a portion of their home, living with roommates, or moving to an LCOL area. Others have cut back on transportation, trading the new car for a 5 to 10-year-old used Honda or Toyota or deciding to forego car ownership altogether. And lastly, many have chosen to meal prep and buy in bulk to cut their food costs dramatically.
These are all just options — you choose what works for you.
Once you’ve identified any big opportunities to reduce your expenses, you can begin to trim at the edges if you like. Here are three few easy ways to save money each month:
Switch to a budget cell phone provider like Mint Mobile*
Shop around for lower insurance rates through PolicyGenius*
Take stock of your monthly subscriptions and cut back on any you aren’t using.
When cutting expenses, it’s essential to avoid cutting back on the things that bring you joy.
So if you love dining out, keep plenty of money in the restaurant category of your budget. But don’t be afraid to cut back mercilessly on the things that don’t matter to you. By aligning your spending with your values, you will get more satisfaction from each dollar spent.
3. Breathing Room: You’re saving some money and no longer living paycheck-to-paycheck.
At Level 3, you’ve created some breathing room.
You’re no longer living paycheck-to-paycheck and can begin saving some money. This is where you can start to feel some growing pains. You’ll be faced with questions like:
What accounts and investments should I be using?
Should I pay off debt or invest?
How much should I be saving?
First, take a deep breath. You’ve made it this far and are on your way to financial independence. Here are some things to focus on:
Building your emergency fund: 6 months’ worth of living expenses in a liquid, risk-free account.
Getting rid of ‘bad’ debt: consumer debt with high-interest rates (credit cards, payday loans, etc.)
Investing in tax-advantaged accounts using low-cost, diversified investments: 401(k)s, IRAs, Roth accounts, HSAs, and diversified low-cost index funds.
Assuming you’ve built healthy financial habits on your way to Level 3, you should have no problem continuing your financial independence journey.
Remember, good things take time, and this is no different. Depending on your situation, you may be putting in work on Level 3 for a while, and that’s okay. But, once you’ve saved your e-fund and eliminated your bad debt, it’s on to Level 4.
4. Stability: You have no ‘bad’ debt and six months’ worth of expenses for emergencies.
Once you’ve eliminated bad debt and built your emergency fund, you’ve reached Level 4: Stability.
This is where you begin to feel like you’re on level ground and can usually start to make significant leaps in your financial situation. Financial advisors often tell you to wait until you’ve reached this point to start investing — with a fully-funded emergency fund and no high-interest debt. If you’re beginning to invest, consider these three fundamental tenets of investing:
1. The rewards of compounding come to those who wait.
There’s a significant body of work around the power of compound interest, but at its core, here’s what you need to know: it feels like nothing is happening for a long time, then everything happens all at once.
The power of compounding takes time to work on your investment portfolio, so do what you can to stay invested for the long haul. By giving it time, you allow compounding to add up in your favor and improve your financial situation. To illustrate this point, consider that compounding is the primary reason that 99% of Warren Buffet’s wealth came after his 50th birthday and 97% came after his 65th birthday.
Personal finance author Morgan Housel writes:
“Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.
Once you accept that compounding is where the magic happens, and realize how critical time is to compounding, the most important question to answer as an investor is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”
And that’s where diversification comes in.
2. Diversification is key.
Put simply — diversification means having your eggs in different baskets rather than all your eggs in one basket.
As an investor, you can decide between many different types of investments and asset classes and even different investments within an asset class. For example, the US stock market currently has around 4,000 publicly listed companies. Within that 4,000, you’ve got small (small cap), medium (mid-cap), and large (large-cap) companies from different industries, trading at different values relative to their earnings.
If you choose to invest in an S&P 500 Index fund, you’ll get exposure to 500 of the largest and most profitable of those 4,000 companies. But, if you choose to invest in a small-cap fund, you may only get a slice of the smaller, less proven, but higher upside companies. Finally, if you zoom out even further and invest in a total world stock fund like Vanguard’s Total World Index, you’ll get exposure to over 9,500 different companies worldwide.
The point is this: as an investor, it’s wise to spread your risk and avoid over-concentrating your investments.
Many people think that this means they need to hold various assets like gold, real estate, stocks, crypto, and bonds — which is fine. But, you can also achieve the benefits of diversification by holding a variety of stocks and having a globally diversified stock portfolio. Ultimately, do your best to spread out your risk while investing in assets you believe in for the long haul.
3. Habits are everything.
If you want to change your outcomes, start with your habits.
Habits form the basis of our actions, and investing is no different. As an investor, here are some essential habits to consider:
Buy and hold: just like it sounds, buy investments and hold them for the long run.
Dollar-cost-average: automatically invest a set amount every month.
Be wary of financial media: the financial media is designed to grab your attention, and pessimism and fear do that best.
Keep investment fees low: choose investments with low fees because extra fees will eat into your returns over long periods. Low-cost index funds can be a great option.
Increase your contributions over time: Lastly, do your best to increase your contributions over time as you get pay raises. This will add up in your favor.
5. Flexibility: You have at least two years of expenses saved. You could take a year off work.
Once you’ve reached Level 5, flexibility is your superpower.
At this point, you’ve got options. You have at least two years of expenses saved and could comfortably take a year off of work. In addition, you now have a level of freedom and flexibility that most could only dream of.
So it begs the question: what will you do with it?
As a member of the financial independence community, I’ve heard of people taking different paths when they reach flexibility. I’ve heard of people quitting their job to start a business or become a freelancer, and I’ve heard of people continuing at their current job, resting easy with the peace of mind they get from having two years of expenses saved.
The beauty is that you don’t need to make any drastic changes at this point, but you are free to.
In Morgan Housel’s book, The Psychology of Money, he writes about the incremental freedom and flexibility you can have while pursuing financial freedom. He writes:
“A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it.
A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing.
Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.
More still means the ability to take a job with lower pay but flexible hours. Maybe one with a shorter commute. Or being able to deal with a medical emergency without the added burden of worrying about how you’ll pay for it.”
When I achieved flexibility in my finances, I chose to quit my job and downshift my career.
It has been one of the most freeing decisions of my life as I started coasting to financial independence, focusing my efforts on living a well-rounded life while working flexibly. The point is — once you’ve reached this level of financial freedom, you are free to design whatever lifestyle you want.
You can continue aggressively pursuing financial independence or slow down and savor the journey — it’s entirely up to you.
6. Financial Independence: You can live off the income your investments generate.
Once your investment portfolio equals 25 times your annual expenses, you have reached financial independence. For example, if you spend $50,000 annually, you need a nest egg of $1.25 million to be financially independent.
You’re now free to do as you please, without money being the primary motivation. That’s based on the 4% rule, which simply states that you can safely withdraw 4% of your portfolio per year without depleting your assets over a 30-year time horizon (and maybe more.) For some, the 4% rule isn’t conservative enough; for others, it’s too conservative, but it can be a great starting point for many.
You’re now free to do as you please, so what now?
There are many people just like you in the FIRE community that have achieved financial independence. Some choose to continue working, presumably because they like what they do or have nothing else they would like to do. Others decide to quit work and travel, play, read, write, go back to school — you name it, somebody has likely done it.
Here are a few thoughts on financial independence from Morgan Housel in the Psychology of Money:
“The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness — a universal fuel of joy — it’s that people want to control their lives.
The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
I’ve never heard anyone explain it better than that.
Once you reach financial independence, you can wake up every morning and decide how you’ll spend your time. But I will warn you, with great power comes great responsibility. The financial independence community has plenty of stories of people who became so bored or socially isolated by “retirement” that they wished they had slowed down and built more of a life for themselves along the way.
The key is to identify what you would be retiring to, rather than focusing on what you are retiring from. I’ve done some writing on this topic, and for those getting ready to retire, I recommend reading The 3 Habits Every New Retiree Needs to Crush Retirement, No Matter Their Age.
Whether you’re pursuing financial independence or already there, my challenge is this: get clear about the life you’d want to live if money were no longer a concern.
7. Abundant Wealth: Money isn’t a concern. You have more than you’ll ever need.”
Beyond financial independence lies abundant wealth — the point where money is no longer a concern, and you have more than you’ll ever need.
This is where you can shift your financial focus in a couple of different ways.
You can decide to give more to your community, church, or other charitable organizations. You can increase your lifestyle and live however you please. Or you can focus on building a legacy for generations to come. The beauty is that you have the financial resources to do what you want, and money is no longer a concern.
Building a legacy for generations to come.
What if instead of planning for the next 30 years, you were planning for the next 100?
Once you’ve met your financial needs, you can begin looking to the future and setting up a legacy of intentional wealth in your family for generations to come. Some of my favorite work on this subject comes from a book by Courtney Pullen: Intentional Wealth: How Families Build Legacies of Stewardship and Financial Health.
In his book, Pullen explains the phenomenon of shirtsleeves to shirtsleeves in three generations — “that 90% of affluent families lose their wealth by the end of the third generation.”
But Pullen explains that the real tragedy isn’t the loss of wealth — it’s often the loss of the family that goes with it. Pullen offers readers a clear look at how they can avoid this tragedy and create a legacy of stewardship and financial health. Through intentionality, open communication, creating a family identity, and focusing on future generations, you can be well on your way to a strong family legacy.
If you’re looking to plan for the next 100 years instead of the next 30, building a legacy for generations to come, Pullen’s book is a must-read.
And there you have it — the 7 Levels of Financial Freedom from The Millennial Money Man, Grant Sabatier.