If you want to quit your job because you hate it or because you want to pursue your dream than you want financial freedom. Financial freedom is the freedom to do whatever you want. In this article I explain in more detail the concept of financial freedom and the levels of financial independence you can acquire.
Levels of Independence
In short, there are 10 levels of financial independence ranging from being dependent on others to being dependent on absolutely nothing. As you go through life you can decide to level up or stay where you are. Nevertheless, you need to know what is possible in order to make an informed decision.
Everyone in this world starts at level 0 as being Dependent. As a child you have expenses (food, clothing, healthcare, education) and are dependent on others (often your parents or caretaker) to pay for those expenses. At this level you are not independent at all, hence you are at level 0. Poor people or people who live of the money they get from their parents or the government are also on this level. Some people even stay at this level for the majority of their lives. In some countries, once you retire you receive a pension from the government which means you are also still dependent. If the government cuts government pension, because of changing governments or economic recessions, you can fall below the poverty line. It is always better not to be financially dependent on others so try to reach the higher levels at all times. Once you start earning an income that allows you to pay for all of your own expenses (income=expenses) you have achieved level 1 and are Financially Solvent. It doesn’t matter where your income comes from: earned income (student job/adult job), profit from your business/side hustles, interest, royalties, dividend, rental income or capital gains. They all count as income. Most people become Financially Solvent once they start job and generate earned income. However, in some countries even when you have a job it is difficult to become financially solvent. Being Financially Solvent means you live pay-check to pay-check and it can be as struggle to make ends meet at the end of each month. Anything can push you right back to level 0 or even into poverty. However, you did just start to mean something and life and you can work towards getting to a better life.
The next level is a bit more tricky, you now have to either permanently decrease your expenses or permanantly increase your income in order to start saving money. Once you regularly save money you have achieved level 2, Financial Stability. This can be achieved by most people in this world by working hard, keeping a budget and making reasonable financial choices. The next level is something the majority of people struggle with. It requires you to use the savings from level 2 to pay off any and all debt you have. This means student loans, car loans and credit card balances but also the mortgage on your house. Once you are free from debt or your assets are larger than your debt (so you can pay it off in one go if you want to) you achieve level 3, Debt Freedom.
This is were things start to get interesting. You are no longer a slave to regular payments which immediately gives you some extra breathing space as your expenses decrease. You no longer have to pay back loans and you have no interest costs anymore. However, this is only the start of reaching financial freedom. The next stage you want to achieve is some form of independence from earned income. Freedom means to be able to go when and where you want to and as long as you are dependent on your earned income you are dependent on your employer. Your employer decides how much free days off you get and when you get to take it, you are still restricted in your movements. This means you need to start focussing on passive income, or the income from interest, dividend, rent, royalties or capital gains. This is income that will generate money on its own over time without you having to put in work. Of course you can already start these streams of income at level 1. In order to reach Coasting Financial Independence you need to generate enough passive income in order for you to be free from your employer. That means you can still reach retirement with a lower salary or a different employer. It means you have the freedom to give up a job you hate or change jobs to something closer to home so you have more free time.
Now we can start working to the lightest for of financial independence, level 5 or Financial Security. At this level your passive income covers your basic needs. This means it pays for the roof over your head and related expenses, the food on the table, the clothes you wear, healthcare expenses and any insurance you need by law. If absolutely necessary, you can quit your job temporarily and survive until retirement although you will have absolutely no luxury and you will need a job again later. Financial Security is a level you decide yourself. What can you absolutely not live without. For some people that includes internet for some it doesn’t, this all really depends on you. It is also only temporary, during an economic crisis it is possible to get pushed back a level if you continue living off your passive income. Once your cash flow increases to cover your survival expenses even in times of economic crises you have reached Financial Flexibility and level 6. After your passive income covers all your regular expenses at all times, you have reached Financial Independence and level 7. You can now quit your job, retire early and do whatever the hell you want to as long as you keep your expenses the same.
It doesn’t end here. Financial Independence is already something most people in this world will never reach but there are 2 more levels above this which you can achieve. Most people don’t want to just quit working but also want to pursue their dream. For example, I want to start my own restaurant and would like to help people with financial advice. For my restaurant I need money as well. If I spend the money from my retirement investment fund I am no longer retired if my restaurant doesn’t generate income. Perhaps you want to live in a castle or travel the world, you will also need additional money for that. This is the next level. If you are able to generate enough passive income to cover your financial independence and any life goals you have you have reached true Financial Freedom and level 8. Even at this level, you still cannot do everything you ever wanted just the life goals you decided beforehand. You cannot save your friends and family when they get in trouble financially or buy a house for your children (unless that was a life goal). The Forbes 500 list include people who have more money than they will ever need. These people have reached the last and final level: Financial Abundance. This is the ultimate level of freedom in which you have more money than you will every be able to spend reasonably. There will be very few people that can stand in your way when you reach financial abundance, you have achieved absolute freedom. Although it is not always admitted, money rules the world and it can buy you out of a lot of difficult situation. Money also buys you power, it buys you influence which you can use to influence the world around you. This can create a lasting impact on the world for the better or for the worse. Everyone starts at level 0, it is up to you to decide how hard you are willing to work and how far you want to go. Good luck!