especially when we're just getting started on our road to financial independence.

I and many others like me in the financially independent, retired early community have

found it helpful to break down the goal of becoming financially independent into smaller

and more manageable levels of financial independence.

Not only because it makes it easier for us to track our progress, which in turns helps

us to stay motivated throughout the process, but also because it helps us get over that

initial hurdle of starting to chip away at this mountain of a task.

In today's video, I'm going to take you through what I consider to be the 10 levels

of financial independence as well as give an example on how to go from the first level

to the top level in your lifetime.

Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about

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Now obviously these ideas of the levels of financial independence are not solely my own

nor are they very new as there are many articles and blog posts that have covered this topic

already and have done so for many years.

So consider this more of a summary of many of the ideas expressed in those articles and

if you want to learn more about the topic feel free to check out some of the articles

for yourself.

I've left some links in the description.

With that out of the way, let's get started.

Okay so real quick the 10 levels of financial Independence are Level 0 Financial dependence,

level 1 Financial solvency, level 2 Financial stability, level 3 debt Freedom, level four

coasting Financial Independence (also sometimes known as freedom from employer), level 5 Financial

Security, level six Financial flexibility, level 7 Financial independence, level eight

Financial Freedom, and finally level 9 Financial abundance.

The levels are usually defined as something like the following:

Level 0 - Financial dependency is when your debt payments and other living expenses are

greater than your own income.

This means that you are in one way or another dependent on someone or something else to

help you pay for your bills or if you happen to be a kid and don't actually have any bills

you need someone else, usually your parents, to pay to put food on the table and keep the

lights on and have a roof over your head.

This is the level that all of us start out on and it is referred to as level 0 because

as a financial dependent you obviously have no Financial Independence.

Level 1 - Financial solvency is when you are current on all your debt payments and you

can meet your financial commitments and your other living expenses without any outside

help.

Level 2 - Financial stability is usually defined as when you have built some sort of emergency

fund in addition to being financially solvent.

Level 3 - Is again debt freedom and it's defined differently depending on who you ask.

For some, it is being completely debt-free, mortgage and everything.

For others, it's being just free of the high-interest debts like credit cards but you still might

have a mortgage or other debts like student loans.

And for some others, it is paying off all of your debts except for the mortgage but

your credit cards and student loans or car loans all that stuff is all paid off.

Level 4 - Coasting Financial Independence also sometimes known as freedom from the employer,

Barista Financial Independence, or Agency in blogs and other mediums.

I personally like the idea of it being coasting Financial Independence so that's what I'm

going to be using in this video but know that some people refer to it by one of those other

titles but the idea is the same.

You have reached the level of coasting Financial Independence when you could, if you wanted

to, step down from a job that may be higher-paying but may also be either less satisfying or

more stressful or both into a new job that is lower paying but more enjoyable or less

stressful or both.

This is because in the early years of your career or just thought most recent years you

have managed to save a very decent sum of money that would be able to provide for the

later years of your retirement after it has grown even if you don't put much more in.

Therefore all you need to do is make enough money to get you to age 60 or 65 or 70 or

whatever your numbers work out to be when that amount of money you've already invested

will be able to fund your lifestyle because it's been given enough time to grow.

So in a sense, you've worked really really hard and been very frugal in the first few

years so that you can coast into your retirement.

I have gone into more detail on the various types of financial Independence in a previous

video which I'll leave Linked In the description if you're interested in learning more.

Level 5 - Financial Security is effectively when your cash flow from wealth such as you

are investments has grown to large enough that it can provide for your annual basic

survival expenses.

Now I say survival expenses because I do differentiate that from living expenses survival expenses

are just the basic things you need to survive Food, Water, Shelter, some form of transportation,

clothing and probably insurance.

This does not include things like Netflix subscriptions or cable bills or things like

that it is purely survival expenses.

So this may not be exactly the ideal spot to retire and I certainly wouldn't want to

retire at this point but it is an important level to keep in mind because it does give

you...

well security.

If you were to get fired today and you were on level 5 you would be okay you could survive

until you found another job.

This is essentially the first level that really gives you I guess that piece of mind even

if the lifestyle should you have chosen to live it may not be the most lavish.

Level 6 - Financial flexibility is similar to Financial Security just one step up.

It is when you have the ability to live off of your current cash flow from your wealth

assuming that you have a flexible spending plan that adjusts for up and downs in the

market.

So if the markets up 20% one year you're able to spend a little bit more but if the market

is down 20% the next year then you don't spend quite as much.

I've seen it defined many different ways so it could vary depending on who you ask,

but the one that I personally like the most is that it is roughly half of your full financial

independence goal, or roughly about 12.5x your current annual expenses if you follow

the 4% rule to get an idea of how much money you need to retire like I've explained in

previous videos.

So it isn't quite Financial Independence yet but it's close.

Level 7 - Is financial Independence and it's usually based on the 4% rule which I have

covered in a previous video.

You can follow the 4% rule when you have saved roughly 25x your annual expenses.

The vast majority of the time this will be enough money to allow you to maintain your

current lifestyle in retirement and as a result, you can be considered financially independent.

And some articles end it right there but I think there are a couple of levels that are

a bit higher than that that are worth considering even if some of us may decide to not ever

try to achieve them because being at level 7 allows them to do what they wanted all along.

So let's talk about those other levels.

Level 8 - Is Financial Freedom which I've often seen defined as the cash flow from your

Investments is greater than financial Independence and a few more life goals.

Life goals, of course, will differ for everybody but this is could be something like taking

a trip or two overseas or moving to a new place you've always wanted to live but haven't

had quite enough money to live there up till now or whatever the case may be for you like

I said it's different for everybody.

Level 9 - Is financial abundance and this is quite simply just that the cash flow from

your Investments is more than you will ever need.

You could spend it if you really wanted to but it would actually take some effort.

And the stuff from level 8 doesn't really cut into it much at all.

So you could up those goals even more and still have more cash flow left over at the

end of the year.

This also probably has a slightly different definition for each person depending on who

you ask, but I like to think of it as roughly 3x your financial freedom number because this

would allow you to experience a horrible bear market where your investments go down by 50%

and still has 1.5x the amount that you would need to maintain the lifestyle you lead when

you reach level 8.

To me, that means that it is likely more than you will ever need, but again that one is

strictly my own opinion on the matter.

So those are the 10 levels of financial Independence, now let's walk through a hypothetical example

of how someone could go from Level 0 to being financially independent in a single lifetime.

John and Jane are recently married couple each making $20 an hour at age 23 or $83,200

a year between them assuming no overtime.

They manage this because they are not only good hard-working people but got great grades

in school and we're selective about the job that they decided to pursue.

Obviously just like everyone else they would have started off as Financial dependents and

as they were going through college they would have been building up student loans that they

would not have had the money to pay off (assuming of course that they didn't earn enough money

while in school to keep up with the rising debt).

In all they have credit card debt, two car payments and the student loans which have

balances of $5,000, $35,000, and $60,000 respectively, but since they got their jobs they are no

longer financially dependent and their incomes have allowed them to become current on all

their debt payments without the help of others.

In addition to the regular monthly debt payments, their annual expenses are $48,000 a year.

So they are currently in level one Financial solvency and trying to figure out a way to

move to level 2 Financial stability.

In order to do that they need to figure out a way to build up an emergency fund.

Now if they're following the 10 levels system to a T then they would look to build a 3 to

6-month emergency fund of their survival expenses.

However, this is not the only way to approach it say if you were to follow Dave Ramsey 7

baby steps you would start off with just a $1,000 starter emergency fund and then get

right onto attacking your debts.

And other Financial systems and plans may have you approached it an entirely different

way.

Either way is perfectly fine because the 10 levels system is not meant to be a financial

formula per say it's more there to give us some sort of guidepost so that we can better

track our progress towards achieving Financial Independence.

But for the purposes of this video, I am going to assume that they follow the 10 levels in

order so we are going to be building up a full emergency fund.

In order to find how much of an emergency fund they will need we will need to know how

much money they need to survive not necessarily on their current level of expenses while they

have jobs but purely on Survival expenses which are basically your four walls of your

financial house or in other words food shelter including utilities Basic clothing and some

form of transportation as well as the insurances that are related to that assuming there are

any.

In this case, I'm going to assume that their survival expenses are right around $3,000

a month.

Which means that in order to get a 3-month emergency fund they would need $9,000 in order

to get a six-month emergency fund they would need to save $18,000.

Both John and Jane feel that their jobs are pretty darn secure and the market is doing

fairly well so it's not likely at least in the near-term that they would get laid off

because the company has to downsize so they decide together that they are comfortable

with having just a 3-month emergency fund of $9,000.

So with $83,200 a year in income, $48,000 a year and expenses, plus minimum monthly

payments of $100 on the credit card which is 2% of the balance, $550.78 on the car loans,

and $621.83 on the student loans they will have approximately $1,660.72 a month left

over to start building their emergency fund.

However, both John and Jane have been looking into their finances and researching a lot

lately and they become fired up at the possibility of becoming financially independent while

they're still young.

So they want to see if there's a way that they can speed this whole process up.

And as it turns out thankfully there are many.

After taking a look at the options they decide that they're going to work as much overtime

as they possibly can (for the sake of Simplicity I'm going to assume that they manage to work