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  • Long-term financial goals can sometimes seem so big that they feel almost unattainable

  • 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

  • Investing, debt, retirement, and many other general financial education videos because

  • the school's aren't going to do it for us.

  • So if any of those topics sound interesting to you or if you want to learn how to better

  • handle your money and have more financial freedom be sure to hit that subscribe button

  • and the bell next to my name to be notified every time I upload a video.

  • And if you want to further support the growth of this channel you can check out some of

  • the links I've left down in the description below which includes a 30-day free trial of

  • Audible and 2 free audiobooks of your choice as well as a list of some books on money I'd

  • recommend checking out, or you can share this video with a friend, and leave a comment below

  • letting me know what topics you'd like me to cover in future videos.

  • 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

  • on average 5 hours per week of overtime which will increase their monthly income by about

  • $1,300 a month, meaning that instead of $1,660 a month they will have $2,960 a month left

  • over) and they're going to sell both of their cars and buy some nice used cars with cash

  • to help knock down some of that initial debt.

  • After putting out a couple of ads online they managed to find buyers for each of their cars

  • that is willing to give them $15,000.

  • So they take that $30,000 and use $5,000 of it to pay off the credit card balance and

  • another $10,000 to buy a couple of used cars from someone that they know takes good care

  • of their Vehicles whether that be a family friend or just a mechanic that they Trust.

  • The remaining $15,000 is thrown at their car loans.

  • This means that the credit card loan is fully paid off and therefore the hundred-dollar

  • minimum payment is no longer needed.

  • So John and Jane start throwing $3,060 per month into their emergency fund and get it

  • fully funded in 3 months with a little bit left over at the end of the third month to

  • throw out their car loan.

  • Over the course of those first three months, they managed to bring the car loans balances

  • down to $18,423 thanks in large part to the $15,000 that they threw at it in the first

  • month after selling the cars and also making the minimum payments in the first three months.

  • Now that their emergency fund is fully funded however they're able to throw that $3,060

  • a month in addition to the $550 a month minimum payment at the car loan and get it paid off

  • in 6 months flat.

  • So a mere nine months into their Journey John and Jane not only have a fully funded emergency

  • fund but they also have paid off both of their car loans.

  • Now there are just the student loans to tackle.

  • And thanks to the fact that they've been making minimum payments on them for 9 months and

  • the fact that they had a little over $3,000 at the end of the ninth month after paying

  • off their car loans their student loans now have a balance of $53,263.

  • John and Jane follow the same pattern that they did with the car loans throwing the $3,600+

  • which is what they now have left over at the end of every month because they no longer

  • had a $550 car payment to make and they managed to get their student loans paid off in full

  • in 13 months.

  • So John and Jane have managed to become debt free and have a fully funded emergency fund

  • in 22 months.

  • They have now reached level three and because of that they now have over $4,200 a month

  • left over to start investing.

  • This brings us to level four coasting Financial Independence.

  • Let's assume that John and Jane want to retire by the age of 65.

  • That means that whatever they put in now needs to be enough to grow to a point where it can

  • support their lifestyle in retirement by the time they're 65.

  • If we assume a rate of return on an average in the market of about 10% before inflation

  • and an inflation rate of about 3% per year on average then we can get a rough estimate

  • of how much John and Jane need to put away in order to achieve a state of coasting Financial

  • Independence.

  • In this case, since they're 24 about to be 25 they will have somewhere in the neighborhood

  • of 39 or 40 years to let the money grow before needing to take any of it out.

  • If their expenses were $48,000 a year at age 23 then 42 years later if we assume a 3% rate

  • of inflation they would need a tad bit over $166,000 each year to live on.

  • Again assuming we follow the 4% rule to figure out how much they need once they fully retire

  • to be financially independent that means that they would have to have at least $4.15 million

  • invested in the market by the time they turn 65.

  • In their case, they would need about $110,000 saved up give or take in order to achieve

  • coasting Financial Independence and because they're able to save about $4,233 a month

  • now that they're debt free, they're able to hit that goal in 2 years flat.

  • Meaning that in theory, they would be able to step down from their jobs to a more rewarding

  • less stressful but probably lower-paying job just 3 years and 10 months into their financial

  • Journey.

  • That is incredible!

  • But like I said coasting Financial Independence wasn't their end goal.

  • They wanted to be fully Financial Independent so they keep working and investing for now.

  • The next level is level 5 Financial Security which is achieved when your cash flow from

  • your Investments is greater than your annual survival expenses which remember is $3,000

  • a month or $36,000 a year in John and James case.

  • Because they are debt-free, are making good money at their jobs, and being intentional

  • with their finances they Achieve Financial Security in a little over 4 years with over

  • $367,000 in their portfolio.

  • It is been a mere 87 months or 7 years and 3 months since they began their financial

  • Journey.

  • John and Jane are 30 years old and they are able to get by on their Investments alone.

  • In theory, they could retire now, it wouldn't be the most glamorous retirement and it wasn't

  • their goal but it is an option they have.

  • They don't have to worry about losing their jobs anymore because even if both of them

  • lost their jobs today they would be able to make it long enough to either find a new job

  • or some other source of income.

  • This is really the first level where you start to get that piece of mind when it comes to

  • money at least in my opinion.

  • Next is financial flexibility which as I mentioned earlier in the video has many definitions

  • depending on who you ask but for the purposes of this video, I'm assuming that it is roughly

  • 12.5x your current annual expenses which for John and Jane would be roughly $600,000 or

  • about $855,000 if you account for inflation.

  • This means that they would Achieve Financial flexibility 9 years and 8 months into their

  • Journey not accounting for inflation or about 11 years and 9 months if we do account for

  • inflation.

  • John and Jane continue investing through all the highs and lows of the markets until they

  • reach Financial Independence exactly 14 years into their financial Journey assuming we don't

  • account for inflation or 18 years and 3 months if we do.

  • So you might be wondering why did I split up the accounting for inflation time frames

  • and the not accounting for inflation time frames should we always be accounting for

  • inflation?

  • Well technically yes but the reason I split them up is because in my experience taking

  • this journey myself as well as seeing others take it, this journey changes how you view

  • a lot of things and more often than not those changes lead to you valuing things such as

  • freedom of mobility and location and freedom of time to be able to spend with the people

  • you love more and valuing more material things that cost possibly a lot of money less and

  • less.

  • That's not to say that everybody becomes minimalist going through this journey, I'm not saying

  • that at all but I have seen a lot of people who have gone through this journey become

  • closer to minimalist than they were when they started the journey as they find out more

  • and more things that they used to buy just don't provide enough value or happiness

  • for them to be worth the purchase.

  • They find better uses for their money and time and as a result, they generally tend

  • to spend less.

  • Which means that even though inflation is technically increasing your expenses by making

  • every dollar less and less valuable over time, if you're also decreasing your expenses because

  • what you value is changing it may even out or in some cases, you may even see your regular

  • expenses going down year-over-year as you continue through this journey.

  • So that's why I split them up.

  • And, before I go, I do want to mention that based on what I've seen on various articles

  • and forums some people really like to have even more goals to chase as they go through

  • this journey than what I've laid out today in this video so if that's something that

  • would help you feel free to break down these levels even further then I have today this

  • is obviously just the list that I used and what worked for me, but you could take it

  • even further.

  • For example, Debt Freedom could be broken down into three separate stages: One where

  • you are free from all high-interest debt, a second where you are free from all debts

  • except for the house (if you have one), and a third where you are totally debt-free.

  • You could tackle the coasting Financial Independence level in a similar way breaking it down into

  • two stages: One where are you have invested enough to survive in retirement and a second

  • where you have invested enough in order to maintain your current lifestyle, adjusting

  • for inflation of course, in retirement.

  • And the financial independence level could also be broken down into three stages: Stage

  • one would be where you are at a survivable level of financial Independence, stage 2 would

  • be where you have achieved leanfire status, and stage 3 would be where you have achieved

  • full Financial Independence on your current lifestyle assuming that it is above the leanfire

  • level.

  • So what do you guys think of this 10 levels system of tracking our progress to financial

  • Independence?

  • Do any of you use a similar system to track your progress?

  • If so, what is it and what level, step, or stage are you guys currently on?

  • Let me know in the comments section below.

  • But that'll do it for me today once again if you enjoyed this video be sure to subscribe

  • and hit that Bell next to my name so that you'll be notified of all my future uploads.

  • I generally upload every single Monday, and if you have a friend that would be interested

  • in this kind of content be sure to share it with them and let's really get this information

  • out there and start our own Financial revolution.

Long-term financial goals can sometimes seem so big that they feel almost unattainable

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10個層次的財務獨立和提前退休|如何提前退休? (10 Levels of Financial Independence And Early Retirement | How to Retire Early)

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    林宜悉 發佈於 2021 年 01 月 14 日
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