Financial Autonomy and the 8 Levels of Financial Freedom – Episode 97

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Financial Autonomy and the 8 Levels of Financial Freedom – Episode 97

Writer David Rae, in a great article in Forbes magazine, identified the disconnect between the early retirement through extreme frugality crowd, and the mainstream of society who want to enjoy life without financial constraints. 

He identified 8 levels of financial freedom. A ladder that we progress along to gain more and more choice and freedom.

Given this aligns so well with our Financial Autonomy mission, I thought they were worthy of exploration.

Level 1 – Not living pay cheque to pay cheque

When the fridge dies, or the car needs $1,500 of work done on it, do you have some money set aside to cover it?

This is what level 1 on the Financial Freedom ladder is. If your solution to something like this would be to slap it on the credit card, then you’ve not yet attained this level yet.

Start building an emergency fund and aim to get at least $5,000 in there. If you’ve got a home loan, this could sit in an offset account. If you’re mortgage free, perhaps you could use an online saver type account. The key is that it’s separate from your normal daily money.

I’d also suggest having a separate Bills account, so that when the insurance renewal or car rego comes in, you’ve got money sitting their ready to cover it.

Level 2 – Enough money to quit your job (for a bit)

Financial Autonomy is all about gaining choice, and the choice of how you go about generating income is perhaps the most important of all the financial choices available.

Now being in a position to quit work entirely is a big ask, but an initial goal should be to grow that emergency fund some more so that you could be out of work for 1-3 months and get by okay.

If you put yourself in that financial position, a whole lot of stress and anxiety is relieved. If work is making you miserable for whatever reason, you have the knowledge that you could always just quit and find something else – you’re not trapped. Incredibly empowering.

Level 3 – Enough to be financially happy and still save

This is the comfortable stage.

You’re living your life, able to afford all the normal things that your friends and neighbours are participating in, and you’re still able to save. You’re not living the movie star lifestyle, but you’re comfortable. You’re happy.

Level 4 – Freedom of time

This is a really key stage when it comes to gaining choice. You’ve got a good amount of money in your emergency account, and you have the cash flow to continue to build on that. What next?

Control over your time.

Whether it’s the ability to get to your dentist appointment without needing to take a day off, hiring a cleaner to come through your home once a fortnight, or attending your son’s award presentation at school assembly, freedom of time is a momentous milestone in your Financial Autonomy journey.

Gaining freedom of time could occur through you working from home 2 days a week, cutting back your working hours, or becoming self-employed.

Level 5 – Enough for a basic retirement

I hope you never find yourself in the position of doing a job that you hate, but for many, that’s just one horrible boss away.

Or early retirement could come about through industry change – if you haven’t contemplated a world where your role is supplanted by a machine, you’re sticking your head in the sand.

This step step up the Financial Freedom ladder is being in a financial position where if you had to retire, you could cover your basic expenses. Again, it’s not a glamorous, jetting around the world retirement, but you wouldn’t starve or be forced to live in a tent.

Level 6 – Enough to retire well

Having ticked the box of being able to afford a basic retirement, the next step up is a more comfortable retirement. This is to maintain your current standard of living – no penny pinching required.

So at level 6 you have the wealth to generate enough income to meet your basic costs and the comforts of life – the annual holiday, Friday night at the local restaurant catching up with friends, attending a concert, or perhaps updating your car every 5 years.

For most of us, Level 6 is the goal.

Level 7 – Enough for a dream retirement

The flight to Europe is long. How much more comfortable would it be if you could fly Business Class? Maybe even First Class.

That’s Level 7 – it’s beyond living well. Level 7 is the dream retirement. It’s having the money to help your kids start their own business, or stay in a great hotel in the middle of New York to soak up all the energy and fun of one of the world’s great cities.

In a financial planning context, thinking about your dream retirement, and working towards that, could be akin to the approach of shooting for the moon – even you if miss you’ll land among the stars.

Level 8 – More money than you can ever spend

And the final rung on the financial freedom ladder is simply having more money than you will ever need. Often there is some luck involved in people who reach this level – they’ve worked at a company like Google or CSL and their shares become worth millions, or perhaps its an inheritance.

Level 8 is not a place most people would plan towards, but it’s a reality that befalls a few. I guess the challenge for those who reach this level is finding motivation and purpose. That’s perhaps why many of the mega rich – Bill Gates or Warren Buffet, turn towards philanthropy as a way to give their financial success purpose.

Well their you have my take on David Rae’s 8 levels of financial freedom. I encourage you to:

  1. Make a realistic assessment of where you currently sit, and then
  2. Develop plans to make progress up the ladder, being careful to define success not by some social norm, but by what is right and meaningful for you.

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