The 6 Little-Known Levels of FI Revealed
Table of Contents
There are 6 little known levels of financial independence. In the FI world most people talk about FI, which stands for financial independence. What isn’t well understood is a way to measure different levels of Financial independence.
Why this is useful?
Having a separation and distinction for each level of FI is useful because it can gamify the process of building towards FI.
This builds in intrinsic rewards to progress to each new level. Having intrinsic awards built into the FI ladder makes it more likely that people will continue along the journey as they will be spurred on by each little success along the way.
The 6 levels of FI are:
Level 1 – Financial Desperation
Level 2 – Financial Dependence
Level 3 – Financial Security
Level 4 – Financial Independence
Level 5 – Financial Freedom
Level 6 – Financial Legacy
Below is an outline of what each level means in practical terms and how to reach this level.
After you know this you will be in a better position to decide which level feels right for you to set as a target for your retirement.
That is do you want to be financially desperate, financially dependent, financially secure, financially independent, financially free, or leave a financial legacy.
Here is a breakdown of each level.
Level 1 - Financial Desperation
This is a place where you don’t want to be, basically it equates to emotional, physical, mental and financial bankruptcy.
The path to bankruptcy starts from a scarcity mindset and heart set. If in your mind and heart you believe that you cannot ever reach financial freedom then you are lost.
The sad thing is that so many people in our world today fall prey to this mindset and heart set which permeates our modern world.
The crazy thing, is that the opportunities and gifts available to each of us today to create and realise the destiny we want are enormous.
We live in an age of unprecedented information, abundance, freedom and opportunity. And yet so many people are still unhappy and not wealthy.
So what does it look like:
People who are financially desperate do not own a house, are not paying down a house, i.e. they rent a house commercially or are living in social housing.
They are on social welfare because they do not have a job. They are in ill-health and they have broken relationships.
Growing old for these people is has a very bleak outlook as they will need to rely entirely on the community, public services and social welfare to survive.
People who end up financially desperate, sadly really only landed there because they never learned the skills of gratitude.
You never get beyond scarcity, you need to start beyond it.
We need to redirect our focus away from what is missing to what we already have, from this position of strength, gratitude and abundance we can attract more good things and start building
Level 2 - Financial Dependence
Financial dependence means you are not destitute but you are likely in debt and/or have some negative habits or beliefs around money.
Here are some signs that you may have a financial dependency issue:
- You are in debt and don;t know how to get out of it.
- You feel resentment or anger because the money you receive seems to come with strings attached, but you’re too scared of being cut off to say anything.
- You have never supported yourself on your own.
- You lack even the most basic financial know-how, such as how to balance a chequebook or read a bank statement.
- You lack self-confidence and ambition and have little sense of purpose in your life.
- You have no idea what your income level, net worth or cash flow is.
When you are financially dependent you may have enough money coming in, but most of that goes to paying off the debt, incurring more debt, and/or you are not the source of the income or the manager of the income.
This position is unsustainable over a long term. For example hat happens if you lose a job, or this set up is no longer available to you, for example through death, or divorce.
For these reasons you are in a dangerous position.
The other problem is that you may lose your sense of self-worth and fulfillment.
If you are financially dependent or know someone who is then the best approach is to see a financial counselor and talk to them about how you can become less financially dependent and learn how to build your financial literacy and independence.
If you are financially indebted you can get out of debt. You don’t need to live in Debt. If you know the strategies to get out of debt it is a matter of applying those strategies.
Plenty of people have got out of debt following similar strategies to my Debt Destroyer method.
This is the method I used to get out of nearly $40,000 of debt. To learn how to get out of debt in 5 simple steps go to my debt destroyer method post below.
Related Post: Debt Destroyer Method – Debt Free in 5 Simpler Steps
Level 3 - Financial Security
Financial security refers to the peace of mind you feel when you aren’t worried about your income being enough to cover your expenses. It also means that you have enough money saved to cover emergencies.
That is you have an emergency fund. An emergency fund is 3-6 months of expenses stashed aside in a quick access account which you can immediately if an emergency was to occur.
Beyond the emergency fund when you are financially secure you never have to work to pay for any of these items ever again, because your retirement pool covers then, they are:
- Home Mortgage (if you still have one)
- Utilities (Gas, Electricity, Water, Phone, Internet)
- Basic Transportation (Car expenses, some Uber and Bus)
- Basic Insurance Costs (House, Car, Medical, Life, TBD, Death)
A 2014 Study conducted by Princeton University and University of Chicago found that 40% of Americans could not come up with $2,000 if they needed to. Crazy!
Look, not having an emergency fund is the equivalent of driving drunk down the highway at night, not wearing a seat belt!
The first step of financial security is to be out of debt, that is to have the house paid off and no other debts.
The second part of financial security is to have enough money to pay for electricity, gas, water, food, transportation, phone, internet and some household items per year.
This is the base level of financial health in the positive zone.
Level 4 - Financial Independence
Financial Independence is having no debts, home paid off, and a retirement nest egg that is equivalent to 25 x your expenses rate of the year that you retired.
That is you are able to live at the exact same lifestyle you are living at today.
In terms of items it would include everything in the Financial Security list as well as:
- Monthly Clothing Costs
- Monthly Dining and Entertainment Costs
- Monthly Small Indulgence and Luxury Costs
So for most people that is a level with slightly more room for discretionary expenditure than the financial independence level.
So on top of the basics covered by financial security you would have enough to eat out once per week, and go on 2 short trips per month and 3-4 longer vacations per year, e.g. 2-3 cruises plus 1 x 6 week holiday overseas each year.
Level 5 - Financial Freedom
At this level you are made.
You live in your dream house, debt free. You have multiple passive income sources plus your retirement nest egg is equivalent to 25 x your annual expenses at the time of retirement.
You are able to pay for your all your utilities, (electricity, water and gas), food, transport, house maintenance, household goods, insurances, registration, medical, holidays etc.
You have have enough for luxury expenditure, gifts on others and more extravagant holidays whenever you want to. At this level you are able to leave a decent sum of money for your children and possibly your grandchildren as well.
Further to this you are able to afford some more grandiose luxuries such as:
- Monthly donation to charity of your choice
- Fishing boat repayments (e.g. $50,000 at 5% financing)
- Ski condo repayments ($800,000 mortgage financed at 3%)
Level 6 - Financial Legacy
The 6th level of financial health is Financial Legacy.
Most people never get to this level. At this level you are an outlier. You have left a significant sum of money in charity or you have even set up your own fund which grows every year and pays out interest each year in our name.
You have left a legacy to be remembered by.
You are likely etched in History as a major contributor to society through all the people you employed over your life and the lives of families that you changed with your positive business and charitable contributions.