In the FIRE movement (Financial Independence, Retire Early) there are 10 levels generally considered the journey from financial dependence to financial abundance. It can help psychologically to look at achieving financial independence as steps to new levels, one at a time. It is easier to focus on the next level than to see how far away the end goal can be.

The primary goals of the FIRE movement is to become financially self-sustaining without needing a job. Retiring early doesn’t mean doing nothing it means doing whatever you want to do. Almost all people in the FIRE community continue to work on their own business or projects and earn an income on their own terms after leaving their job.

The ten levels of financial independence are as follows.

0. Financial Dependence
1. Financial Solvency
2. Financial Stability
3. Debt Freedom
4. Coasting Financial Independence
5. Financial Security
6. Financial Flexibility
7. Financial Independence
8. Financial Freedom
9. Financial Abundance

Let’s look deeper at every level of the journey.

0. Financial Dependence

This is the level everyone starts out on when they are born. It’s not level one, it’s level zero. It means you must depend on someone or something to pay your bills as your income doesn’t cover your living expenses.

Children still living at home have a financial dependence on their parents to pay the rent or mortgage. People on government programs depend on those monthly payments for bills. Financial dependence mean you don’t earn enough money to pay all of your own bills each month so you need help.

1. Financial Solvency

Level one is where all your bills are paid on time each month and covered by your own income. This is hand to mouth living but your hand earns enough to fully fund your mouth and all other needs. There is zero savings in this first level.

2. Financial Stability

Level two is where you have an emergency fund for a more stable financial life. Your income pays all your monthly bills and you have enough money leftover to save. This is cash savings not investments and the money you would use to fix your car or any household emergency. You have a small buffer between your paycheck and financial emergencies.

3. Debt Freedom

For most people in the FIRE movement debt freedom is being out of debt from every payment except your mortgage. It’s commonly accepted than when you have no credit card debt, no car payments, and no student loans you have achieved level three. The most extreme people count a mortgage as debt and believe it must be paid off for complete freedom.

4. Coasting Financial Independence

Level four is when you achieve freedom from needing your current higher income from a stressful job you no longer enjoy. You either have enough capital in your 401K retirement account, have lowered your monthly bills to an easy level, or have cash flowing assets that give you new choices. It means you have enough money to coast to retirement without needing to continue to grind at your previous level in your career. It gives you financial room for more life choices.

5. Financial Security

Level five is achieved when your monthly cashflow from investments or a side business is enough to replace your paycheck and pay all your bills. This covers just the basics: utilities, housing, transportation, and food. You would still need to be frugal to make it work but this is a huge milestone as you start transitioning away from selling your time for money and can pay your bills with cash flow.

6. Financial Flexibility

Level six is financial independence if you’re flexible with your spending habits due to your irregular cash flow. You are technically independent from your job but your cash flow income doesn’t have a large margin of safety. If the stock market is down or your business is seasonal you may have to spend less money. If the stock market is booming or your business is going through a growth cycle you can spend more. If you’re flexible you can be free, but this can be uncomfortable for many people.

7. Financial Independence

Financial independence is the level where you can easily pay your monthly bills with your investment capital and/or cash flow. This removes the majority of stress from both your personal finances and your need for a career with an employer.

The common definition for financial independence in the FIRE community is that you have 25 times your annual income saved and can withdraw 4% a year for living expenses.

So this means if you earn $50,000 a year you would need to have saved $1.25 million in a retirement account and can withdraw $50,000 a year to live off of, replacing your income. Most believe that the capital should be kept in stock index funds and that the average stock market return of approximately 10% will create a hedge against inflation over time in excess returns.

This makes more sense why the FIRE movement is so obsessed with frugality and investing in index funds. The less they spend the faster they can save and the more they pile into the stock market the faster the compounding starts.

For a faster path to financial independence you can also focus on creating and accumulating cash flowing assets and building your own business to pay your monthly expenses.

8. Financial Freedom

Level 8 freedom is where you have not only enough money to be independent from a job but also enough to spend extra for doing things you have always wanted to do. Financial freedom means you can live where you have always wanted, travel like you want, or buy your dream home. You have enough extra money to spend some and have a great lifestyle.

9. Financial Abundance

Level nine is the wealth stage where you have enough money to likely last you the rest of your life even if you quit working on any new things for income. You have more than you can spend even when you try to indulge.

One way to quantify financial abundance is three times your financial independence number. So if you need $1.25 million for financial independence then financial abundance may be $3.75 million dollars. Of course, this number will be very different for everyone based on their own income and living expenses along with where they live.[1]

How to Retire Early

The path to retiring early is to stay out of debt, minimize your monthly payments, and maximize your income. If you continue to grow your debt and your spending out paces your income you may never be able to retire.

If you want to retire early you must master your self-control in your personal finances and optimize your earning power in your career. The less you spend and the more you make the faster you will climb up through the above levels.

The fast track to an early retirement that few in the FIRE movement discuss is to create your own business or build a portfolio of cash flowing assets. Once your business income or your cash flow exceeds your monthly bills you are financially independent from a job and can then double down on the effort in your business and cash flow building.

Whatever path you choose it requires being a good manager of your own earnings power and capital. You want to convert your earned income into capital, assets, and cash flow and move from the employee quadrant to the investor and busines owner quadrant. This is the way.

10 Levels of Financial Independence And Early Retirement
Image Created by Holly Burns