Here are the steps to Financial Independence. There are only five steps to get to the summit.
If saving money is wrong, I don’t want to be right! -William Shatner
In this category you can not make enough money to sustain yourself or your family. In this case you would need assistance to cover your basic necessities. This assistance could come from other family members or the government. Many people can find themselves in this position and lead normal lives. Nearly 21% of Americans are in this category according to the Census Bureau.
In this category you are living paycheck to paycheck. Many people feel they do not live Pay check to paycheck, my self included when I was. I define pay check to paycheck as someone who does not have three months of expenses saved in case you were temporarily injured and couldn’t work. You are paying all your bills and keeping up with payments, but there is no financial growth happening.
In this category you can take on a true emergency. You have three months of expenses saved up in case something major happens. As well as having all your consumer debts paid off, i.e. credit cards, auto loans, personal loans, and lines of credit. The only debt this group still holds is a mortgage.
In this category you have your three months emergency fund saved in a bank account. In addition you have one years of your life style expenditure saved in some form of liquid assets, i.e. stocks, bonds, mutual funds, or cash. As for life style expenditures I define it as by everything you would usually spend in a year to live at your current standard of living, i.e. vacations, car maintenance, putting money in kids college fund, everything you normally spend to live the life you live. When you’ve reached this level you have options in your life. But you still have to go to a normal 9 to 5 job in order to earn a living.
At Financial Independence you have mastered all the levels before this one, but now you have an income source that allows you to work on your own terms and covers all your lifestyle needs. I’m talking of having cash flow from a “passive” income source. Passive in the since that you do not have to be at the physical place of work everyday 9 to 5 in order to make money. This gives you true freedom to travel and work when and where you want. This type of “passive” income source would be rental properties, online businesses, consulting, real estate agent, anything that does not hold you down to one central location.
These are the progressions to financial independence. There are only five steps and it is not difficult to achieve if you can pinpoint how to make it to the next level. The key to reaching financial independence sooner is by keeping your expenses low. One way to keep your expenses low, with out sacrificing your standard of living, is by getting rid of all your debt payments. The average car payment in America is $479 per month according to Bank Rate. This would allow you to save $5,748 per year, bringing you that much closer to financial independence.
I want your thoughts. Do you believe this is a reasonable way to describe financial independence? Do you think I’ve covered all the bases? I would love to hear you thoughts, start the conversation below.