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Levels of Financial Independence

The Levels of Financial Independence

For many years, while on my Journey towards Financial Independence, I assumed that my goal was a specific target. I thought I needed an exact amount of money so that I could draw 4% from my nest egg and live happily ever after. After retiring early in my mid 30’s I learned that this is far from the truth.

Apparently, I missed all the discussion on the various levels of financial independence available on many FIRE message boards… but not anymore!

In this article, I will go over the 10 levels of Financial Independence as spelled out on the ‘Next Level Life,’ YouTube Channel. As the author admits, the levels are largely a summarization of what is available elsewhere. The same is true here and likewise, the levels are highly subjective.

However, in my case, understanding these levels really opened my eyes on how to differentiate between distinct financial goals above and beyond basic financial independence.

The Levels

Here is a listing of the levels and the sections I will cover. There are 10 levels, 1 through 10 and each one has a specific financial impact. Check out the YouTube video for an excellent presentation on the topic and my original inspiration.

Levels of Financial Independence

The 10 Levels of FI YouTube Video

Level 1 – Financial Dependency

In level 1, you are financially dependent. In essence, your expenses are larger than your income. Thus, it is necessary for you to depend on a non-passive income like working or borrowing to survive. Keep in mind, not everyone starts at level 1, but most people do.

Being in level 1 could also means that you rely on some external factor for something you need. In the video, the author gives the example that a child is likely in level 1 since they must rely on their parents for food. As an adult, you could rely on your parents for things like car or medical insurance.

If you find yourself in level 1 that’s okay. Take the knowledge that you are at the beginning of an exciting and rewarding journey as motivation for advancing through the next 9 levels. The quicker you start the quicker you will get to where you want to be!

Level 2 – Financial Solvency

Cash Flow

In this level, you will find yourself having an income that at least matches your expenses. I like to think of this stage as treading water. It is what most people would consider, ‘Living Paycheck to Paycheck.’

According to a press release in LendingClub, 54% of all Americans live paycheck to paycheck. That should be an eye-opening number… most people are at level 2 there entire working lives. This is a dangerous level because it doesn’t take much to have a misstep and end up right back at level 1.

If you are at level 2, in my opinion, you are at a much more critical stage than level 1. It’s like letting go from the side of pool and heading into the deep end to tread water. It’s rewarding to have progressed to be out on your own but also a critical waypoint that needs to be passed as quickly as possible.

Getting out of level 2 is essential for your financial survival… and possibly your actual survival. Chances are there will be decisions you may have to make at this level that affects your safety in a very negative way.

Things like food quality, vehicle maintenance and preventative medical care are things that may take a hit at this level.

Level 3 – Financial Stability

Financial stability is when you are meeting your expenses with your income, and you have a buffer in case things go wrong. Financial experts call this an emergency fund.

Essentially, level 3 is where you are living paycheck to paycheck but have some money set aside to weather some of life’s storms. Ideally, the emergency fund should consist of 6 to 12 months’ worth of expenses. I wrote an article on everything you need to know about emergency funds here.

Having a buffer smooths out the financial ups and downs in life. Having an emergency fund will allow you to make smarter decisions when under stress. For example, when your car breaks down you can go get it fixed immediately (instead of getting a payday loan), and prevent having to miss work (a double whammy!).

Level 4 – Debt Freedom

Level 4 is about being completely free from debt besides a mortgage on your primary home. Being debt free means that you your overall expenses each month is reduced to things that you can afford to pay for in cash.

All previous credit card debts, car loans, personal loans, and mortgages for homes that you don’t live in are paid off.

For many folks, achieving debt freedom seems like a pipe dream but it is most certainly attainable. The 2 most popular methods for becoming debt free are the ‘Debt Snowball,’ and the ‘Debt Avalanche.’ Either method will work.

The debt snowball, or the payment of debts ordered by the lowest balance, is widely touted by Personal Finance Guru Dave Ramsey due to its psychological benefits.

The debt avalanche, however, is the method that will get your debts paid of mathematically the fastest by tackling loans with the highest interest rates.

Whichever method you choose, getting out of debt is like getting out of prison. The choices you can make and the lifestyle you want to live no longer depends on other people. You are no longer beholden to a bank.

Level 5 – Freedom from Employer

Level 5 is when you can do the work you want to do and not the work you must do in order to maintain your lifestyle and build your nest egg. During the initial levels, you may have found that you had to work at a job that you needed to either pay your expenses, build an emergency fund, pay off your debts, or build a large of nest egg to cover your basics in retirement.

Freedom from your employer could mean that you are now working the same job but maybe only part time. It could mean that you have taken a lower stress job that also pays less. Often, freedom from an employer means freedom to choose your employment.

I personally disagree with the existence of this level. Taking control of your own life means that you have freedom from your employer all the way in step 1. This is because you have the freedom to reduce your expenses to extremes… the only thing holding you back is you.

Thus, level 5 should be considered a luxury. It implies that from a financial point of view you have flexibility in terms of employment. Never forget that these levels do not define YOU. They only illustrate a possible narrative.

Level 6 – Financial Security

The Four Percent RuleThis is a critical level! Financial security implies that you have saved enough that the return on your savings or investments meets or exceeds your minimum monthly budget.  By minimum monthly budget, I mean the absolute minimum needed to survive… think food, medical expenses, and shelter.

For example, if you have invested your savings in the Stock Market, a 4% withdrawal rate is a fairly common recommendation (here is a quick article on the 4% rule).

If you have saved $1,000,000 you can withdraw $40,000 per year or about $3,333 a month. As long as your bare bone budget is below this amount then you have achieved financial security.

This level implies that you could survive forever on your savings if you don’t spend more than your barebones budget. It is a significant turning point in your personal finance journey. At this point, you will always have food, medical care, and shelter.

Level 7 – Financial Flexibility

Compound Interest Formula

The next level, financial flexibility, is when your investment portfolio is large enough that the 4% withdrawal rate meets most of your expenses. This means that you can afford to buy the normal creature comforts associated with an average lifestyle on top of the barebones budget mentioned in level 6 but you may have to downscale during bad years in the market.

I like to think of level 7 as the year you could retire comfortably most years, but during market down cycles would have to penny pinch. Thus, you aren’t fully detached from external impacts on your finances and thus not fully financially independent… but you are very close.

Level 8 – Financial Independence

Hooray! Level 8 is the big kahuna! Being financially independent means that 4% rule of withdrawal will meet your normal budget requirements during good and bad years… you have saved approximately 25x your annual budget and have eliminated all debts besides your mortgage.

This is the level that I personally get off the train.

Financial Independence means that the burden of having to earn an income of any kind is completely removed from the equation. You can live your life based on your budgeted expenses forever. Any additional money you can earn or cut from the budget is completely unnecessary.

Bonus Level 9 – Financial Freedom

Financially Independence Means You Can Buy A Car

The author of the video remarks how the next level, Financial Freedom, is the amount of money needed to achieve Financial Independence and a bit extra. It means you can safely withdraw an amount from your investments that is more than you have explicitly budgeted for.

Likely, this may end up being money that you could use philanthropically, or perhaps to go on a vacation or two that you were not expecting to go on each year. It might mean a luxury car is in your future or even season box seats at the nearby baseball stadium.

Bonus Level 10 – Financial Abundance

Saving Money to Get Financially Independent

Financial Abundance is the last level. It implies that you have more money than you could possibly spend at a safe withdrawal rate. With this amount of money there just isn’t anything that you really want that could spend it all.

While this may sound fantastic, keep in mind that if you reach this stage, you have probably lived a frugal lifestyle. Recognizing that you have more money than you could ever spend may feel like winning the lottery, but it also puts you in the driver’s seat with a resource that can have a significant and positive impact on others’ lives.

If you reach this stage, then perhaps its time to start dreaming bigger than yourself. Identify a goal that could help your community. Build a plan to solve a problem that helps others. Use your gift of wealth to make other’s lives better.


Getting to level 10 is not necessarily the goal for everyone on this journey… including me. However, understanding where you are at now and knowing what level you would like to realistically end up at is exceptionally important.

Sitting down and defining the numbers for yourself what it will take to advance through each level can be a critical first step towards achieving your ultimate goal.

Again, this framework was a product of a YouTube video… if you enjoyed it, give the author a ‘like’ but don’t consider the advice set in stone. Don’t be afraid to define your own levels. Use the levels as tools to get you where you want to be and not to define who you are.

If you are on your own journey let me know down in the comments section what level you hope to end up in!

Guy Money

As a formally trained Data Scientist I find excitement in writing about Personal Finance and how to view it through a lens filtered by data. I am excited about helping others build financial moats while at the same time helping to make the world a more livable and friendly place.

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