Your 6 steps to Financial Independence

🙋♂️🙋♀️ What is financial independence?

Financial Independence (FI) is a level of financial maturity at which you no longer need to work unless you want to. It is a step in your financial journey where you are fully in control of your finances and your life choices and where you can finally step out of the rat race without jeopardizing your financial security or that of your loved ones.

(Un)fortunately, and like many things in life, financial freedom is earned not given and reaching it requires a good amount of discipline, patience, and the willingness to learn and stay the course.

How can you get there, you ask? In this article, I will take you through the six steps of your FI journey assuming that, like most of the people on the planet, you are still at step 0.

🥴 Step 0 - Financial Dependence

In this phase, you are not able to (fully) provide for yourself. You could be a teenager or a college student depending on your parents to pay your tuition and living expenses. You could be employed but stuck in a situation where your income is falling short to meet your needs, or where your debt overpowers your earnings forcing you to rely on a spouse, a relative or a bank to close the gap. It is important to note that financial dependence is not necessarily linked to a low income. If you are a high income earner but struggling with debt, you are financially dependent.

If you are at this stage, do not panic and remember that it is all about knowledge, discipline and control. Your focus over the next few months should be on improving your earnings (through a higher paid job or additional sources of income) while ruthlessly curbing your spending and paying off your debt (highest interest first).

🏊 Step 1 - Financial solvency

Your real journey towards financial freedom starts with this step. You are here when you are able to fully meet your financial obligations without requiring help from others (people or institutions). This does not mean that you do not have any debts, it just means that you are solvent and can cover your payments in addition to your cost of living.

At this point, you have reached net zero, but you are still on the treadmill and any unexpected headwind could take you one step back. You might lose your job; your TV might die on you like mine did two weeks ago or you might need to take an emergency trip somewhere. You should have some cash on hand to deal with the situation.

Your focus over the next year or so will be on building a financial cushion (Some call it an emergency fund, others a rainy-day fund). You should aim for 3 to 6 months' worth of your regular spending.

To achieve this goal, you will have to continue to be very disciplined with your spending and save as much as you possibly can. Also make sure to direct any excess income from promotions, bonuses, or other sources towards building that cushion.

🥳 Step 2 - Financial Stability

Congratulations! you have made great progress and have built up a decent cash cushion and adopted the healthy habit of spending less than you earn (Stay tuned, I will tell you more on how this could save your retirement in an upcoming article). Keep up the good work, and whatever you do, do not feel overconfident and start competing with the Joneses.

Ok! but now what? Should you just keep piling up cash in your bank account and building up a bigger and bigger cushion? Not really! First of all, you should take a deep breath, let go of the anxiety that comes with common unexpected expenses and enjoy your newly acquired sense of freedom. It is a great feeling, isn’t it?

Your focus from here on will be on learning to take more risks and diving into the world of investing. Having cash is good and reassuring, but you are very unlikely to reach Financial freedom if you do not make your money work for you.

I will be writing a whole series of articles on investing so stay tuned. There is also a wealth of books and content on the internet covering all investment topics on all platforms (Youtube, Instagram, Twitter, Blogs, TikTok), in all formats and for all ages. Just be curious and dive into it. It is better to learn and make mistakes now that you are just starting than to make them later when you have accumulated large amounts of money where your focus should be on wealth preservation.

💪🏽 Step 3 - Agency

Impressive! Over the last few years, you have consistently made more money, avoided lifestyle creep by being disciplined with your spending and invested the difference. You are comfortable with the ups and downs of the market and your portfolio has grown to a respectable size. As your portfolio starts producing more and more income, you have more flexibility and start seeing more options. For example:

• You could start taking more risks with your career and shooting for much higher paying jobs
• Since your investments produce income that covers a small part of your expenses, you could decide to look for more fulfilling jobs.

At this stage, it is still very important to keep working full time and to continue investing aggressively. Things are about to get a whole lot more interesting.

🤑 Step 4 - Financial Security

A few years have passed, and your Portfolio is on fire. Your investments could now produce enough income to cover all your basic living expenses (but not much more) for the rest of your life. Congratulations ! you have reached your first real level of Financial Independence. We call it Lean FI.

Of course, this is a huge milestone, but you have not come this far to just cover your basic expenses. You want to go all the way! you want to travel, pursue new hobbies, give to charity, eat out and have some additional wiggle room. For the next few years, you will just keep doing what you have been doing so far and the most powerful force in the universe (the power of compounding) will get you to where you need to be.

🚀 Step 5 - Financial Independence

Mind blowing! Your investments have now grown so much that the income they produce can cover all your regular expenses (necessities and personal luxuries) ... forever. Your life is now all about agency and choice.

You can choose how much you want to work, what you want to work independently of pay, where you want to live, and most importantly, and that is the ultimate luxury, what you want to do with your time.

It goes without saying that if you stay on the same path, if you do not drastically alter your spending habits and stay invested in the markets, you are highly likely to reach the next level of financial independence: financial abundance. Your investments would naturally continue to grow, opening the door for inter-generational wealth and a life of giving.

👋🏽 Conclusion

In this article, I have tried to introduce you to the concept of Financial Freedom and to the steps you would be going through if you ever decide to go on that journey. It is, however, the journey of a lifetime with its ups and downs, its wins and its losses. It is of the utmost importance that you spend some time thinking about the reason why you would want to embark on such a journey. Is it because you are trying to get away from something (the rat race, your current financial situation, your current job)? or is it a journey towards something? is it both? **what is your why? The answer to this question is what will give you the strength to persevere over the years and bring back to the path of success when you drift away.

Thank you for reading this far.

Yours,

Ali

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