What is your level of financial independence? Can you afford to take time off work to do yoga on the beach?

How to Find Your Financial Independence Level. If you have looked into FIRE (Financial Independence Retire Early) you have likely heard people espouse living on pennies a day. Or perhaps, hear some opine how they spend practically nothing, so they can retire as a homeless person, at 29 and 7/14ths. You know they couldn’t just say 29 or 29 and a half, am I right?

What I hear when I read some of these people talking about you can achieve FIRE – Sell all your stuff, find a tent on the side of the road, get free rent by living in the woods or in a park, and use the bathroom at Starbucks or Burger King. I’ve actually come across a blog that promoted dumpster diving for food. No thank you, I don’t know if that stuff is even vegan! I’m not really vegan, but I do try and eat a plant-based diet, and I’m a picky eater, food out of dumpsters is not in my future. You don’t have to go to extremes to achieve your own level of Financial Independence.

Would You Be Willing to Live in a Tent to Achieve Financial Freedom?
Photo by Lucas Ludwig on Unsplash

Realistically, most people are not willing or able to live cheaply enough to survive a retirement starting at age 30, 40, or 50. In fact, many people who are reading this likely are not saving enough to maintain their current standard of living during their golden years in retirement. That is even assuming they waited until the ripe old age of 70 to retire. A whopping 21% of people have zero, zilch, nada saved for retirement, according to Northwestern Mutual’ s 2018 Planning & Progress Study.

Think of planning for financial independence as a marathon, not a sprint, as the saying goes. Saving any money, let alone enough for financial freedom can be daunting. Break up your financial independence goals into smaller chunks, this will help keep you on track while making the process a bit more manageable and, hopefully, a little less stressful. Even if you are starting small, the important thing is to get started. Given enough time anyone can become a multi-millionaire.

Enough about that, if you are reading this post you have hopefully already achieved some level of financial independence. You may be on track to retire well before full retirement age (67). Or maybe you are just living your happiest, healthiest and wealthiest life, now and into the future.

When I was younger I was striving to achieve financial independence sometime in my forties. As I’ve aged I realize I love working as the fun financial planner too much, and that I don’t think I will ever fully retire. All the same, I still want to know that work is an option. I’ve reset my goal to have all the FU money by the time I’m 50. The good news is I’m on track. I was also surprised to see I saved about 50% of my income last year, don’t tell my husband. Keep working with my amazing clients as long as I can physically and mentally offer the best financial planning guidance for their specific needs.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Here are the Eight Levels of Financial Independence:

Level 1: You have an Emergency Fund

The first level of financial independence is getting out of the hamster wheel of living paycheck to paycheck. A major part of this is establishing an emergency fund. Ideally, you will have also paid off any credit card debt at this stage of financial freedom.

Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, 40% of households would not be able to cover a $400 surprise expense. We all likely have some unexpected bills pop up throughout the year such as car repairs, medical bills or a big night out drinking with friends. A fully-funded emergency fund will come in handy during those types of situations.

Level 2: Enough Money to Quit your Job (for a bit)

Financial Independence is all about making work an option. Saving enough money to quit your job forever is a huge undertaking. Accumulating money to be able to afford to take some time away from working is a big leap in the right direction. This does not mean you have to quit your job, but it sure is a good feeling to know you can.

For extra credit, you may want to save up for a sabbatical or extended vacation. I dream of spending a month or two, in a foreign country each year. By no means will I be quitting my job, but it would take some planning in order to be away from my Registered Investment Advisor Firm- DRM Wealth Management- for that long. (As we’ve learned during COVID – we can work remotely, making some of these trips more manageable).

In the shorter term, that extra money could also serve as your emergency fund. I mentioned that just in case some of you wanted some extra motivation to get to this level.

I just had the pleasure of attending a Yoga Retreat in Costa Rica, and I think everyone there had reached this level of financial independence. If you have a chance, add a yoga retreat to your bucket list.

Level 3: Living a Happy Life and Still Saving

I am here to help you live your happiest, healthiest and wealthiest life. What that means to each of you will vary. But I want to help you find a way to enjoy life today, while still planning well for the future. There is an immense amount of freedom and stress relief when you are in a place where you are earning enough money to save, experience the best that life has to offer, and still have money left over at the end of the month.

That extra cushion can be used to move up your financial independence date. That, of course, assumes you avoid increasing your lifestyle and spending it. We all know people, who every time they get a raise or promotion take on new expenses, and never really get ahead financially.

Level 4: Financial Independence is about Freedom of Time

I was just reading about workers in Amazon warehouses being tracked by computer, and fired by computers for not being productive enough. I’m betting they know when you go to the restroom, and how long you spend in there. This strikes me as the ultimate lack of freedom of time. It also sounds miserable.

I think many people desire more flexibility with their work schedules. Freedom of time and financial independence go hand in hand. Together, they are about leaving the rat race to follow your passion, or spend more time with family, and not going completely broke doing it. It could come in the form of more paid time off, flex-time or perhaps working remotely on occasion. Not having to take a day off from work just so you can visit the dentist or take your kid to the doctor could be a huge benefit for some.

I worked with a trial attorney who was totally burned out. They were ready to quit their job, and I think to hide under their bed for a few months. We helped them negotiate a sabbatical each year between big cases. They had enough time (and money) to get their travel itch taken care of. Then they came back, recharged and ready to win another case, and bring in all those billable hours. They gave up a lot of freedom of time (during a trial) for a lot of freedom to travel (during the months of sabbatical).

Level 5: Enough to Fund an Entry Level Retirement

Who do you know who hates their job? I’m talking really hates it. Let me tell you, I have met a few over the years as a financial planner. Those individuals were willing to do almost anything to retire as soon as possible. Some considered things like moving to a foreign country with a low cost of living, selling their home, or getting roommates. Someone even had a plan to sell blood as often as possible to bring in some extra cash. I should point out that those people were closer to full retirement age.

For those of you looking to achieve financial independence at an early age, think about what your bare minimum retirement wants would look like. Could you move to a place or location with a lower cost of living? The yoga retreat I mentioned earlier was in Nosara, Costa Rica, which seems to be primarily populated with zen surfers.

Would you be willing to give up going out to dinner? Work towards a nest egg that will support this bare-bones lifestyle. You probably won’t enjoy living in the woods without running water, or maybe that is your dream retirement. At the very least it might be nice to know you could afford it. Considering your bare minimum retirement, and knowing you have enough money saved to at least cover some standard of living in your early retirement, will also influence other life choices you may make along the way.

Would you lease a new luxury car if you knew it meant you would have to work a few more years? Downsizing your house might look more appealing if it meant you could retire now rather than in 10 years. If you think of dining out as extra days you will have to work, you may not order the surf and turf quite as often.

Level 6: Incomes Streams to Actually Retire Well

Assuming you are doing pretty well and are happy with your current standard of living, what would you need to maintain your standard of living in retirement? Knowing you are on track to accumulate a nest egg to support that lifestyle is a big win. Gold medals go to those who have accumulated enough assets, or passive income streams, to be in a position to retire well.

Level 7: How Much Would Your Dream Retirement Cost

If you did not spend 40, 60 or more hours per week at work, what would your dream life look like? Would it include things like traveling more and spending more time with friends and family? Traveling the world, flying first class, and staying in nice hotels do not come cheap. Think big here. What would really bring joy into your life? The sky is the limit.

How great would it feel knowing you are on track to have enough money to retire and be able to live your dream life? What is stopping you from getting there before you are 70 years old?

Level 8: More Money Than You Could Ever Spend

This is surely the most exclusive level of financial independence. Few people will really have the ability to achieve this on a typical salary. We are hoping that your financial independence plan will allow you to never run out of money. Having more money than you expected to spend is great.

Building enough wealth so that you could not possibly spend all of it is another. This group will likely be filled with people who either won the lottery, inherited a fortune, or are founders of companies – think Jeff Bezos, Bill Gates, Larry Ellison or Warren Buffet. Even if they went on a spending spree buying planes, yachts, and automobiles; they would still have a hard time spending all of it. I should note that both Gates and Buffet have pledged to give away a vast majority of their wealth when they pass. It would be unfair to count that as “spending all their money.”

Take a look at where you think you fall on the aforementioned levels of financial independence. Use it as motivation to keep moving towards your most important financial goals. While I love what I do, and plan to help people with financial planning forever, I take comfort knowing that it will be a choice to continue working in my golden years. Although I am still decades away from full retirement age, I am right between bare-bones retirement, if I stayed in Los Angeles, and retiring comfortably if I was willing to leave California. Who knows what the future holds and how far up the chain of financial freedom my household will climb? For now, I will enjoy working and living between home in West Hollywood and Palm Springs, life is good.

Where are you at, and where do you want to be in five, 10 or 15 years? Feel free to reach out to see how Financial Planner LA David Rae can help you reach financial freedom faster and easier.

Yoga on the beach in costa rica - financial independence personified. — Financial Expert David Rae on E! news discussing your level of financial independence after a divorce.

DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Forbes.com, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com

Connect With David Rae, Financial Planner LA

David Rae, CFP® AIF®

President / Founder DRM Wealth Management LLC

1(323) 905-4380

david.rae@financialplannerla.com

"How to Find Your Financial Independence Level"

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How to Find Your Financial Independence Level

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Here are the Eight Levels of Financial Independence:

Level 1: You have an Emergency Fund

Level 2: Enough Money to Quit your Job (for a bit)

Level 3: Living a Happy Life and Still Saving

Level 4: Financial Independence is about Freedom of Time

Level 5: Enough to Fund an Entry Level Retirement

Level 6: Incomes Streams to Actually Retire Well

Level 7: How Much Would Your Dream Retirement Cost

Level 8: More Money Than You Could Ever Spend

Connect With David Rae, Financial Planner LA

Comments 130

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