Speeding through the different stages of Financial Independence

My friend Sebastien was worth a big fat zero aged 26. That’s better than negative, at least. He had paid off his debts and was ready to earn some real money in the UAE and Saudi Arabia. After learning about Financial Independence and Bogleheads-style investing, he thought he might be able to retire at 45. Seven years later, he retired aged 33. Once you have your intention and finances sorted, things can move fast.

Now he spends some of his days designing cool little diagrams like the one above and he runs the website Impactivated. It’s an example of how one person’s progress can really help others.

The diagram (click Display Images if you can’t see it) shows ‘The Six Stages of Financial Independence’, with the guy in the hot air balloon being equivalent to the gym guy winning muscle competitions in his Speedos I mentioned last week. You don’t have to aim for that (now or ever) if it feels too uncomfortable. Any step along the way will make your life happier and more secure.

The Six Stages of Financial Independence

1. Financial Dependence. You’re not really earning money, or not enough to rent a place and move out. You lean pretty heavily on the Bank of Mum & Dad. By the way, if you don’t mind living at home, this is an excellent way to save money early on and get a head start on investing.
   

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2. Financial Solvency. You can cover your living expenses with the income from your work. Well done, you’re a real adult now! Welcome to a lifetime of paying the bills. You are vulnerable though if you lose your job, as you don’t have much to fall back on. Many people get into a Debt Spiral at this stage, because something bad happens and they can’t pay off their ever-growing debts.
   

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3. Financial Stability. You save up enough spare money for an emergency fund, also known as a cash buffer. It’s money designed to sit there boringly in an accessible, high-interest savings account, waiting for something bad to happen. Ideally, it should be 3-6 months total expenses, depending on how secure your job is and what other income sources you have. It brings stability because if life throws something bad at you, you have the money (and thus the time) to find a new job, pay the hospital bills etc. Don’t start investing large amounts without a cash buffer.
   

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4. Financial Security. You have enough spare money that you don’t need for 10+ years, so you can start investing – in cheap, diversified stock and bond funds or maybe real estate. Or you have some side hustles that generate money outside of your main work. Either way, you have some passive or non-salary active income that can be used to cover some of your living expenses. It might not cover birthday presents and trips abroad though.
   

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5. Financial Independence. Congratulations, you have enough income from your investments to cover all your expenses, forever! Your passive income will keep growing and you can dip into it (sensibly) like an ever-replenishing well. Now you can quit your job. Don’t burn your bridges though, as you may want to keep some useful connections for your new Mission or aim for…
   

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6. Financial Abundance. There’s no need to stop working if you love your job. Some people blast through the FI point and just keep going. Over time, you can reach true abundance, where you have so much more income from your non-salaried investments and activities that you could pay all your living expenses, even if the markets crashed. That’s when it’s time to think about your legacy and how to help others – and/or start living it up in First Class.