Imagine not ever having to worry about money again. It’s something that everyone wants, but few people ever achieve. Yet, the term financial independence probably has a different meaning depending on where you are in your life right now. To some, it might just be not having to worry about paying your bills, while to others it could mean the ability to quit your job today and retire.
There are several levels of financial independence, all with their own freedoms from worry and stress. The higher up the financial independence ladder you go, the harder you will have to work. But, work hard enough, and you might achieve that ultimate level of financial freedom, and never have to stress about your finances again.
Before you start, ask yourself…
What is your current job? What is your earning potential on your current career path? At what age do you want to retire? How many children do you have or plan on having? What are your financial goals? What would a financially independent life look like to you?
By keeping these things in mind, you can better project your financial future and how to achieve different levels of financial independence. It’s important to ask yourself these questions to figure out what you want from your financial wellbeing before you get started on your journey. Doing so will give you the insight on where you are right now, how to set realistic targets and expectations, and what it would look like to attain your ultimate goal.
Knowing the different levels of financial independence will help you set goals and see positive growth on the way to a better financial future. So, let’s take a look at the 6 levels of financial independence and what they represent.
1) Paying your bills on time
The first level of financial independence might sound easy to some and extremely difficult to others. At this level, you can pay all of your bills on time and cover your monthly expenses with no delays. For many, like half of all Americans who live paycheck-to-paycheck, paying bills on time is not an easy feat. If your job doesn’t pay well, it might require sticking to a budget to get all of your bills and expenses paid in a timely manner.
Budgeting shouldn’t just include monthly expenses like rent and food, but any debts you have such as student or car loans that need to be paid regularly. By calculating your total monthly bills, you will have a better idea if you can already achieve this goal, or if you have to work harder to maintain good financial standing.
2) Emergency fund
This second level gives you some financial peace-of-mind, as you begin to create an emergency fund to cover unexpected life expenses. While you might want to start investing your money right away, an emergency fund is essential for preparing for the unpredictable, whether it is a change of jobs, new child, or even an unexpected global pandemic like COVID-19.
This level will begin to give you a little peace of mind in your financial life, as you can start to relax slightly that an unexpected expense won’t cause you and your family to go into financial disarray.
3) No day-to-day financial stress
Halfway up the financial independence ladder and you have attained a position of little to no financial stress on a day-to-day level. You can also afford some extra expenses in your life, whether it be a family vacation, replacing your old car, or helping support an elderly parent. It’s not that you can forget about finances forever, but at this level you can comfortably pay your bills, put away money in savings, and offload much of the previous financial stress you used to incur on a regular basis.
For those that would rather tuck more money away than go on a vacation, you might consider beginning to slowly invest your savings. With the extra money leftover after establishing an emergency fund and paying your bills, the rest of your earnings can be used to grow your wealth even further, and propel you into the next level of financial independence faster than you expected.
4) Starting to save for retirement
As you move further up the ladder you begin to consider not just your current financial status, but your future financial wellbeing at the same time. With your expenses covered and stress minimized, you can start to plan and save for your retirement. At this stage, you will have built up an investment portfolio that will be a good starting point for retirement. You may even start to consider ways to gain passive income that will continue to grow with you over time using the power of compound interest.
For those that don’t know how to start investing, Bondora Go & Grow is a great, automated way to invest in peer-to-peer loans and receive extra income. You can even use the Go & Grow Forecast tool to see how your investment now can grow over time to help you save for retirement and plan for a better future.
5) Enough income to retire well
Those that can afford to retire early and live a comfortable lifestyle know that your primary source of income is only a small part of this level of financial independence. At this level, you are letting your money do the work for you, and generating enough passive income that your investments might even earn more than your day job. At this level, you can also afford to not just retire, but to do so comfortably as you take trips around the world and spoil your grandchildren.
As previously mentioned, the best way to generate passive income is taking advantage of compound interest, and generating even greater wealth on top of your already existing wealth. Take, for instance, Bondora Go & Grow, which provides investors with compound interest on their investment. In just a few clicks, you could be earning a return of 6.75%* p. a. in passive income.
6) Complete financial freedom
Congrats! You’ve come to the holy grail of financial independence: a state of financial wellbeing where there are complete freedom and lack of worry. At this level, you don’t ever have to worry about money again. You can afford to live a comfortable lifestyle, prepare for retirement, and take care of your family with ease. You might have other worries in your life, but at this stage, money isn’t one of them.
It goes without saying that this level of financial independence is the hardest to achieve, and is one which not many people achieve in their lifetime. That being said, getting to this level of independence means true financial freedom.
Plan and achieve
Working your way up the ladder of financial success isn’t easy, but it also isn’t impossible either. Think about how badly you want financial freedom and the things you are willing to sacrifice to achieve your financial goals. As you begin to see your financial worries lifted, it will motivate you to work even harder to put yourself in a position to achieve the ultimate financial independence.
One of the best ways to achieve your financial goals is to create an investment plan, which you can use to visualize your financial success. With an investment plan, you can actually see how to get from one level of financial independence to the next as your wealth grows, and take the actions to make these goals a reality.
Financial independence is a personal pursuit. Figure out for yourself what being financial free would mean to you, and see yourself working your way up the financial independence ladder. But don’t feel like you have to achieve the highest level of financial independence in order to be happy. For you, all it might take is moving one level up in financial independence to feel more at ease and free. As you climb higher, you might start to experience money in a whole new way.
*As with any investment, your capital is at risk. Investments made through Bondora are not guaranteed; therefore any assets allocated to the Go & Grow account are not guaranteed by any state fund or otherwise secured and it may not be possible to liquidate assets or withdraw money immediately. The yield is up to 6.75% p.a., but please note that the yield achieved in past periods does not guarantee the rate of return in the future. Before deciding to invest, please review our risk statement or consult with a financial advisor if necessary.