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10 Stages of Financial Independence

When you begin your financial independence journey, you should have a goal for how much money you need to have saved up in order to really be financially independent . . . to retire and never have to work again. This goal/amount of money is your financial independence (FI) number. It should serve as your ultimate financial goal. By tracking this number, you’ll know exactly what you’re working towards and how much progress you’ve made. It is CRUCIAL to identify your financial independence number. After all, you need to set a concrete goal before you can really start planning anything, right?

Let’s start with how you calculate your financial independence number: All you have to do is calculate your anticipated, annual expenses in retirement and then multiply that number by 25. So let’s say, for example, that you have anticipated $40k in expenses per year in retirement. That would mean that your FI number is $40,000 x 25, which is $1 million. So in this case, you’d need to have $1M in a stock portfolio in order to be financially independent.

Ok, so now that you have your FI number, how would you determine whether or not you reached the goal if you’ve been investing in say stocks, like we generally recommend, rather than just saving up money in a savings account? Let’s take our Robinhood portfolio as an example. Right now we are collecting a 7% dividend annually. This means that if we were to grow that portfolio to $1 million and then withdrew up to 7%, the value of that portfolio would still increase over time. This is because by only collecting the dividends and leaving the principle amount untouched, we would allow the portfolio to grow via appreciation, which is on average 7%. The rate of increase for the portfolio would be even higher if we limited ourselves to a 4% annual withdrawal rate, as the 4% rule recommends.

Achieving financial independence is a process that consists of several stages. A lot of people get overwhelmed when they just see this huge, seemingly unreachable number that they need to reach, but when you break it up into smaller, more achievable goals, the journey becomes much less daunting. This is why it is so important to understand what your FI number is and to break it down into stages.

So, without further ado, let me reveal the 10 stages of financial independence that helped us get to where we are today.

Stage 1: Negative Net Worth - Debt is Greater than Assets

I know it may seem odd to list this as the first stage but if you think about it, starting here actually does make sense. The natural beginning of one’s FIRE journey is when you sit down and asses all your assets and debts. You may in fact be in the red, as many Americans are, but when you understand where you are financially and decide that you do want to pursue financial independence, that is the true start of your journey. After all, you need a solid understanding of where you are before you can determine where you want to be and how you’re going to get there!

Stage 2: Net Worth Zero - Debts are equal to Assets

Once you’ve come to the realization that you want to strive towards financial independence, the next stage is to balance our your finances. This stage would encompass anyone who is living paycheck to paycheck, where they earn their money and then put it towards basic living expenses and servicing their debt. Most Americans are either here or in the previous stage.

Stage 3: Net Worth Positive by $1 - Assets are Greater than Debt, even if only by $1

Now having a positive net worth of at least $1 may not seem like a big deal, but because most people are stuck at Stage 1 or Stage 2, even having a small sum of money to your name is an accomplishment. Think about it this way: that $1 is the seed that is required to grow your money tree. You're on the right track!

Stage 4: Net Worth Positive by $10k - Assets are Greater than Debt by $10,000

You are very motivated when you add up all of your debts and assets and discover that not only are you positive, but you’re positive by $10,000! Its important to note here that having positive net worth doesn’t necessarily mean you have no debt, it just means that your assets outweigh your debt. Eventually you want to get to a point where your assets are actually growing faster than your debt.

Stage 5: Net Worth Positive by $50k - Assets are Greater than Debt by $50,000

By Stage 5, you will have saved enough money to live off of for an entire year. So worse case scenario, if you had to sell everything and pay off your debt, you would still have $50k left over for you to live off of.

Stage 6: Net Worth 10% of FI

By Stage 6 you should have 10% of your FI number saved up. So, if, for example, your FI number is $1 million, then 10% of that would be $100,000. With this amount, if you were to lose your job tomorrow, you should have enough to live off of for 2.5 years with no income coming in. This is such an important stage because it's at this point that you start to really have the freedom to make life choices that are not entirely determined by money. That’s a HUGE accomplishment! What I mean is that if you wanted to do something you’ve never been able to do before, like go back to school, homeschool your kids, travel the world, work on a passion project, start your own business, etc., or even if life throws you a curveball, like having to care for sick or elderly family, this is the stage where that becomes doable. There is just so much freedom associated with reaching this stage!

Stage 7: Net Worth 25% of FI

Now if we’re looking at someone with a $1 million FI number, they would have to have a net worth of $250,000. This amount of money would allow them to live without a job or any income coming in for 6 years! Getting to 25% of your FI number is a HUGE milestone, and is very much a reason for celebration! It's at this point that you can start to treat the process like investing. Thanks to the magic of compound interest, this 25% will turn into 50%, then 75%, at a much faster rate!

Stage 8: Net Worth 50% of FI

Speaking from experience, reaching the 50% mark is huge! Here is when we got this epic boost of confidence- we were so focused and absolutely sure we were going to make it! But make sure to keep yourself in check, because, as exciting as it is, with that confidence can come a false sense of security, which may lead to self-sabotaging behaviour like quitting your job too early or taking on more debt. When you’re half-way there, you tend to want to cheat, but you MUST resist the urge! You need to stay focused here and STAY ON PLAN!

Stage 9: Net Worth 75% of FI

At this point, if you had 75% of your FI in investments and never touched it from that moment on, you’d still double your money in 7 years. That is the power of compound interest. This basically means that once you reach stage nine, you can rest assured that you will have financial independence in just 7 more years without having to do anything else! You're pretty much set! BUT, at this stage you still should be contributing to your portfolio if you really want to make the most of your time and money.

Stage 10: Net Worth 100% of FI

Once you pass the 95% mark it's going to be really tempting to just give in, quit your job and call it a day. Trust me, I know! And if that’s what you really want to do, then no judgement. But honestly guys, if you stick it out all the way to 100% and finally reach Stage 10, you’ll find that everything you’ve had to sacrifice, all the work you’ve put in to reach your dream of financial independence will have paid off! And it will feel SO GOOD! You will have officially arrived! Enjoy this incredibly sweet moment- you earned it!

We are SO CLOSE to Stage 10 right now! Looking back, it seems so unreal! And it really would have been so much harder to accomplish had we not dedicated ourselves to the above 10 steps. I mean, when we got truly focused on these milestones and reaching our FI number, we were able to reach our goal in just 5 years! Granted, we did have a head start thanks to our previous investing, but it was only after we determined our FI number and really got intentional about financial independence that we saw such efficient and effective gains.

Now with this blog post, you guys can follow our lead and utilize these 10 stages as a guide for your own financial independence journey! Good luck!

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Hello, We’re Amon & Christina

We’re former federal government employees that focused on saving, making, and investing money so that we could grow enough wealth in our investments to never have to work again.

And, guess what? We did it! At the age of 39, we reached financial independence, quit our jobs, and . . . we retired!

So, if you’re interested in learning how to save, make and invest money on the road to financial independence and retiring early (i.e., F.I.R.E.) - this site is for you!

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