Do you dream of financial independence? Do you lust after a life of freedom where you can choose what you do and with whom you work?
Let me let you on a secret – my dreams are the same as yours. Except, they are becoming my life after a couple of decades of money focus, hustling like obsessed and celebrating moving up the different degrees of financial independence.
Today, I’d like to tell you about the degrees of Financial Independence and how to move between these. I didn’t invent them – they come from a book.
What is the book, you wonder?
‘Money Master the Game: 7 simple steps to financial freedom’ by Tony Robbins.
I will not review the book here (though I may do it at some point). It is a book well worth reading despite the many pages of padding that I had to skip. (What I consider padding may be very useful to someone who has never read anything about personal finance before.)
What I’d like to share is an idea I found very useful.
What is financial independence?
You know that there is a lot of talk about financial independence, right?
Bloggers and civilians are also debating what it is, how do you know that you’ve got there and whether you should ‘retire’ once you have achieved financial independence.
(I suspect I’ll never understand some young people’s obsession with early retirement or any retirement for that matter, but each to their own.)
I may have a problem with ‘retirement,’ but John and I have already achieved financial health and are approaching the third level of financial independence. Since October 2018, we have been in a financial position where I didn’t have to be employed if I didn’t want to be.
(Yes, work is a beautiful thing when you love it and have the option to reduce your time. I semi-retired in Autumn 2019.)
To make this move, we used the TMP retirement calculator and worked out exactly how much money we need to live a joyful and fulfilled life. We still have much higher aims, but I’ll get back to this some other time.
Reading Tony Robbins’ book has given me the will to continue on this path.
Tony gives a lot of handy messages in his book.
One of these is:
‘If you want your life to be better, you have to become better.’
Another one is that there are different degrees of financial independence.
Degrees of financial independence
Recently, on a course I am attending, someone said that they would have never built their business if they focused on the outcome. She had to break down the stages of building a successful business and, at any given time, focused on climbing the next step.
It is the same with financial independence. Achieving financial freedom where money is no longer a problem is possible; it is just likely to take time, hustle, ingenuity, and patience. For most of us, including me, patience is not an easily attainable virtue.
Hence, the critical importance of thinking of financial independence as different degrees of achievement – you only focus on climbing to the next one.
Here are the degrees of financial independence according to Tony Robbins:
#1. Financial security. It is achieved when you have sufficient passive income to cover your life’s very basics like the rent (mortgage), bills, and basic food.
#2. Financial vitality. Your passive income can allow for more things like clothes, going out and having fun, and basic holidays at this level of financial independence.
#3. Financial independence. That is the level where your passive income is sufficient to allow you to have your current quality of life.
#4. Financial freedom. At this level of financial independence, you can up-step your lifestyle to the one you desire.
#5. Absolute financial freedom. That is the level where money stops being an issue, and you can do anything you want.
You see, very few people will get to the 5th level; that of absolute financial freedom.
Some will get to the 4th level.
Everyone can get to the 3rd level of financial independence.
Where do we stand on the way to financial independence?
Do you know why reading about these levels of financial independence gives me the will to go on?
Because I could put numbers to the different levels.
(It is an excellent exercise and very useful to keep you on track; get a pen and start working out your numbers.)
Here is what I figured out (all numbers are of income after-tax).
#1. Financial security. For financial security, we need a passive income of £24,360 per year. We are above that today.
#2. Financial vitality. For this level of financial independence, we need £38,400. At the moment, we are over-shooting this one if I include our advertising income (which is not entirely passive).
#3. Financial independence. For financial independence, we need an annual income of £48,000. At this moment, we fall short of that by approximately £4,000.
#4. Financial freedom. Currently, this is our programme maximum, and you know we are rather short here.
#5. Absolute financial freedom. We have not even allowed ourselves to dream about this one! Yet.
Now you see why I’m encouraged. We are very close to the third degree of financial independence today. The way we are going, we’ll undoubtedly be there in four years.
It means that even if we don’t get to financial freedom (our £2.5 million plan), we have choices!