6 Levels of Financial Freedom (How Free Are You? Interactive Exercises)
Most people want financial freedom and most think that it is a one-step process. One day you are still struggling in a job that you do not like, the next thing you know you are financially free. Little is mentioned or taught about how to achieve it, step by step.
Rome is not built overnight.
Financial freedom is not easy (as you may have guessed). Skipping the steps make it even harder.
Level 1: Emergency fund
Having a strong foundation is the most important when it comes to building tall and lasting for generations.
And the foundation of our financial freedom is level 1: emergency fund.
Financial advisors suggest 3–6 months’ of expenses saved as emergency fund — this sum cannot be invested and has to be liquidated immediately.
You never know what would happen. Just recently, the coronavirus has taken the world by storm and thousands of people were laid off. Corporates are having record-low profit and business is almost ceased. Countless SMEs are facing closure or even bankruptcy. While there are still some experts claiming that they anticipate the financial crisis in 2019, no one could have anticipated this virus and the enormous impact that it has globally.
Therefore, for a strong foundation, I would suggest to have 6–12 months’ of expenses as emergency fund. At least that gives you some more buffer when things happen.
Total Emergency Fund figure: ______ *12 = ______ per year.
Level 2: Financial Security
What this level entails:
Home mortgage paid forever.
Utilities for the home paid forever (no need to work to pay for your phone bill, electricity bill, water bill)
Food and household for family paid forever.
Transportation needs paid forever.
Insurance costs paid for (healthcare insurance etc.)
To find out your financial security figure, ask yourself:
How much is my monthly outstanding mortgage
How much is my monthly utilities
How much is my monthly food and household expenses?
How much is my monthly transportation cost?
How much is my monthly insurance premium payment?
Adding all these up:
Total Financial Security monthly expenses: ____ *12 = ____ per year (US average basic annual expenses is $34,668)
Level 3: Financial Vitality
What this level entails:
Half of your current monthly clothing costs paid.
Half of your current monthly dining and entertainment costs paid.
Half of your current small indulgence and little luxury costs paid.
Financial Security monthly expenses
To find out your financial vitality figure, ask yourself:
How much is my monthly clothing expenses, then divide it by half.
How much is my monthly dining and entertainment expenses, then divide it by half
How much is my monthly small indulgence and little luxury expenses, then divide it by half
How much is my financial security figure?
Adding all these up:
Total Financial Vitality monthly expenses: ____ *12 = ____ per year
Level 4: Financial Independence
What this level entails:
Money is now your slave — you are not slave to money.
How much money needed to maintain your current lifestyle.
Monthly home mortgage paid
Monthly utilities for the home (no need to work to pay for your phone bill, electricity bill, water bill)
Monthly food and household for family paid
Monthly transportation needs paid forever.
Monthly insurance costs paid for (healthcare insurance etc.)
All of your current monthly clothing costs paid.
All of your current monthly dining and entertainment costs paid.
All of your current small indulgence and little luxury costs paid.
To find out your Financial Independence figure, ask yourself:
How much is my financial security figure?
How much is my financial vitality figure, then times 2.
Adding these up:
Total Financial Independence monthly expenses: ____ *12 = ____ per year
Level 5: Financial Freedom
What this level entails:
As many trips as you like with your loved ones
Donation to your favourite charities
More luxury items
To find out your Financial Independence figure, ask yourself:
What annual / monthly income would I need to have the lifestyle I want and deserve? Freedom to travel? Contribute to charity?
_(how much)____ * _(how many)___trips in a year = ______, then divide by 12
How much I want to donate per month
How much would that luxury item cost me each month?
How much is my Financial Independence figure
Adding these up:
Total Financial Freedom monthly expenses: ____ *12 = ____ per year
Level 6: Complete Financial Freedom
What this level entails:
You could have anything you wanted and cash flow enough even for the next generations.
To find out your complete financial freedom figure, ask yourself:
What is my dream life? What would that cost me that I haven’t taken into account in previous level’s calculation? (Divide it by 12 if you are taking an annual figure.)
How much is my financial freedom figure
Adding these up:
Total Complete Financial Freedom monthly expenses: ____ *12 = ____ per year
There you have it!
Now you have all the goals and milestones personalized! And with these goals, you can now work towards finding the right investment tools that can help you achieve these step-by step. Getting rich is not a race.
Just remember how you eat an elephant!
Note: These 6 levels of financial freedom is written with reference to Tony Robbins’s book “Money Master the Game” five Levels of Financial Independence.
Note2: this is not investment advice. I’m not a financial planning professional. Just sharing what is working for me as part of my investing strategy or what I have learnt on my investment journey. Please be reminded to do your own research and consider your own circumstances before making any financial decisions. You could also check with your financial professional to understand what would be best for your situation.
