Where Are You on the Spectrum of Financial Independence?
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Awhile back I came across an awesome post by Morgan Housel at Collaborative Fund titled, “The Spectrum of Financial Dependence and Independence.”
The posts details 17 levels, from Level 0 to Level 16, along a spectrum ranging from complete financial dependence to complete financial independence. It’s a brilliant post, and I found it to be a valuable exercise to read through the various levels to determine which levels I have completed, where I’m currently at, and where I’m hoping to reach.
Housel details the following descriptions for the various levels:
Level 0 is complete financial dependence, in essence panhandling.
Level 1 – Level 3 involve varying level of receiving assistance from others, like children and young adults who rely on their parents to provide for their needs.
Level 4 is reached when you can provide for yourself, but your work can easily be replaced. This can be viewed as an entry level employee.
Level 5 – Level 6 involve building up levels of savings, and emergency fund, to protect against unexpected circumstances.
Level 7 is building up retirement savings and having all consumer debt paid off. He considers this level to be the most realistic goal for most people.
Level 8 – Level 11 are varying levels of being able to choose which career to pursue, which jobs to work, saying no to debt, avoiding flashy symbols to try and gain higher social status, and being fully protected from emergency expenses.
Level 12 – Level 16 are varying levels of your assets covering your living expenses, reaching full financial freedom. This enables you to work on projects you enjoy, give charitably to others, and no longer have to work for a paycheck.
Most people have all experienced Level 0 through 4. This is what we experience as we grow up. We’re learning about money, getting an education, and trying to build our skillset. We start earning money and paying our own bills. Hopefully our income is greater than our expenses, and we can begin to build up savings and pay off debt.
Many millennials are stuck in Level 5 through 6, where they’re living paycheck to paycheck and maybe saving 5% of their income each year.
Where We’re at in the Journey
Fortunately, my wife and I were able to pass through Level 7 by paying off our $55,000 of consumer debt. We contribute significantly to our 401k’s and are widening the moat and building wealth with each paycheck that comes in. Right now I would put us at Level 10, where we’ve gotten to the point where we’re saying no to debt, social status isn’t important to us, and we’ve built up a large enough cushion that we can pursue the right fit for employment.
We still have a ways to go for reaching various levels of financial independence, but we’ve made significant progress in the past few years and have much more freedom than we used to have. I really like this spectrum of financial dependence and independence, because it’s helpful to take this journey a step at a time rather than thinking of it in such black and white terms. You don’t go from having zero financial freedom to having full financial freedom overnight.
Even when you haven’t fully achieved that point, your financial freedom continues to grow the further along the journey you get. Ultimately, we want to reach Level 16, but each level along the journey brings additional flexibility.
I’d encourage you to read through Housel’s post and consider your own journey. Where have you gone, where are you currently at, and where do you hope to go?
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