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The 7 Levels of Financial Freedom, According to a Millionaire — 50% of American Workers Are Level 2

Grant Sabatier is not retired. But he could be.

One of the leading voices and greatest success stories of the FIRE movement – ​​short for “financial independence, early retirement” – the self-made millionaire has amassed enough money to live comfortably on the income from his investments in perpetuity.

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Sabatier sees his situation as the end goal for people who think of money like him: not as something that lets you buy things, but as a way to give you more choice in how you want to live. “With every dollar you save, you give yourself more freedom and options in life,” he told Grow. “Based on how much you’ve saved and invested, ask yourself, ‘How many months of freedom have you gained?'”

Rather than playing golf or renting fishing boats, Sabatier spent his post-9-5 life in what he calls “a mission-driven phase.” In his book “Financial Freedom”, as well as in the Financial Freedom Course, an online program on personal finance, Sabatier offers a roadmap for financial security that includes seven levels of financial freedom, ranging from Clarity to Abundant. wealth.

Half of American workers say they live paycheck to paycheck, according to a recent MagnifyMoney survey, which places them at Level 2, self-sufficiency.

Moving up the tiers likely requires a shift in your financial habits and overall thinking about money, says Sabatier.

Sabatier’s 7 levels of financial freedom

Level 1: Clarity

The first step is to take stock of your financial situation – how much money you have, how much you owe and what your goals are. “You can’t get where you want to go without knowing where you’re starting from,” says Sabatier.

Level 2: Self-sufficiency

Next, you will want to be financially self-sufficient. This means earning enough to cover your expenses without any outside help, such as contributions from mom and dad.

At this level, Sabatier notes, you can live paycheck to paycheck or take out loans to make ends meet.

Video by Courtney Stith

Level 3: Breathing room

People at Level 3 have money left over after living expenses that they can spend on goals like building an emergency fund and investing for retirement.

Escaping Tier 2 means giving yourself financial leeway, which Sabatier says doesn’t necessarily mean earning a much higher salary. In fact, 31% of American workers who earn more than $100,000 live paycheck to paycheck, according to MagnifyMoney.

“Just because you’re making a lot of money doesn’t mean you’re actually saving that money,” says Sabatier. “Most people in this country live in debt.”

Level 4: Stability

Those who reach Level 4 have paid off high-interest debt, such as credit card debt, and stashed six months of living expenses in an emergency fund. Building up emergency savings helps ensure that your finances won’t be disrupted by unforeseen circumstances.

“At this level, you are not worried if you lose your job or if you have to move to another city,” explains Sabatier.

Video by Stephen Parkhurst

When calculating how much you would need to save, think about what your financial situation might look like, understand emergency circumstances, rather than your regular, day-to-day expenses, say financial experts.

“If you lose your job, you’ll make some changes. You’ll probably cut your gym membership and get rid of your memberships, for example,” said Christine Benz, director of personal finance and retirement planning at Morningstar at Grow. “Think of the bare minimum you would need to get by.”

Level 5: Flexibility

People at Level 5 have saved at least two years of living expenses. With those kinds of savings, Sabatier suggests, you have the ability to think about your financial terms of how much time it can save you: “You could take a year off from your job if you wanted to.”

You don’t need to carry all that money in cash, Sabatier notes: it could be a whole sum from your savings and investment accounts. As long as you are able to access that money in some way, if you need it, you have the ability to break away, at least temporarily, from the workforce.

Level 6: Financial independence

People who have achieved financial independence can live solely on the income generated by their investments, according to the Sabatier framework.

“You usually have one of two things,” says Sabatier. “Either you have a large sum of money in an investment portfolio that earns interest, or you have rental properties, and the cash flow from the rent covers your living expenses, or some hybrid of the two.”

Video by Stephen Parkhurst

To get here, you will need to invest a high percentage of your income, which may require you to adopt a more modest lifestyle to significantly lower your cost of living. Pursuing this lifestyle requires a mindset shift away from traditional personal finance paradigms, says Sabatier.

“People are taught to save 5%, 10%, 15% of their income, and maybe you can retire at 65,” he says. “Fortunately, more and more young people are beginning to understand that if I save and invest aggressively, I can work less and have more control over my future and my destiny.”

Level 7: Abundant Wealth

Financially independent people who live off their portfolio income rely on the “4% Rule” – a retirement rule of thumb that posits that an investor can safely withdraw 4%, adjusted for inflation, a balanced portfolio of stocks and bonds every year, and be relatively certain that the money will continue to grow and not run out.

Although economists debate whether 4% is the optimal number (some more conservative observers believe the right number might be closer to 3.3%), the underlying calculation serves as the basis for establishing a FIRE number – the amount money you would need to retire and earn an annual income you could live on comfortably.

More and more young people are beginning to understand that if I save and invest aggressively, I can work less and have more control over my future and my destiny.

Grant Sabatier

author of ‘Financial Freedom’

While those in Level 6 need to monitor their portfolio fluctuations to make sure their retirement is still going as planned, those in Level 7 have no such worries. “Level 7 is abundant wealth – having more money than you will ever need,” says Sabatier. “You don’t have to worry about money, and it’s not essential to your daily existence.”

This is where Sabatier is, and where he wants to take you, too, if you’re willing to change your mindset around money.

“If you want your life to be different, you have to make different choices,” he says. “The plans are available.”

The article “The 7 Levels of Financial Freedom, According to a Self-Made Millionaire – 50% of American Workers Are at Level 2″ was originally published on Growth (CNBC + Acorns).

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