Start Your FIRE Journey: The 10 Stages of Financial Independence

19 March 2020 – Financial prudence is more relevant than ever. The COVID-19 virus is disturbing the health, social and economic fabric of our world. Right now we have much more pressing concerns than Financial Independence. However, I still believe that the basic concepts of FI (live well below your means, save and invest) apply even more so in these extraordinarily trying times. People are losing their jobs.”Hope and a Plan” can provide comfort.

TL;DR To improve your financial situation, you need a plan. To have a plan, you need to know where you are now and where you want to be. This post provides a roadmap to begin building that plan.

This post is part of the ‘Start Your FIRE Journey‘ blog series. The first 5 posts in this series focus on two things: (1) Are you ready to begin investing? (2) If so, how do you get started?

This post builds on that foundation by providing a roadmap to full Financial Independence highlighting key milestones along the way.

[12-Minute Read]

Hope and a Plan…

Financial Independence is a journey. Often it is a long and lonely journey.

Lifelong savers and frugal people might achieve it in just a few years, but for many, it can take 10 to 20 years to achieve FI.

But even if you never achieve (or intend to achieve) full Financial Independence, I believe it is a journey worth taking.

Your FI journey can also be lonely and distancing. For many, the journey to FI involves kicking against a popular culture of mindless consumerism. Finding your tribe is a great antidote. Local meetup groups like ChooseFI can provide you a safe, supportive and non-judgemental place to find answers, talk through challenges and share experiences that most modern Western society might think are strange. It is also an excellent place to find life and financial hacks that most people don’t know about. BTW, a friend and I just started the ChooseFI Valencia, Spain local group. This is a private group, but if you live in the area, we would love to meet you.

Why Choose Financial Independence?

Putting money worries behind you is life-altering. Debt is a burden. It causes stress in all aspects of your life… your job, your relationships, etc. Living paycheck to paycheck is traumatic.

As you progress through the stages of FI, stresses dissipate, opportunities open up, you find yourself, you can experiment, you can take chances, you can do all kinds of wonderful and creative things that you never thought possible when you lived under the dark cloud of “financial DEpendence”… when you lived and worked as a slave to your job, your stuff, your debt or someone else on whose financial support you relied.

Why Are There Stages of FI?

These stages of FI exist so that you can track your progress and stay motivated.

As stated, it is usually a long journey. Reaching these milestones gives you an opportunity to reflect and evaluate your path and progress. It gives you a chance to celebrate how far you have come. Sharing your progress with your tribe is important.

These stages also provide goals… milestones to keep you focused. What is the next stage? What do I need to do to reach it?

How Do I Track My Progress?

What gets measured, gets improved!

The best way to track your progress is with an automated account aggregator. If you are in the US, I highly recommend Personal Capital. If you are in Spain, Mexico or Chile, try Fintonic.

Setup a free account, link your bank accounts, credit cards, investment accounts, loans, and assets to get a complete picture of your financial well-being. After that, the software does the rest automatically syncing transactions and presenting summaries. Personal Capital includes tracking income and spending, a dashboard of key financial numbers including your net worth and an amazing Retirement Planner that allows you to run multiple What-If scenarios… answering questions like ‘How soon can I retire?’

What Are the Stages of FI?

There are 10 stages of FI. They are not evenly distributed throughout your journey.

They are front-weighted… that is, there are many stages toward the beginning of your journey and fewer as you move to the higher stages.

This uneven distribution reflects the effort you must put in. Generally speaking, most effort is required at the beginning of your FI journey. Maybe you are trying to turn around some bad habits. Your work will pay off.

Many of these stages are defined by numbers. Some numbers are inherently absolute and some are arbitrary. Achieving zero net worth, for example, is absolute. It is based on math. Examples of arbitrary milestones include Emergency Fund and FU Money… you get to choose the numbers you are comfortable with.

Stage 1: Finding FI

Definition: You have reached this stage when you have discovered Financial Independence and decide you need to make changes in your financial life.

Why Is It Important: Finding the FI movement opens up a world of tips, tricks, and life hacks that will put you on the fast-track to financial security and freedom.

BTW, Congrats! If you are reading this, then you have discovered FI and you are already doing better than the vast majority of people!

Achieving FI might be your ultimate goal, but you have some work to do to get there. Stage 2 is all about setting your plan!

Stage 2: Assess

Definition: You have reached this stage when you have completed a basic financial assessment of your current situation including income, expenses, your gap, debt, assets, net worth, and financial goals.

Why Is It Important: You can’t improve what you can’t measure.

Take Action: Do an honest and accurate assessment of your complete financial well-being. What is your Gap (we’ll discuss this in a bit)?

After you realize you need to make changes, you need to spend some time understanding yourself, what kind of saver or spender you are, how you relate to money as well as assessing where you are at financially. Each individual situation is unique. You need to understand where you are financially and what your challenges are before you can set a plan.

This is where a tool like Personal Capital can really help. It is the fastest and easiest way to get an accurate assessment of your financial situation including your actual spending. One of the mistakes I see most often is people making guesses or assumptions about their income and expenses. As much as you think your best guess is close enough, people are almost always surprised to see how much they actually spend and where the money is going! Take this step seriously.

Your Gap is your ticket to Financial Independence!

Your Gap is the difference between your income and your expenses. In Personal Capital and in traditional finance, it is called cashflow. If you make 1200 euros per month and you spend 1000 euros per month, then your Gap is 200 euros per month. This number will fluctuate with your income and expenses. It is your responsibility to use this Gap for good, to protect it and grow it over time so that you accelerate your progress to FI. You grow your Gap by increasing your income, reducing your expenses or doing both! At first, you simply use your Gap to build an emergency fund, then use it to eliminate debt, then use it to build wealth by saving and investing it wisely for the long-term!

Warning: Do not dismiss this stage. If you are not comfortable with the suggested online tools, use a pen or Google Sheet. Make a list. Write down and track your actual income, your actual expenses, and your actual account balances and liabilities. Do this over a longer period of time to get a more clear picture.

Read more about this stage including how to set your own personal full FI goal number in my post titled Start Your FIRE Journey – Step 3: Track

Next Stage: Do you have a sufficient emergency fund? If not, take care of this first

Stage 3: Emergency Fund

Definition: You have reached this stage when you have built a small cash fund to be used for unforeseen emergencies like car repairs and loss of a job.

Why Is It Important: An emergency fund should give you a small safety net and allow you to stop using loans and credit cards altogether.

Everyone needs an emergency fund regardless of your financial situation. If you don’t already have one or it is not sufficient, then this is your first priority after your assessment.

How much of an emergency fund you need is somewhat arbitrary. It differs depending on your situation, but generally, it is defined as having 3 to 6 months of expenses saved. This should be in a high-yield savings account that is liquid… you can get to it when you need it. Don’t use Certificates of Deposit. Don’t invest this money.

Next Stage: Do you have any high-interest debt? If so, tackle that next. If not, consider eliminating any and all debt to reach zero net worth fast!

Stage 4: Zero High-Interest Debt

Definition: You have reached this stage when you have paid off all your consumer debt like credit cards; you may still have low-interest debt like a mortgage.

Why Is It Important: Paying interest (especially high interest such as credit cards, consumer loans, and store cards) is the equivalent of a hole in the bottom of your piggy bank! You need to plug the hole as fast as possible!

The definition of “High-Interest” changes over time, but in the current (2020) economy, I’d say if your interest rate is over 6% you’ll want to pay it off as quickly as possible. Possible exceptions including primary, first-home mortgages and public, stable, student loans.

Stage 5: Zero Net Worth

Definition: You have reached this stage when you have reached zero net worth where your assets are at least equivalent to your debt.

Why Is It Important: It is difficult to achieve financial security and freedom if debt is weighing you down.

Your net worth is defined as your Assets (the things you own that are worth something, like cash accounts, investments, and property) minus your Liabilities (the debts you have like credit cards and loans you need to repay). If your assets are worth more than your liabilities, then you have a positive net worth. Your liabilities are dragging your net worth down… and costing you interest! Getting rid of your liabilities (or at least those that are costing you the most interest) is the quickest way to increase your net worth.

Stage 6: FU Money

Definition: You have reached this stage when you have managed to save a stash of FU Money… basically it is your emergency fund on steroids!

Why Is It Important: FU Money is an important milestone that represents your first taste of financial freedom!

FU money is a significant cash cushion such that you sleep well at night knowing you could quit your job tomorrow if you wanted to or you could take a sabbatical. This number is also arbitrary. You get to decide what your goal is.

You still need to work to support your lifestyle but FU Money allows you an escape from a job or boss you can’t stand or a career path that no longer works for you. You could take time off, switch career paths, pivot, start a business, or try a side-hustle without the stress of money worries. In other words, you can begin to take calculated risks that you would never even dream of when you were living paycheck to paycheck!

Stage 7: Half FI

Definition: You have reached this stage when you have reached half of your FI number.

Why Is It Important: The first half of your FI journey is the hardest; now, the power of compound interest is really starting to kick in! Every month, every year… the growth of your investments is building on itself! It’s like riding your bike with a nice tailwind!

Life-long savers might learn about FI, discover that there is a movement around a lifestyle that has come naturally to them and they might begin their FI journey at this advanced stage.

Stage 8: Lean FI

Definition: You have reached this stage when you have saved and invested enough to cover all your essential living expenses forever.

Why Is It Important: Even slight adjustments to the line between needs and wants can have huge implications in your FI journey.

You have come a long way! The finish line is close. At this advanced stage, you begin thinking about your exit strategy and when you might call it quits. How progressive or conservative do you want to be with your actual FI number? Consider some of the biggest risks… your health, your relationships and your sense of self-worth. No amount of money is going to mean anything if you don’t have good health, a strong social group or a personal sense of purpose.

Stage 9: Flex FI

Definition: You have reached this stage when you have saved 20 times your annual expenses.

Why Is It Important: You could retire early here if you are flexible with spending or have a side hustle.

What is the next chapter in your life going to look like? It is never too early to begin building a picture in your mind about what your new post-FI life will look like. And, if you have not already begun testing new hobbies or business ventures or whatever you will do in this next phase, then you need to begin that now. Be bold! Be creative!

Stage 10: FI

Definition: You have reached this stage when you have reached your full FI number!

Why Is It Important: Congrats! You are now Financially Independent and can now choose what to do with your time.

Many continue to find value in their work or start a business, others move on to different pursuits like travel and adventure or more philanthropic endeavors. I am a firm believer in ‘giving back’. We always need to think beyond ourselves. If FI is not the perfect time to embrace that wholeheartedly, then I don’t know what is!

A Final Word About the Stages of FI

This is a no-judgment zone. We all progress, generally, through every stage. We are all at different places in our journies.

The stages are NOT about comparison… I am wiser or more successful because I am at a higher stage than someone else. These stages are about providing a path, showing the way and providing encouragement. I hope this post offers some clarity and hope.

It is real. It is worth it. You can do this! It is within your ability!

Take Action

  • Continue your FIRE Journey with a like-minded community of friendly and helpful supporters
  • Connect to the Travel Inspire Connect community by following the blog
  • Share your responses to the following…
      • What stage are you currently at in your FI journey?
      • What challenges are you facing? What are your roadblocks?
      • What is the one thing that has helped you the most in your FI journey?
      • What are you doing to help those on the FI path behind you?

Un Saludo! Thanks for reading. We are here for you.


4 Replies to “Start Your FIRE Journey: The 10 Stages of Financial Independence”

  1. Setting goals that are measurable and holding yourself accountable really does make a difference. I really enjoyed how you broke down each stage for those of us who really want to learn more.
    Keeping track of finances SEEMS hardest when “life” gets in the way.. It really goes back to self discipline and being honest with yourself. So glad I came across your site.
    Looking forward to reading more articles 🙂

    Liked by 1 person

    1. I’m glad you are finding it helpful, Nicole. Thanks for your thoughtful comments. In my experience, what works for one person might now work for someone else. So, FI is a very personal journey in many ways. So, it is helpful to know yourself first. For some, setting goals is not motivating. For people like me, it is vital. For some, holding yourself accountable is all that is needed. For others, it only works if they are accountable to others. For me, the best way to get over these emotional/psychological money hurdles is to automate! make a one-time decision to save/invest X dollars per week and set up an ongoing auto-contribution… takes the decision/emotion/mental energy out of the equation!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s