Most people think financial independence is a binary thing. You’ve either achieved it, or you haven’t. But the truth is, financial independence is more like a spectrum. There are many stops along the journey, and you are gradually achieving more independence with each dollar you put in the bank.

The best part is, at each level in your FI journey you’ll unlock more freedoms and benefits, and you can take advantage of those benefits waaay before you technically cross the financial independence finish line.

Thinking of FI as a spectrum can help you from both a mental AND financial perspective. Let’s dig into this spectrum theory a little more and then outline some of the FI levels.

Financial Independence: A Holistic Approach

We hope you already know this… but money isn’t the only kind of wealth in life. Dollars and cents are mostly what we talk about on the podcast, but true wealth is really an abundance of resources.

Ironically, focusing intently on money as the only source of wealth might make you “rich”, but it’ll actually prevent you from attaining wealth in other super important areas.

A recent Schwab survey found that wealth looks a lot more like ‘not having to stress over money’ vs. just ‘having lots of money.’ And that’s exactly what we’re talking about with the levels of financial independence. Even though we encourage HTM listeners to become wealthy from a monetary perspective, we want you to enjoy building wealth and abundance in all the sectors of your life.

So forget about math, numbers and money for a moment. Let’s instead discuss the freedoms that money can unlock, and stress it can relieve from your life as you build more wealth.

6 Stages of Financial Independence

Moving up the FI spectrum means doing a few different things simultaneously: Paying down debt, saving, & investing.

If you’re plugging away at all three simultaneously, which most of us are, you’re increasing your net worth and liquidity over time. This in turn eliminates more ongoing monthly obligations, alleviating more stress along the way.

Here are some of the levels along the FI spectrum…

1. No FI

At the very bottom of the spectrum is ‘no FI’. This means that you’re living paycheck to paycheck. You have literally zero financial freedom and you’re completely dependent on your job for survival.

Sadly, a big chunk of Americans actually live in this stage currently. In fact, given the cold reality of student loan debt in our country, a giant swath of young people are starting out in a big hole with a negative net worth.

When you’re in this ‘No FI’ stage, you don’t really have any options available to you, because you gotta keep working for that next paycheck. No work means no money. You could switch jobs I guess, so there is some flexibility, but you’d have to have the next one lined up before quitting the old one.

How long you end up hanging out at this stage of FI is up to you. Escaping that rut of living paycheck to paycheck means building some margin in your life. And when that happens, you can advance to the next phase where a handful of cool new options become available… 

2. Credit Card FI

The next phase we’re going to call Credit Card FI. This is when you still don’t have much, but you’ve amassed enough to give yourself some basic breathing room. And most importantly, you’re no longer dependent on your credit cards when unexpected expenses crop up.

There’s a reason that our first money gear is to have a basic emergency fund set aside of $2,467. We’re all for using credit cards wisely, but we don’t want them to become a crutch, something you have to rely on when a few unexpected expenses pop up in your life.

With a healthy emergency fund and no longer being dependent on credit cards, you’ll have some breathing room. It’s not a huge amount, but at least it’s something. It’s a fairly low bar, but considering where so many Americans are with their finances, it’s what many need to be aiming for first. Just getting to this point can relieve a LOT of stress.

3. Layoff FI

This is the next level to shoot for on the HTM FI spectrum. It’s when you have a fully funded emergency fund, meaning you’ve grown it from from $2,467 all the way up to 3-6 months worth of living expenses.

And the reason we call this stage Layoff FI is because having that bigger emergency fund on hand will smooth out some of the bigger bumps in life like getting fired, or hopefully just laid off, from a job.

An unexpected layoff is one of those jarring events that can set you back in your financial progress meaningfully. If you’re living paycheck to paychek, you’d have to take on some serious debt and scramble to get a job (any job) just to make ends meet.

But with 3-6 months worth of financial breathing room up your sleeve, you won’t have to enter into a negative net worth situation if you lost your job. You can even take a little more time before you have to commit to a new job. That might mean getting a few weeks of rest, taking a short amount of time off, or just allowing you to turn down a job that’s not ideal for you. Achieving Layoff FI is a clutch level on the FI spectrum increasing the options at your disposal. 

4. Peace Out FI

This next level is when you’ve saved beyond 6 months of living expenses. And instead of just being prepared for a layoff, now you can engineer one if you want.

It’s still best to give two weeks notice and not intentionally burn bridges (that’s why we call it ‘peace out money’ and not ‘F U money’), but you should feel the freedom to step away from a job. This could be for health reasons, to take care of an ailing parent or spouse, or even a planned prolonged career change.

Rather than taking a more passive role in your employment and hoping that you’re not next on the chopping block, achieving Peace Out FI means you’re actively steering your career and life ship.

This level of FI also comes with more power to push back. And it also means you also don’t have to completely quit when something happens at work that you’re not a fan of. You have more confidence to ask and push for the things you really want at work. It’s easier to negotiate successfully when you really can walk away.

5. Sabbatical FI

Moving up the financial independence spectrum, next comes Sabbatical FI. This level is like Peace Out FI on steroids. Here, you can take an extended absence from work and be just fine. If you quit, you’re not immediately looking for a new gig like you would be with ‘peace out FI’. You’re actually able to enjoy a lengthy period of rest, and you might even have enough on hand to completely change what your life and career looks like.

We’re not really talking about a simple extended vacation that your employer offers. Some workplaces might call taking 4 weeks off, a sabbatical. What’s at the heart of ‘sabbatical FI’ is the ability to reinvent yourself. It’s when you have the freedom to change course in your career, or to fulfill a desire to go back to school, or even to have the confidence to start a new business.

This makes me think of our buddy Chad Carson, who we’ve had on our podcast a few times. He’s done multiple year-long stints in overseas countries for fun with his family. Sounds impossible for most folks, but if you have enough cash on hand or passive income, (which comes from rental properties in Chad’s case), you can make this lifestyle a reality!

Related: Full post on How to Take a Year Off Work!

6. Full FI

The last stop on the FI spectrum is when you achieve Full FI. Congrats to you, the world is your oyster! You never have to work again if you don’t want to.

Interestingly enough, most folks do keep working, especially if they’re still young and find something they want to pursue. Some folks might not want to quit work completely, just do less of it and enjoy it more.

And even once you’ve achieved this level, you might still want to find ways to grow your net worth. Maybe you have goals of generational wealth or to be super philanthropic. Whatever the case, this is where the FI spectrum ends. Your goals from here on are usually less about money, and more about how you want to spend your time.

Saving vs. Investing

Liquidity is certainly helpful. It’s a meaningful part of how you’ll get to experience the increased levels of FI, and pay for those short term life goals and expenses. How are you supposed to handle unexpected medical bills unless you have some cash in the bank?

On the flip side, tax advantaged retirement accounts should be a priority too. But you can’t access those till you reach the ripe ol’ age of 59.5! So if you sock everything away into those accounts, despite your growing net worth, you’ll be a bit strapped for cash and you’re less likely to feel like you’re moving along the FI spectrum.

The right way to think of saving vs investing is to take the ‘both/and’ approach. Yes, liquid savings matters. But don’t shoot for 18 months worth of savings before you invest your first dime. We actually want you investing as soon as you hit credit card FI, once you’ve got a basic stash of $2,467.

Savings alone won’t get you to the ultimate stop on your destination. You’ve gotta experience compounding returns over a longer period if you want to achieve Full FI.

The Bottom Line:

As you continue to save money and grow wealth, find ways to exploit your independence. What do you want your days to look like? What do you want your weeks to look like? You really are able to morph your life more than you think along the way.

This is the real power behind realizing that financial independence is a spectrum. Take advantage of the progress you’ve made, no matter what level you are at. The ultimate goal isn’t dying w/ millions in the bank. So don’t be afraid to lean into your FI level and enjoy the benefits. That’s the whole point!

You’re not going to achieve FI overnight. And the real secret is: you don’t need to.

Related posts:

• Pros and cons of the FIRE movement
• Choose your own FIRE adventure!
• 12 ways to stop dipping into your savings account

Beer notes:

While talking about the FI Spectrum we enjoyed a Hayburner IPA by Big Ditch Brewing. Big thanks to Liz and Tyler for sending this one our way! And please help us to spread the word by letting friends and family know about How to Money! Hit the share button, subscribe if you’re not already a regular listener, and give us a quick review in Apple Podcasts. Help us to change the conversation around personal finance and get more people doing smart things with their money!

Best friends out!