The Ten Stages of Financial Freedom

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Financial freedom is a goal many of us aspire to, yet is poorly defined and means different things to different people. Financial freedom can mean anything from being able to pay the bills without worrying to being able to live an extravagant lifestyle, without needing to work.

The usual advice of staying away from bad debt, spending less than you earn, setting goals and forming a written financial plan apply. But there are also non-financial ways to progress up the financial freedom ladder.

What Financial Freedom Means – Ten Stages

There are many stages along your financial journey. You may not want or need to reach step 10. This is an individual journey, you get to choose your own goal:

1. Have Some Savings

As soon as you are an independent adult, you need an emergency fund. Unexpected things happen, good and bad. It’s worth gritting your teeth, digging in and producing a cash flow boost to get ahead on the bills and fund an emergency fund.

A good start is $1000. This will cover a lot of common emergencies (including insurance excess charges).

The less financially free you are, the more of an emergency fund you need. If you are young, a loss of income would be disastrous. Insurance policies can also help you protect against emergencies. Income protection is the most expensive, and most important if you have one main income earner in the household. It does not, however, cover unemployment. Having dependents obviously increases the necessity of a large emergency fund and insurance.

Once you are financially independent, your emergency fund doesn’t need to cover loss of income, only unexpected events requiring cash quickly.

2. Being Able to Pay Bills without Worry.

Receiving a large unanticipated bill is never pleasant. When first starting out as an adult, almost everyone has this challenge. Being unable to afford to pay the latest bill is a sign of overspending or under planning.

Are you spending money faster than you earn it? Because you don’t earn enough money, or that you spend more than you can afford? Options are to cut expenses or increase income. Cutting expenses has an immediate effect and is the most efficient. $1 saved means an extra $1 for your savings. An extra $1 earned means $1 minus tax to add to your savings. Increasing income takes a bit more time but is, in comparison with cutting spending, unlimited.

As well as reducing discretionary spending, there are many low effort ways to save more. Opting for annual payment for a discount, checking whether for discounts and shopping around every year for renewals can save $100’s. Cancel subscriptions you don’t get a lot of value (or really can’t afford).

Sometimes, it’s just a matter of timing. The council rates always seemed to be a nasty surprise in our house, despite the fact they arrive on a predictable schedule!

Dividing the largest bills into direct debit instalments is great for avoiding bill shock. Direct debiting into a separate account for big bills (+/- Christmas) means you can earn the interest rather than giving the company an interest-free loan.

Coles flybys and Woolworths rewards points can be used towards flights in better times, but right now no one is going anywhere. It’s definitely not a reason to shop at these stores if you have a cheaper option you like close by. But if you are shopping at either of these, you are collecting points. Rather than let them expire or claiming them randomly, many save these to reduce cover the Christmas grocery shop.

When you are struggling to pay all the bills before their due dates, having enough income to pay all your bills worry-free seems like the ultimate dream.

Once you have managed to get ahead of the bills and have built a cash cushion, “bill shock” quickly becomes a distant memory. Good riddance! But do reflect on how far you have come, and appreciate the privilege that has allowed you to leave this struggle behind.

This is a huge step towards financial freedom and indicates you are in control of your finances. All the other stages on this list are a possibility once you have achieved this stage.

3. Be Investing and on Track for Retirement

The younger you are when you work out a basic plan for retiring, the easier this is.

$200 per month earning 8% per year builds $300,000 after thirty years.

That’s an extra $12,000 per year after retirement, according to the 4% rule of thumb.

I have talked a fair bit about how overwhelming it is to choose a retirement age in your 20’s or 30’s. I remember being completely stumped by this question! Choosing a retirement age is just a starting point, you can always change your goal later. You will make more progress working towards any goal than not having any.

As you get older, the focus on retirement sharpens into focus all of a sudden. It’s pretty variable when this happens. Hopefully, you have already made a good start before this occurs.

Either way, it’s time to set some goals, make a financial plan, choose your investments and automate as much as you can. Motivation comes and goes. Remove your brain from the process as much as possible!

Most people feel behind when they start. Getting on track with your plan is another huge achievement. Check out the ultimate guide to wealth building to get some ideas.

4. You Can pay for the Lifestyle you Want Without Consumer Debt

The “without the consumer debt” is the important part here. Plenty of people fund their desired lifestyle with debt. Over time, this becomes increasingly stressful as they spiral towards financial destitution.

With patience, a well-paid career and mindful upgrades, one day you realise you can pay for everything you need, and everything (in reason) that you want without worrying.

Wanting less brings this date forward significantly! Here, I think the investors from lower-income families have a big advantage. If you were brought up in a huge house, always had a newish car that never broke down and travelled overseas for holidays these are the standards you accept as normal.

If you grew up “roughing it” a bit at times, making do is a way of life you are familiar with. Very few of my colleagues have furnished their first homes secondhand. Those willing to do without all the little luxuries for a while will progress towards their financial goals faster.

Many stop when they can pay for their lifestyle without consumer debt. It feels like the game is won, and it’s easy to start drifting. But an increase in expenses, such as taking on your mortgage or having kids can set you back for a prolonged period. If you can fund your lifestyle without stress, thank your lucky stars and just keep going a little longer to get to stage 5! Your future self will thank you.

5. Have a Healthy Surplus Income after Everything is Paid For

After paying for all your needs and the lifestyle you desire and are saving on track for retirement, having any surplus income really does mean you are winning. You can choose to spend this income however you like to improve your family’s long-term happiness. You may choose to:

  • Work part-time so you can focus on family, friends and fun. You may even want to take on a side hustle without burning the candle at both ends.
  • Take unpaid (or half pay) leave from work. Long holidays with your kids? Extended travel around the world or to see Australia? Voluntary work that pays in self-fulfilment?
  • Change your job. Saving or investing this surplus instead of just upgrading lifestyle unnecessarily maintains freedom in case things go poorly at your current workplace. Workplaces can change quickly, and a dream job can become a nightmare. Knowing that you’re not tied to your current income will empower you to make the change if and when you need to.

6. You Have 1-2 Years of Living Expenses Saved Up

Having this amount of money saved means, well before financial independence, you have security and options. If your job changes so much it sucks, you can quit and find another (leisurely). If a family member gets sick, you can take extensive time off without worrying.

You will need to pay down debt before retirement, and this goal will often be met along this debt destroying journey.

7. Be Non-Deductible Debt Free (or Completely Debt Free)

Some people hate debt. Others embrace investment debt.

Either way, we can all agree that becoming non-deductible debt-free is a huge achievement. There is always lots of debate over whether to pay off debt or invest first. The mathematical answer is usually to invest (tax effectively), but the emotional answer is often to get rid of the damn mortgage.

Being non-deductible debt free means you are far less susceptible to interest rate changes. Your cost of living will drop (sometimes dramatically). This move provides a large sense of freedom. There will be ongoing costs associated with owning a home including rates, insurance and maintenance. But being mortgage payment free is an aspiration for many.

What will you do when you get rid of this cumbersome debt? It should definitely be celebrated, but not, I argue, with closing the account and receiving the “deed” from the bank.

The future remains unpredictable, and even if your plans are to stay in this house forever, those plans may have to change. Maintaining flexibility is a wise move where possible. Instead of completely “paying off” your mortgage, fill the offset and then switch to interest only to maintain the ability to withdraw your offset cash if needed.

The offset cash can also be moved over to a new home whilst maintaining the tax dedutibility of the balance of your original home loan if you choose to hold the property and rent it out.

8. Reaching Coast -Financial Independence

Money invested and earning around 7% per annum will double in around 10 years.

If you have saved half of your financial independence number (Annual living expenses post-retirement x 25) at least 10 years before your planned retirement, you are Coast FI.

So for example, if your retirement expenses will be $80,000 you need to accumulate $2 million before retirement. If you can get to $1 million 10 years ahead of retirement you are Coast FI.

This means you could go back to living “paycheck to paycheck” by reducing work income to just cover your lifestyle expenses. Funny how things come full circle!

Of course, some savings are still a good idea so that you maintain the freedoms in the points above. But this provides you with a lot of options, being able to drop your income significantly.

If you are 15 years out from retirement, assuming the same 7% returns, 1/3 of your FI number makes you coast FI. If you are 20 years from retirement under the same assumption, you only need 1/4 invested.

Note if you increase your lifestyle once you reach Coast FI, you will either have to reduce your lifestyle back to the previous level at retirement, save more or work longer.

Coast FI also assumes a set investment return, which of course is not guaranteed. All the same, reaching this point is a massive psychological win. You are unlikely to stop investing completely, but you can take your foot off the accelerator.

9. Lean Financial Independence

This is having enough invested that you could live off your investments if you really had to. So, you would be housed, clothed and fed, but not a lot more.

It may not be a lifestyle you would choose to live, but there are psychological benefits in knowing you wouldn’t be destitute if your job were to disappear.

Depending on your desired retirement income and time frame, this may come before or after stage 8 – Coast FI.

10. The Ultimate Financial Freedom – Complete Financial Independence

Complete financial independence is considered when you have investments worth around 25 x your annual expenses (including discretionary spending).

There is an entire financial movement based on the idea of reaching financial independence as soon as possible.

Complete financial independence gives you all the choices you could wish for. You can work or not, volunteer, start a business, anything money stops everyone else from doing.


Many financially independent bloggers continue to receive income through passion businesses. So in actual fact, if they are now choosing their ideal life they didn’t need complete financial independence to achieve this level of freedom.

Even a small amount of income makes a big difference to the nest egg you need to have invested to live off. Earning $20,000 per year through an enjoyable hobby-job would mean having to save $500,000 less. Each person in a couple earning $20,000 per year means they need $1 million less invested!

The important thing is not to delay living your ideal life waiting for financial independence. Work out what you would do if you were financially independent – and see how much of this ideal life you can build now.

How To Achieve Financial Freedom in 5 Years.

With a good income, an incredible amount of progress is possible in 5 years. The White Coat Investor’s famous Live like a Resident suggests a focussed initial 3-5 years of investing on reaching a high income.

The most important steps won’t surprise you

  • Avoid “bad debt
  • Educate yourself about investing
  • Buy less house than you can afford (unless this is part of strategic capital growth plan)
  • Live below your means
  • Set goals and make a financial plan
  • Look after your health – without this, you can’t buy this back
  • Look after your spouse – you can’t protect yourself from the emotional and financially devastating effects of divorce.
  • Consider risk first, be suspicious and don’t get ripped off
  • Automate your investment plans
  • Live your ideal life as much as you can along the journey

What stage of financial freedom are you at? Do you have any tips for readers a stage or two behind? Comment below to share what you’ve learned.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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