7 Levels Of Financial Independence You Need To Know

Financial independence can be achieved on many different levels. Which level is right for you? The great thing about the levels of financial independence is that they can be applied to practically anyone with any income and spending level because these levels specifically can be applied based on percentages, not on specific numbers. These levels of FI are often not too far away from each other in terms of the years it takes to achieve them because of the power of compound interest propelling you through each level.

Hello everyone my name is zach and welcome to on cash flow where i help you become a master of your own cash flow now let’s get started the seven levels of financial independence that you can achieve the order that i’m going to be presenting them here is not necessarily that one is better than the other or that you need to achieve a certain level of financial

Independence now we’re just going to be talking about generally speaking how much you wealth like you would need to accumulate in order to be considered this level of financial independence so let’s go ahead and start with the first level of financial independence and that is coast fire alright so coasting financial independence and it generally means that if you

Achieve coast fire that you have enough money to use compound interest to get you to regular retirement with the amount of wealth that you have now so let’s explain that with a good example here so let’s say that you are currently aged 30 and you want a regular retirement at your full retirement age according to social security at age 67. that means between age 30

And age 67 that you have at least 37 years left until your retirement so you want to figure out are you coast fire right now in order to estimate this you just have to take your current amount that you have invested and then make a projection of how much average annual return that you’re going to get from that investment and see what the number is going to be at

The end of your time period so you’re just going to be using a simple compound interest calculator in order to estimate this so let’s say at age 30 you have 100 000 net worth 37 years from now you expect to get an average return of 8 from your investments and a compound interest calculator is going to estimate that you have 1.7 million dollars by the time you’re

Age 67. now that does sound great but we do have to keep in mind that during that same time there’s going to be inflation that’s going to be eating away at that 1.7 million dollars so it’s not going to be worth nearly as much as it is today so you have to actually adjust for inflation to see how much you’re going to have in the future and how much it’s going to

Be worth in today’s dollars like how much you would theoretically need to retire in today’s dollars but you’re going to have to adjust that for inflation based on when you turn your actual retirement age if that is enough for you to retire on then you are technically coast fire so your coast fire number is going to be the number of wealth you need today in order

To allow compound interest to allow you to retire in the future when you want to retire the next level of financial independence we’re going to discuss here is known as flexible financial independence or put shortly flex fi with flexible financial independence you’re going to be using a higher withdrawal rate initial withdrawal rate than you would in a traditional

Sense so in a traditional sense you’ve heard about the four percent withdrawal well in a flexible financial independence withdrawal rate you’re going to be starting with a higher withdrawal rate of around five percent the magic here is that you’re going to be adjusting for market downturns so you’re starting with a higher withdrawal rate of five percent and you’re

Not going to be withdrawing that same amount adjusted for inflation upwards every single year you’re actually going to be decreasing your withdrawals when the market takes temporary downturns you also need to be flexible to where you are willing to earn a little bit of extra income the whole idea here is that you don’t have to wait as long as you would if you were

Following the four percent rule or if you were following a three and a half percent role or even like three percent for your withdrawals now you’re starting with around five percent a much higher withdrawal rate but you are being a lot more flexible as in how much you’re going to spend year to year so for example if you started with a base amount of spending of 30

000 per year that would be around twenty five hundred dollars per month then your flex five number is going to be six hundred thousand dollars so once you achieve your investments of an amount of six hundred thousand dollars then you would be considered flexibly financially independent because you can start withdrawing five percent of that and that would be thirty

Thousand dollars and then if there are market downturns you want to build in flexible spending within that spending plan to where you can re further reduce your expenses temporarily in order to you know wait out those market downturns you also want to be willing and able to go and earn some extra income if you need to if your portfolio is not doing it as well as

You expected and then you just keep adjusting to keep your plan going no matter what level of financial independence you personally are going for there is some due diligence that needs to be accounted for that needs to be done after you achieve financial independence and i have a whole separate video on what you should be doing after financial independence but

We’ll talk more about that later but for now let’s move on to the next level of financial independence and that is lean financial independence or lean fire however you want to call it and this is open to your interpretation of how you want to define lean thigh generally speaking it’s mostly acceptable to say that if you are living on below the median household

Income in the united states then you would be considered lean phi when you’re living off of your investments with lean fly you’re typically going to be following the four percent withdrawal rule so your initial withdrawal rate is gonna be around four percent but you’re also going to have baked into your plan a little bit less discretionary spending that you would

Typically have with like a regular financial independence and there really is no specific number to say hey this is lean thigh and this is when you become regular fly but i like to define it as being a little bit lower than the median national income or the median national spending however as a good example you can live on about two thousand dollars per month in

Many low-cost living areas in the united states specifically and of course around the world as well and that could be about twenty four thousand dollars per year and if you were living on the four percent rule on twenty four thousand dollars per year then you’re starting initial portfolio value should be around six hundred thousand dollars and that would be your

Lean five number now one small step above lean fi is one that i like to call nomad phi so instead of staying in one place which is generally the plan if you are lean fire nomad phi is where you’re actually moving around typically worldwide based on where is going to be best for you to have a higher quality of living now traveling can have a much higher expenses all

Right those are going to be higher discretionary expenses and that’s why even if you are moving to lower cost living countries it might be a little bit more expensive than a lean thigh lifestyle that stays in one place one low-cost living place so with nomedphy i would generally define it as you’re still starting with the four percent safe withdrawal roll but your

Plan is basically traveling full-time and taking advantage of low-cost living areas around the world so for example if you want a nomad phy number of 30 000 per year then you would need to spend 2500 per month if you’re using that four percent as your guide then that means that you would need a portfolio of around 750 000 before you start taking your withdrawals

Sometimes you can stay in higher cost of living areas and sometimes you can stay in lower cost living countries and you can kind of balance out your budget that way so where it fits into your nomadify lifestyle and one more quick thing i do want to add in here no matter what level of financial dependence you are going for you do need to like this video because

It’s definitely going to help you out on your path to financial independence because then the youtube algorithm is going to recommend more of my videos to you and with knowledge comes power with power comes great responsibility and that is what you’re going to be getting if you like this video so please like the video if you’re enjoying it so far i would really

Appreciate that but next up on the totem pole of phi lifestyles i think that right after nomad phi we could define a financial independence lifestyle known as barista fire barista fire can take many forms but at the most simple level it is still continuing to work part-time in some kind of capacity so you’re taking some money from your portfolio and you’re also

Earning some income whether it be from a part-time job whether it be from a business whether it be from pretty much anything so the point is that you’re still earning a little bit of money each year to supplement your asset withdrawals and barista fire is still also based on the four percent withdrawal of course and also a barista fight lifestyle usually allows

You to spend more and you can still achieve financial dependence in a similar amount like of a time frame because you still have additional income coming in in addition to your asset withdrawals so a barista 5 lifestyle might be let’s say you’re spending 48 000 per year so that’s about 4 000 per month so that could be a pretty decent lifestyle in most areas in

The united states besides the really high cost of living areas and you might be earning let’s say 1 000 per month on average from your part-time work or your part-time business or whatever you’re doing to earn some income and then the other three thousand dollars per month might come from your investments so if you are doing three thousand dollars a month from your

Investments that’s about thirty six thousand dollars per year and therefore if you were following the four percent withdrawal rule then your initial starting portfolio value would have been around nine hundred thousand dollars so in this example your barista five number would have been nine hundred thousand dollars and like with most other forms financial dependence

There is no one number that you have to follow to become barista phi the only difference here is that you are also earning a part-time income you are also earning income in addition to your portfolio withdrawals next but certainly not least after barista phi i think the next level of financial dependence is just regular financial independence so this is what most

People are looking for when they discover financial independence this is some kind of lifestyle that they’re looking for and again regular financial dependence is not defined by any single number but generally it is also following the four percent rule anywhere around the median income value if you are around there or a little bit more than that you know within a

Few standard deviations of that i think that would be considered like a regular financial independence lifestyle so for example the median household income i think it’s in the 60s like the 60 000 per year somewhere around there and that’s how much you’re basing your regular financial independence goal on then that would mean that you’re spending about five thousand

Dollars per month and if you’re spending five thousand dollars per month in financial independence that means you need sixty thousand dollars per year multiply up at twenty five if you’re following the four percent roll and you would need about 1.5 million dollars of investments of your starting portfolio value to be considered regularly financially independent

And that is the typical definition that when you would define hey i’ve reached regular financial independence but there is another level that is typically above regular financial independence and that is what most people would call fat fire so fat financial independence it just basically means that you’re spending more than the median income you could say hey 100

000 per year is fat fire if you live in a really high cost living area then 100 000 per year really isn’t fat fire but generally speaking you know if you average it out through the entire country then 100 000 is generally speaking fat fire but if you’re spending much more than the average income or much more than the average spending especially in the area that

You’re living in then you can consider yourself to be fat financial independent if you’re living off of your investments so let’s take an example of 120 000 per year for easy math sakes that’s going to be 10 000 per month so if you’re spending that amount while you’re financially independent while you’re retired then you need approximately three million dollars

To be considered fat fire if you’re following a four percent withdrawal rate and now i want to know from you in the comments below what level of financial independence are you going for of these seven levels or maybe one i didn’t mention which one of these appeals to you the most and as i said before no matter what level of financial independence you are going for

There are some special considerations there are some due diligent things that you need to account for and so that’s why you need to watch another video that i created okay i created another video my full guide to what to do after you achieve financial independence and this applies to any level so make sure you watch that video after you’re done watching this one

Okay it’s gonna pop up on the screen right after i get off the screen thank you so much for watching this video i’m zach from oncashflow.com and i hope to see you next time you

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7 Levels Of Financial Independence You Need To Know By On Cash Flow