Levels of FI - Bro

Financial independence (F.I.) is not just a goal that is achieved or not achieved. Instead it is a broad spectrum of states ranging from having a job that pays the bills to having a steady stream of income from investments so strong you can follow you dreams. To kick off this blog I am going to explain what my different levels of F.I. are. The end goal is to be able to not have money run your life but instead to just have money be a tool.

My Levels of FI
1. Having enough money to pay for expenses:
This is the most basic level of F.I. It is achieved when your income (most likely from a job) is equal to or greater than your expenses. It is impossible to get anywhere in life if you are simply racking up debt. If you are living on debt then you are simply building a house of cards. One tiny gust of wind and it will all come crashing down. I have been lucky in my life and always had a good job.

2. Own a house:
This level is on my list but might not be on everyone's list. A house is a place you can work, rest, and play. It provides shelter for your family and stability for your children. It is also a savings vehicle. As you make your mortgage payments a portion of that payment is to yourself. As the years pass you are buying the freedom of owning your own home. I do not consider a home to be an investment. It does not generate any cash and the value typically only tracks inflation.

3. House has a 15 year or less loan:
This is on my list but might not be on everyone's list. Once you have bought a house you also have the negative weight of debt. Debt in a way is a step away from F.I. It is the same is negative income. To minimize the negative effects of a mortgage it is best to minimize the debt you are in (bigger down payment and/or cheaper house) and pay it off as quickly as you are comfortable (shorter loan and/or extra payments). Personally the 15 year fixed mortgage is best for me. It offers some of the best rates and the shorter the term (length) the better.

4. Own a house outright:
In my book this is one of the most important steps to F.I. Owning a house outright means that you do not have any mortgages or loans against your property. This is important because if you own your home outright then you have much greater stability (if the stock market tanks you have a place to live) and your expenses are lower. Lower expenses helps with the following steps.

5. Passive income flows covers half of expenses:
This step seems fairly arbitrary but it is a major milestone on the spectrum of F.I. It means if for some reason you lose your job you have a large part of your expenses covered. Between cutting costs (eating out less, driving less) and scrabbling for work you could make your savings last quite some time.

6. All expenses are covered by passive income and part time work:
This step does not require that you actually work a part time job it is more being in a place where you could get by with only a part time job. This is really the first step to retirement if that is your end game. Many people never fully retire. Instead they choose to work at a hobby or a job they love. Having the power to not need to work full time opens up many different avenues of retirement or alternative careers. I am currently at this step. I am quite happy with my job but it is nice to know I could get by with only a part time job.

7. Passive income covers expenses:
This is what most would consider true F.I. This allows you to tell your boss what you really think if you need to or to just read books for a few months if your heart desires. At this level of income you are not getting a new BMW or traveling much but on the other hand you will never need to eat cat food for dinner or worry about the water bill.

8 Full cost of living covered by passive income:
This is the level we should all strive for. It is also the level that is the hardest to tell if you reached. This is where you can live a normal life that you find comfortable. The difference between this step and step seven is at this level if you enjoy a new car every once in awhile you can get one or if you would like to travel a month per year you would not need to tap into your nest egg at all.

9 Baller mode (optional)
This step is a bit more controversial. If you have income significantly above your cost of living you have the freedom to really explore some more extreme ideas. This might include living overseas for months at a time, having a toy car, or donating ridiculous amounts of money to your church or charity. Given some of the savings rates in the FI community a few extra years might be all it takes to hit this level but then again the “just one more year” syndrome can be quite dangerous.

I have used these steps on my journey as guide posts. I personally need to see progress or I have a hard time continuing to work at my goal. The last step in the journey is one I am very torn about. I hate to be a consumer sucker but I also do like nice things and like the idea of being able to travel for extended periods of time. I think I am willing to work the extra few years to get there but only time will tell.


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