Seven Levels of Financial Independence

The concept of financial independence is closely associated with retirement; after all, if you aren’t financially independent, you probably won’t be able to retire.

But it’s not just a question of whether you are financially dependent or independent. There are several levels between being entirely dependent and fully independent.

The following is a guide to different levels.

Sadly, we don’t all move through all of the stages, and we don’t all reach the final level. And it’s not a one-way street – we can move down a level as well as up.

It can be a bit like Snakes and Ladders – with divorce and ill health often being the snakes, and inheritance often being the ladder.

And you might deliberately make choices that move you back a level (e.g. moving house and increasing your mortgage).

This framework of the levels of financial independence can help us to understand the economic consequences of the choices we make quickly.

Level 1 – Dependence

We all start here.

At this level, your lifestyle depends on others for financial support.

You’re at this level if you rely on financial support from your parents, spend more than you earn, or if your debt payments (credit cards, personal loans, student debt) exceed your income, after tax.

Level 2 – Solvency

Solvency is the ability to meet your financial commitments. You reach this level when you no longer rely on anyone else for financial support — when your income exceeds your expenses, and when you are no longer accumulating debt.

Level 3 – Stability

You achieve stability once you have no credit card or personal loans, have established some emergency savings, and your after-tax income exceeds your outgoings.

You may still have a mortgage — but you’ve paid off other borrowings and built up enough savings to protect you from the unexpected.

Level 4 – Free Agency

You reach this level once you can work and live how and where you want.

You will have eliminated all debt (including your mortgage), and you have enough savings, investments and pensions that you know you could quit your job at a moment’s notice.

Often people take a different job at this stage – one that gives them more control over how they spend their time – a move to self-employment or flexible working is common at this level.

Level 5 – Security

You achieve financial security when your pension and investment income and savings can cover your basic needs for the rest of your life.

Even if you never worked another day in your life, you would be able to afford a roof over your head, utility bills and council tax, transport, basic food and clothing for the rest of your life.

You have to reach this level before you can retire.

Level 6 – Independence

Your pension and investment income and savings are sufficient to fund your chosen standard of living for the rest of your life.

You can afford the basics, but you can afford some comforts too. You have enough.

Level 7 – Abundance

“Enough — and then some”.

Your investment and pension income will not only fund your lifestyle indefinitely but grant you the freedom to do whatever you want.

You can share your wealth with others or indulge in luxury.

You can’t retire before you reach level 5, but you can decide whether you want to retire in level 5, 6 or 7.

To have this basic understanding of your level of financial independence, you first need to have a good grasp of your assets, liabilities, income and outgoings.

And to understand that, you either need to work it out for yourself or ask a good Financial Planner. There are seven levels of financial independence. Spoiler alert; you can't retire until you reach level 5 Share on X