10 Stages Of Financial Freedom - Bitter to Richer (2024)

Most people yearn to achieve financial freedom. Unfortunately, there are a lot of obstacles along the way and not everyone sees a clear path. However, I’ve broken down the path towards financial freedom into 10 stages, to make the process easier to manage!

1. Your Income Exceeds Your Expenses

The first stage is pretty straightforward and clean-cut. Your total household income needs to be larger than your total household expenses. In short, you make more than you spend. If you have issues with that, I recommend building a good budget and sticking to it religiously.

If you need to cut some expenses, the best place to start is housing, transportation, and food. Only buy as much house as you need, buy used cars, and refrain from dining out. If you do that, you’ll be on the right track. Of course, if you need to make more money there are tons of ways to reach six figures these days.

2. You’re Able To Build Up Savings

Stage two is really just following up on the foundations you’ve laid out in the first stage. Now that you make more than you spend, you can actually start saving some money. Your best bet is to build up an emergency fund, probably using a savings account with a high interest rate like the one Axos offers.

If you don’t know where to start with an emergency fund, begin by saving the equivalent of one month worth of expenses. Once you do that, build it into six months worth of expenses. Based on your specific case, you may want to save more than that, but that is a good starting point for most people.

3. You Have The Luxury Of Taking Risks

Now that you make decent money and have savings to fall back on, you can take far more risks. This can be anything from investments to your career. The point is, now that you’ve built something to fall back on, you can actually take on new opportunities without having to risk everything you’ve built. Sure, if you take an opportunity and it falls flat, you’ll encounter a setback. However, at this stage you have the ability to take on new opportunities and still have breathing room if they don’t work out.

Of course, for those opportunities that do work out, you’ll be able to propel yourself towards financial freedom even faster.

4. Being Able To Meet Minimum Retirement Goals

This is the point where it’s normal to start thinking about how you need to plan for your retirement. Now, you still have a long way to go before you get there, but you can start checking off basic things. Think about matching your employer’s 401k contribution or opening a Roth IRA.

Do some research and think about your long-term plans. Again, it’s okay for it to be a ways off. You’re not ready to tackle retirement full-force yet, but you’ll want it to start being on your radar. The important thing in this stage is to not forget what your ultimate goals are going forward. Remember to focus on where you want to end up in the coming decades.

5. Being Completely Free Of High-Interest Debt

Knocking out high-interest debt is one of the best investments. Think of it this way, eliminating debt is a guaranteed return. As a general rule of thumb, I consider anything with an interest rate over 5% too high and an absolute emergency to take care of. Avoid taking on new debt (that is part of what emergency funds are for) and tackle your existing debt with the best method that works for you.

The biggest caveat here is that you need to stay disciplined and be consistent to eliminate all of your debt. It probably will take a good deal of time, so don’t expect overnight success. Take your small victories and eagerly wait for the day when all of your major debt is gone!

6. Having The Free Time To Build A Side Hustle

The sixth stage is all about pushing yourself further. There are tons of lucrative side hustles these days, all you need to do is start one and stick to it for a month. I’m not saying a side hustle will make you rich by any stretch of the imagination, but adding in another source of income can make it much easier to get ahead.

So, build another source of income on the side and use it to fuel your investments (including investing in your own education, if you want to). This doesn’t need to be something that drains you or has a huge upfront cost, just try to have fun with it and do something you’re already good at.

7. Turning A Side Hustle Into A Full-Time Business That Can Replace Your Job

Stage seven is more opportunistic and capitalizes on what you did in the previous stage. Hopefully you have some side hustle that you’ve found at least a modicum of success with. Now, if you want, try to develop it into something that can replace your job. Depending on the side hustle you could turn it into a flourishing business!

Of course, if that doesn’t work for you, just keep going on with the side hustle. Try to get it to the point where it matches your main source of income and enjoy the rewards of your labor.

8. Using Your Income To Skyrocket Your Investments

Now that your income is significantly larger than your expenses, you can use that to propel your investments to the next level. Ideally, if the rest of the stages proceeded well, you may now be able to invest 50% or more of your income! I know that sounds like a lot, but all this work was to help you get to this stage. Investing that much will set you up for success and make your long-terms goals much closer to reality.

Putting in the extra effort now can save you years in the long run. If you’re still looking for a brokerage, try M1 Finance.

9. Being Able To Work Part-Time Or Not At All

Depending on how your investments and income progress, stage 8 could take a few years or many years. Either way, the next step is not having to work full-time. At this point you may be able to step away from your job and just have a business or side hustle that you do part-time. Alternatively, you can sell your business or outsource part of the work. This stage is all about being able to actually realize your financial freedom and using it for your benefit.

10. Being Able To Live Off Of Your Investments In Perpetuity

Eventually, you should be able to live off of just your investments. This can take a lot of money, and if you’re interested in the details you can check out my article on early retirement. At this point, you can do basically anything you want whenever you want. You have the funds to sit back and relax, or you can still work on passion projects and the like. This is the final stage in your journey towards financial freedom, and the sky is the limit.

Conclusion

Hopefully it doesn’t take you long to get through the first few stages, but be prepared for years of discipline and work. Don’t worry though, it’s never to late to start working towards financial freedom! If any of you have tips of your own, be sure to leave them in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure tosign upfor the Bitter to Richer newsletter.