10 Stages Of Financial Independence And How To Get There!

The best way to build your perfect preppy lifestyle is to imagine what your future life will be like day by day.  Once you can see your future, then you just create the plan to get there. Most often, this would require moving through the 10 stages of Financial Independence (FI).

In my life, I imagined my perfect preppy lifestyle with a Volvo, classic roadster, L. L. Bean boots, Vineyard vines cloths, a little cottage by the beach with my 21 foot sailboat in the driveway, and all the time in the world to golf and sail with my family and friends. The key to my plan is TIME!

The key to finding your perfect preppy lifestyle is to clearly define its cornerstones.  For me, it was all about the following, and since I am very preppy

  • Spending time with Family and Friends
  • Having time to travel
  • Focusing on my favorite activities and hobbies (Golf and sailing)
  • Spending time reading, learning, cooking, and gardening

But my time (at least 60 hours a week) didn’t belong to me.  It belonged to my employer.  In order for me to live the lifestyle I wanted, I would need to reach financial independence (FI) at a young enough age to enjoy the perfect preppy lifestyle.

Your perfect preppy lifestyle will likely be different, but the one thing it will likely include is more time for the things you enjoy.  In order to control your time, you need to be on a path towards financial independence.

10 Stages of Financial Independence

Stage 1: Dependence

Dependence is the first of the stages of financial independence and is exactly what it seems like.  You are dependent upon someone else for your basic needs in life.  This includes basics like food, housing, and other basics.

Most minors and students are in this stage because they haven’t had the chance to enter the work force.  Interestingly, the more time you spend in this stage preparing for your career, the better your chances of making it to financial independence.  Just make sure you are using your time wisely.

I had a friend who always told me “You can play now or you can play later”.  This simple phase has stuck with me for more then 30 years guiding me in my everyday decision and if you take the same approach, you will also be successful in your FI goals.

Stage 2: Solvency

Stage 2: Solvency, Stages of Financial Independence

The solvency stage is your fist step in the crazy world and how you are able to attempt to tread water everyday.  You have income, monthly expenses, and you are able to pay your bills every month without going deeper into debt.

This is often called “Living paycheck to paycheck” and according to Forbes, 78% of Americans are in this stage of FI.

According to the 2017 CareerBuilder survey found some startling statistics related to this stage of FI:

  • Nearly one in 10 workers making $100,000+ live paycheck to paycheck
  • More than 1 in 4 workers do not set aside any savings each month
  • Nearly 3 in 4 workers say they are in debt – and more than half think they always will be
  • More than half of minimum wage workers say they have to work more than one job to make ends meet
  • 28% of workers making $50,000-$99,999 usually or always live paycheck to paycheck, and 70% are in debt

Dave Ramsey, a radio personality who provides basic financial advice to listeners recommends his “7 Baby Steps” to get out of debt and build wealth.  This would be step 1 on his 7 baby step program, save $1000 in an emergency fund.

Stage 3: Financial Stability

Stage 3: Financial Stability, Stages of Financial Independence

Financial stability is the 3rd in this list of the stages of financial independence and is probably the most critical step towards FI.  It is the stage in your life when things start to turn around and you are ahead of 78% of Americans.  You simply start saving money and paying down your debt every month as aggressively as possible.  This is Dave Ramsey’s baby step 2 (Pay off debt).

There are many different opinions on how to tackle this stage.  Dave Ramsey and many others tell people to pay off all your debt ASAP.  Others say to pay off debt while also saving and investing to build your passive income nest egg.  My opinion is to try and do both.

Also in this stage it is critical to increase your income as much as you can.  If this means taking on a second or third job, then do it.  You need the resources to pay down debt, save for a rainy day, and get the power of compounding interest working for you as soon as possible.

Like I said above, I agree with both paying off debt asap and saving in your emergency fund.  Debt is bad and needs to leave your life as soon as possible, but a healthy savings account (or investment account) is critical to eating and paying your rent or mortgage every month.  I sleep better knowing I have several months of bills in the bank in case of trouble, and I build that along with paying off debt.

Stage 4: Debt Freedom

In this stage towards FI, you will be mostly free of debt.  There is some debate on how much of your debt you need to have under control to be in this stage.  I believe the only debt allowed in this stage is your house.

In this stage, you have enough money and means not just to survive but also start thriving. You don’t live a hand-to-mouth existence.   If you are following Dave Ramsey’s baby steps, then you are in steps 3-7.  In these steps, you are debt free, saving for retirement, have an emergency fund, and saving for your children’s college.  You are living a very good life.

There is a much easier way to achieve this level of financial happiness.  Living a minimalist lifestyle can pay off debt faster and build your nest egg larger and faster then can be imagined.  Combined this with a good income is the holy grail of achieving financial independence.

Stage 5: Financial Security

Stage 5: Financial Security, Stages of Financial Independence

If you have been aggressively saving in short, medium, and long (retirement) investments, then your reword will be financial security, the 5th step through the stages of financial independence  Once your investment income is adequate to cover your basic major living expenses, such as housing, food, utilities, and transportation, then you’ve reached the stage of financial security.

I also refer to this level as the safety net stage.  You need to continue to work and aggressively save because no one wants to just “get by” on the basics of life.  We want to enjoy life, and the perfect preppy lifestyle is all about doing what you enjoy with the people that mean the most to you.

At this stage, some people prefer to start doing what they love instead of just earning a paycheck. They take their foot off the gas and really start to enjoy life. I agree with this approach depending on your age and net worth. The average American will require $40,000 a year depending on their location to pay for their basic living expenses. This means you will need to have 1 million in investments to earn a basic living in America.

Stage 6: Financial Vitality

Most people don’t include this stage towards  financial independence but Tony Robbins covered this stage in his book “Money: Master the game”.  This is the second best book I have read on how to manage money and its highly recommended to all.  BTW, the first and best book I have read about basic money management is “The Richest Man in Babylon“.  Do yourself a favor and learn how to manage money.  It is really the best knowledge that REALLY pays for itself.

This level is a checkpoint on the way to financial freedom. Financial vitality means that you add half of your luxury lifestyle expenses to the financial security sum.  This is stuff like clothes, cable TV, vacations, dining out, alcohol, hobbies and all other luxuries.

This stage is important for one big reason.  It bring you the most valuable asset to the perfect preppy lifestyle, TIME.  At this stage, you can decide to work part time at a job you love instead of something you do to make a living.  Personally, I believe that everyone should spend their life in a job and career that they love.  There are plenty of them out there and easy to find one that you are passionate about.

Stage 7: Coast Financial Independence

Stage 7: Coast Financial Independence, Stages of Financial Independence

Coast FI is a stage in your progress towards full financial independence.  Coast FI basically means that you have invested enough money for it to grow without adding more money to your savings for you reach your FI number.  In order to meet coast FI, you must understand the rule of 72.

The Rule of 72 is a simplified formula for knowing how much time it will take to double your money at a certain interest rate.  The rule is:

Years to Double = 72 / Interest Rate

For example, if you are averaging 8% in the stock market, then take 72 and divide it by 8 (not .08), to get 9 years.  If you were earning 12%, then you will double your money in just 6 years.

Imagine you have 12 years to go to retirement, then at 12% interest, you would double your money 2 times.  If your goal is to have 2.5 million at retirement, then once you have saved 625K, you will be at coast FI.  If you want to retire in just 6 years, then you will need 1.25 million in your investment account.

Some people also call this Flamingo FI or Barista FI (and maybe also Lean FI if you are able to lower your expenses below your full FI number). They all basically mean the same thing. You can now afford to semi-retire, find a job you are passionate about doing, and enjoy your life while your money still grows towards full financial independence. Please read my article all about the stages of FIRE HERE for more details.

The difference between stage 6 and 7 is rather small but important. In stage 6, you are still aggressively (80/20) growing your money but in stage 7, I would start to move it more to a more 60/40 split. Since you are getting closer to financial independence and withdrawing your money, you need to lower risk and make sure your money is available when you need it.

Stage 8: Financial Independence

Stage 8: Absolute Financial Independence, Stages of Financial Independence

Congratulations, at this level you have all of today’s living costs covered by passive income. Some advisers say this amount of passive income should be about the same (80%-100% of working income) as their income from work since most people spend all their money each month.

I take a much different approach and most aggressive savers would agree with me.  If you have 100K a year job and you are aggressively saving 60% of your pay, then you can really live well on just 40% or around 40K.  Most F.I.R.E people would agree with me (F.I.R.E stands for Financial Independence – Retire Early).

Your desire to live conservatively in retirement can also be called Lean FI. The one difference is people who reach full financial independence but choose to live a Lean FI lifestyle, but people who reach Lean FI cannot choose to spend more.

I believe in living a minimalist life meaning I take no pleasure in buying the latest gadgets or driving a new car every few years.  I am a preppy which means I buy quality stuff that will last for many years.  We drive old, reliable cars and enjoy eating good food at home with family and friends.  It’s the simple life that I aspire to, and is the core of my perfect preppy lifestyle.

This does not mean my FI goal is to generate 40K a year. I am also a conservatives meaning I want to make sure I can handle the rough weather that may come in the future. If my FI number is 40K a year, I would want to make sure I have 2-3 times that in the bank.

This brings up a very important topic.  If there is no magic formula to figure out what someone’s FI number is, how do you know when you have enough?  I recommend the 4% rule and I talk more about that below.

Stage 9: Financial Freedom

Stage 9: Financial Freedom, Stages of Financial Independence

I define Financial freedom in terms of passion.  Financial freedom gives you the time you received from financial independence and extra money to indulge in some of your more luxury type of hobbies into the perfect preppy lifestyle.

In this stage, passive income pays for basic living expenses, most of your luxury lifestyle expenses, and a few significant luxury expenses significant luxuries could be travel, owning a boat, or experiencing other similar dreams

If you like to golf or go sailing, like most preppies enjoy, you can play a few rounds of golf on a nice course every month or own a small boat for sailing or fishing (less then 25′).  This is the dream for most retirees for sure.

This is also called FAT FI.

In order to calculate your Financial Independence number, you take your yearly expenses and multiply them by 25. To calculate your Financial Freedom (or FAT FI) number, you would multiply your yearly expenses by 35. In effect, you would have an extra 10 years of expenses available

Stage 10: Absolute Financial Freedom

Absolute financial freedom is all about doing whatever you want, whenever you want to do it.  It is freedom to do just about anything you want all the time.  This number is hard to figure as some people can imagine their extreme lifestyle very differently.  I think a good place to start is to take your FI number from above and multiply it by 4 or 5.

Passive income pays for the lifestyle you want with few limits.

Stage 10: Absolute Financial Freedom, Stages of Financial Independence

Like golf or sailing?  In absolute FI, you can afford the most expensive private golf clubs and travel the world in a fully equipped 40′ yacht.  These are expensive hobbies and in order to achieve the highest goal in the stages of financial independence, you need to have 3-5 times your FI number saved away.

How to Achieve Financial Independence

Anyone will tell you the secret to achieving financial independence, make a lot of money, save a lot of money, and invest it well.  This advice is 100% true and there is no short cut, but there a few tips I can give you.

Turn Your Dream into an Actionable Plan

The first step in turning your financial independence dreams into reality is to completely understand what your dream life is and why you want it. Ask yourself these questions.

  • Why do you want to achieve FI? 
  • How will you spend your time everyday?
  • What resources do you need to achieve this dream?

Once you can visualize your dream, write it down.  Then get an idea of the steps it will require to get there.

What I have learned is most people want to own their own time. They want to do what they want, when they want, while also being able to pay all their bills.

Some people may dream about being their own boss and having their own business.  If this is true, you may never want to stop working and your active income will support you. 

If your dream is to play golf and go sailing everyday, then you will need a good amount passive income to support yourself while living the perfect preppy lifestyle.

In either case, knowing what you want, why you want it, and an idea of what it will take to get there is all you need at this stage.  Write down the goal, outline the steps and goals along the way, and focus on nothing else until you achieve your goal.  Time and effort is all you need!

Manage Your Money

Most people were never taught about how to manage money when they grew up.  Only 1 in 5 people today were maybe taught by their parents and have the skill.  The rest of us need to teach ourselves through reading and the Internet.

There are so many resources on the Internet on how to best manage your money but lets just start by saying you need to create a budget.  This is the first step to understanding your income, expenses, cash flow, saving rate, and investment strategy.  As luck would have it, there is no better budgeting tool then Mint, and its completely free.

Once you have your monthly budget (I created mine with Excel), input it in Mint so it can automatically track your spending to see if you can match your budget.  In this stage, your goal is maximum savings into interest earning savings or investment accounts.

Increase Your Income

One you start to manage your money better and are living hopefully a minimalist lifestyle, the next step is to increase your income.

It is really easy to increase your income.  Either you can have multiple jobs, do your existing job so well, you can move up and get more money, or you can start earning passive income through investments, real estate, or another side hustles.

The key with increasing your income is not to also increase your lifestyle.  This is the biggest mistake most people make and it will quickly deflate your FI dreams.  Stay focused, maximize your savings rate, and build your investment portfolio as quickly as you can.

Investment Skills

Now that you have a army of money at your disposal, its time to make it work for you.  When you invest your money, your money will double in X number of years and could even create dividends every year.  If you reinvest your growth, this is called compounding interest, and is the key to getting very wealthy.

This is possibly the scariest part of the chasing your dreams because investing is complicated and risky.  There are professionals that can help (for a piece of your earnings).  I always recommend you teach yourself as much as you can about all different types of investments and there are countless books on the market that will help.

It doesn’t matter if you manage your investments or you hire someone to do it, you need to understand it well enough so you can direct your investments to grow the way you need and you need to also understand the risks with each type of investment.  There is no other skill, other then having a healthy lifestyle, that will reward you more if you spend the time and build the skill.

For managing your money, I recommend using Personal Capital. It provides you great insight into your investments and combined with lots of knowledge, you will have all the tools needed to grow your nest egg to your goals.

What is Your Financial Independence Number?

So the last step is to understand how much money you need in your nest egg to provide you the life you want.  Some experts say you will need just 80% of your working income in retirement to support yourself but there are a lot of people questioning this wisdom.

I believe is going the other way.  I think the best approach is to take your monthly expenses, add 20%, multiply by 12, and this is your desired retirement income.  Then apply the 4% rule.

There are a lot of companies that charge you for tools to create a financial plan but this one called “The Flexible Retirement Planner” is one of the best. Its a free tool and will do an excellent job allowing you to play with the numbers so you will know how much your money will grow and what you can withdraw from it every money.

The 4% Rule

The 4% rule is simply allowing yourself to withdraw up to 4% of your retirement savings.  The way I get my FI number to make the 4% rule work, I take my monthly expenses, add 20%, and multiply by 12.  This is my yearly expected expenses.  Then take that number and multiple it by 25 and that is my FI number I need to have saved before I reach financial independence.  If I plan to retire before 60, then I just need to increase this or reduce the withdrawal to maybe 3.5% or less.

The concept is simple.  If the stock market generally makes between 6-10% on average, then if you withdrawal 4% plus about 2-3% in inflation, you will likely never run out of money in your retirement saving.  Lets use real numbers to make this clearer.

To live on $100,000 a year, you will need about 2.5 million in the bank earning about 8%.  If you want to live on $50,000 a year, you will only need half that amount (1.25 million).  If you want to spend $200,000 a year, then you will need a cool 5 million saved up. To achieve FAT FI, you would want to have 3.5 million in the bank.

The Flexible Retirement Planner linked above is a great tool for calculating your withdraw rate using a Monte Carlo simulation.

the Perfect Preppy Lifestyle

The Perfect Preppy Lifestyle

When I envisioned my life when I was ready to retire, I was looking for the perfect preppy lifestyle to fit into.  Given my passion for minimalism, preppy clothes, and spending time enjoying life, I dreamt of all my hobbies; golf, sailing in the river with my  dog, driving my speedster and jeep, reading at the beach, traveling, gardening, and spending countless hours with my family and friends.

Since I am a minimalist, I have little interest in shopping and spending money on things.  I prefer having experiences which is a very preppy thing to do.

I also love my preppy style.  A small closet with well made classic clothes are all one needs to look good.  Make sure everything fits properly and will last and you will save a fortune on wasting money on the latest trends.

Since I value experiences, I love spending time with my family and friends.  A good weekly BBQ or a drive in the country is something I will never get tired of.  I have more hobbies then I can count and never get bored.  I rarely watch TV since I have no interest in it and prefer a good book and a warm fireplace.

What is your picture of a perfect preppy lifestyle?


Like most people , I was not born wealthy.  Yes, I went to a great preppy high school and spent many years putting myself through college preparing myself for a good job and a comfortable lifestyle.  For me to get through these stages of financial independence, I would need a plan.

I worked in tech which means I could be outsourced at anytime.  This means I needed to be prepared as it was very common for large companies to lay off workers in their 50’s to avoid the higher costs of medical insurance and long term retirement benefits.  I wanted to be able to retire by 55 if needed.  Which means I would only have about 20 years of working income.

My plan was very simple.  Earn as much as I can, save as much as I can, and invest it all as early as I can.  In order to make this work, it would need to be automatic (pay yourself first) and I would live on what remains.

We all know this is not as easy as it sounds but there are a number of tricks to make it easier.  Here was my plan to reach financial independence.

  • Pick a good career that I love and earn good money.
  • Dedicate myself to my career so I can earn more.
  • Never borrow money.
  • Automate your investments and pay yourself first.
  • Max out the 401K every year.
  • Spend money wisely and live a minimalist lifestyle.
  • Buy only quality and make sure it lasts.

Chris Hogan has a saying, “Retirement is not an age but a number”.  What is your financial independence number, what does your perfect preppy lifestyle look like, which stage of financial independence are you currently on, and do you have a plan and are you on track to get to your desired FI stage?

Let me know in the comments if this was helpful and how you are progressing on your FI journey.  If you have any questions, please let me know.