Financial Independence: What It Is and the Three Levels
TL;DR - Financial independence is the ability to live free without depending on anybody else for financial support. The three levels of financial independence are lean FIRE, regular FIRE, and fat FIRE. Each level represents a better and more financially free lifestyle.
A life where you don’t have to work for money.
The peace of mind to know you can finally do what you’ve always wanted to do — if only you had more time.
That’s what the financial independence dream promises.
And if it sounds too good to be true…
It isn’t.
Maybe it’ll take you a while to get there, but it is possible.
To help you begin your financial independence journey, we’re going to cover what it is and the three different levels.
Financial Independence: What It Is and the Three Levels
What Is Financial Independence?
Financial independence is the ability to live free without depending on anybody else for financial support.
It means having enough passive income to cover your living expenses without having to work for money.
And, once you get to a certain level of financial independence, you won’t have to think about money at all. If you want to do something or buy something, you can. No hesitation.
In other words, financial independence is the ability to live off of your investments.
With it, you can live the life you want on your own terms.
How much passive income you need or want will depend on your lifestyle and spending habits.
How Do You Achieve Financial Independence?
There are many ways one could achieve financial independence. A few include:
Investing in assets such as rental properties
Generating income through a business
Creating and selling products
Investing in stocks or mutual funds
The list goes on, but the idea is to create enough passive income so you no longer have to rely on an active income to cover your living expenses.
The Three Levels of Financial Independence
There’s no one-size-fits-all definition of financial independence.
For some people, it might mean having enough passive income to cover their basic expenses so they can quit their job.
For others, it might mean that their investment portfolio has enough revenue to cover their costs of living — even if they continue working.
And for others still, it might mean having enough cash saved up that they could live for several years without working or earning any income at all.
The important thing to remember is that your financial independence journey will be unique.
What matters most is that you define what it means for you and then take the steps necessary to make it a reality.
Level One: Lean FIRE
The first level of financial independence is known as lean FIRE. FIRE stands for “Financial Independence, Retire Early”.
To reach this level, you need to have between $800,000 and $1,600,000 in assets returning between 2.5 - 5% per year. This would allow you to reach around $40,000 a year in passive income.
It frees you from the need to work and lets you see the potential of FIRE.
Lean FIRE might require you to make some lifestyle changes, though.
Such as:
Moving to a low-cost area to live in
Downsizing your living space
Putting off having children
At this level, you’re not completely free to live a grandiose life. But you don’t have to rely on others for money.
Of course, reaching this level of financial independence is not easy. It takes a lot of discipline and hard work.
But it is possible.
And even getting to the lowest level of financial freedom sets one up for a better future.
Financial independence gives you the security and peace of mind to know that you can finally do what you've always wanted to do. And that is priceless.
Level Two: FIRE
The second level of financial independence is regular FIRE.
At this point, you have between $1,360,000 and $2,720,000 in assets that return 2.5 - 5% annually. This would give you around $68,000 a year in passive income, which is considered “middle-class”.
This level of financial independence allows you to live a comfortable life without having to work at all.
You don’t need to save money anymore and can do most of the things you want to do.
But reaching this level requires even more discipline and hard work than the first.
You need to be very mindful of your spending and make sure you’re investing enough to reach your goals.
But if you can reach this level, it will be worth it. Because you will finally have the freedom to do what you want, when you want.
Level Three: Fat FIRE
The final level of financial independence is fat FIRE.
When you reach fat FIRE, you have between $5,000,000 and $10,000,000 per person or $6,000,000 and $12,000,000 per couple in assets that returns around 2.5 - 5% a year.
This would give you around $250,000 a year in passive income, which is considered “upper class”.
This level allows you to live a grandiose life. You can travel the world, buy an expensive car, and basically do whatever you want.
You’ll never need to worry about money again. Heck, you might not even check your bank account ever.
If and when you reach fat FIRE, you know you’ve made it.
There’s No One-Size-Fits-All
As you can see, there’s s no one-size-fits-all when it comes to financial independence.
There are different levels of FIRE and which one you make it to depends on your goals and situation.
Even the lowest level of financial independence breaks you out of the rat race and sets you up for retirement!
So if financial independence is something you want, then define what it means to you and then take the steps necessary to make it a reality.
Whether that’s investing in real estate, starting your own business, or any of the other awesome ways to become financially free.
If you can do that, you’ll be well on your way to a bright future.
Happy hunting!
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