7 levels of financial freedom
Do you want to have flexibility in your choices? You’re curious about financial freedom but you don’t have a framework? You want to know where you stand and what may be the next steps for you. And you want to know how crypto can help you get there? You’re at the right place!
“Money will get you wherever you want, but it will not replace you as the driver”. So let’s go, it’s an exciting journey!
Financial freedom is often defined as having the financial resources to live the life you want to live without worrying about money. It is about having options and controlling our finances instead of being controlled by them. But what you picture is very specific to you and that’s what is amazing.
We talk about personal finances for a reason, it’s personal!
The financial freedom pyramid is a great framework as it gives a structure and the possible next steps in your journey. It can be used as a guide, but remember that we don’t all aim for the top. Knowing who you are, what you want to achieve in life, and where you want to go is an amazing
exercise, I urge you to reflect on before starting.
Source : Grant Sabatier
1. Clarity
The most fundamental knowledge you can have is clarity, you need to know your financial situation. Numbers-wise, this includes your budget (how much you earn, spend, save and invest), and your net worth (what you own vs. what you owe).
Part of your financial situation is also about defining your financial goals, i.e. what you want to achieve. To have goals instead of ideas, I suggest you use the SMART methodology to bring them to life. This stands for:
- Specific (What)
- Measurable (How much)
- Achievable (How)
- Relevant (Why)
- Time Bound (When)
Now, let’s imagine someone who earns 40k euros a year or a net salary of roughly 2.4k euros a month. He lives with his girlfriend, has no dependents, and his share of expenses is 2k. This means that every month he has 0.4k euros of spare money to save or invest. He has been working for 3 years. Regarding his net worth, he is close to getting to the 10k euros mark of savings.
He wants to feel safe, and instead of being vague about having a financial cushion, he says “For my peace of mind, I want to have a 12 000 euro emergency fund, which corresponds to 6 months’ worth of my 2k monthly expenses by the end of the year. I still need to save 400 euros a month for 5 months to get there”.
The clearer your vision, the more work you’ll do and the easier you’ll stay motivated.
2. Self-sufficiency
When you earn enough to afford your expenses, you’re at the second step being self-sufficient which means you have enough on your own not to rely on anyone. This is an amazing achievement, but it doesn’t mean you’re safe as you still live paycheck by paycheck. It’s worth noting that 50% of Americans are at that stage.
When you start to have some leeway, you reach the 3rd step which is breathing room. You have some spare cash that you can use every month to save, invest, or repay bad debt. By bad debt, I mean any high-interest debt (sometimes up to 30% of interest!) coming from credit cards, overdrafts, Buy Now Pay Later schemes, etc). They don’t back an asset, something that is increasing in value, but are often used to pay for consumption goods. Be aware that it costs a fortune.
3. Breathing room
If you ask yourself what is better: saving, investing, or repaying bad debt, it’s a tricky one as it doesn’t only depend on facts but also your personality. If we look at the rational side, it will all depend on interest rates. If you were to save and get a 3-4% return, or invest to get a 7-10% average return with a diversified portfolio, it makes so much more sense to reimburse bad debt first where you pay an eye-watering high interest of up to 30%. Also, it’s better to have an emergency fund before starting to invest, it will help make you sleep at night.
So first, repay bad debt, second, create your emergency fund, and third start to invest. That said, if you think those targets are hard to reach, and you don’t want to make compromises, you can do everything at the same time, it will just delay everything individually.
4. Stability
Once you’ve been breathing for some time, you’ll reach stability which is the 4th step. Here, you can face unexpected circumstances because you’ve managed to build an emergency fund. You have a pot of cash representing an average of 6 months’ worth of expenses (it can range from 3 to 12 months depending on personal circumstances and appetite). In our previous example, you have those 12k and know what they represent. After doing some research to get the best deals, you have opened a savings account for that only purpose and earn some interest. Of course, because you are the one lending money, you have checked the institution is part of the deposit protection offered by the EU in case of bankruptcy.
You haven’t invested that money but put it in cash because what you want is to access that money straight away if you need to.
5. Flexibility
Once you have decent savings and investments, you are at the 5th step, flexibility. There you start to have the luxury of being able to choose. Want to change career? You can. Want to go on a sabbatical? You can. Want to take a parental leave? You can too. Your money buys you time.
6. Financial independence
When you want work to be optional, because you have passive revenues that cover your expenses, you have reached step 6th, which is about being financially independent.
This is a huge step forward and can take a few years/decades to build. To get there you need to save a huge portion of your after-tax income. 50 to 70% often comes back as an estimate. This money needs to be invested and work harder because, in the long term, you always have to at least beat inflation, otherwise your purchasing power fades away. Targeting a 4% return is a minimum.
Even though financial independence is accessible to everyone with effort and discipline, the lower your cost of living, the faster you will have financial independence. It’s indeed easier to create 2k of extra revenues than 4k and so on.
7. Abundant wealth
When you have more than you’ll ever need, and your money continues to grow despite your expenses, you have abundant wealth which is the 7th step.
Now an interesting fact to note: you can be on more than one step. You can have stability but may miss some awareness as you didn’t know about the concept of emergency funds for example. You can also have flexibility but your goals aren’t clearly defined hence you still need to work on step 1. You can have passive income but not enough to be financially free and so on.
Let’s now look at how crypto can help you reach financial freedom.
- Cryptocurrencies give a great diversification benefit because they aren’t perfectly correlated to the traditional financial market. They react differently to market forces. Remember we must avoid putting our eggs in the same basket so that the positive performance of some assets offsets the negative performance of others. A portfolio made of different asset classes, geography, or sectors is less volatile and potentially more sound in the long term.
- If freedom is one of your core values, Bitcoin, Ethereum, etc are traded on crypto exchange platforms that run on blockchain. Being decentralised can mean you have less risk of domination, whether it’s from politics or financial authorities.
- Last but not least, if you associate financial freedom with living in different countries and having no strings attached, cryptocurrencies can help facilitate borderless transactions, providing cheaper and faster international transfers.
If you want to go further and get inspired I interviewed Cyrus Fazel, CEO of SwissBorg, for my podcast Money Chill Out. You can listen to the episode here:
Have a great financial freedom journey!
By Marieka Finot, Financial Empowerment Coach, ex-trader, and podcaster
