The millionaire Grant Sabatier, one of the leading voices and one of the greatest success stories of the FIRE movement – an acronym for “Financial Independence, Retire Early” – created a classification to measure people’s level of financial freedom. There are 7 categories, starting with recognizing one’s financial situation and ending in abundant wealth.
Sabatier, author of the book “Financial Freedom” and founder of the websites Millennial Money and BankBonus.com, accumulated over $1 million in just five years by launching several side jobs and saving more than 80% of his income.
As a result, he became a prominent figure in the FIRE movement, whose followers advocate the idea of saving most of their income during their 20s and/or 30s to retire or focus solely on hobbies during their 30s and/or 40s.
Want to know what level of financial independence you are at?
Level 1 – Clarity: The first step is to take stock of your financial situation – how much money you have, how much you owe, and what your goals are.
Level 2 – Self-Sufficiency: Next, you will seek to earn enough to cover your expenses without any external help, such as contributions from family members. At this level, you may be living paycheck to paycheck or taking out loans to survive.
People at Level 3 have money left over after living expenses that they can allocate to goals such as building an emergency fund and investing for retirement.
Level 4 – Stability: Those who reach Level 4 pay off high-interest debts, such as credit card debt, and save six months’ worth of living expenses in an emergency fund. Accumulating savings for emergencies helps ensure that your finances are not derailed by unexpected circumstances.
Level 5 – Flexibility: At Level 5, people have at least two years’ worth of living expenses saved. However, according to Sabatier, you don’t need to keep all that money in cash. It can be a total sum of your savings accounts and investments, as long as you can access that money in some way if needed, giving you the flexibility to detach, at least temporarily, from the workforce.
Level 6 – Financial Independence: People who achieve financial independence can live solely off the income generated by their investments. But to get here, you will have to invest a high percentage of your income, which may require you to shift to a more modest lifestyle to drastically reduce your cost of living.
Level 7 – Abundant Wealth: In this category are financially independent people who live off the income from their investment portfolio and rely on the “4% rule” – a retirement rule of thumb that posits that an investor can safely withdraw 4%, adjusted for inflation, from a balanced portfolio of stocks and bonds each year and be relatively certain that the money will continue to grow and not run out.
Although economists debate whether 4% is the ideal number (some more conservative observers believe the right number may be closer to 3.3%), the calculation behind it serves as a basis for establishing a FIRE number – the amount of money you would need to retire and generate an annual income with which you could live comfortably.