The 7 Stages of Financial Freedom: A Step-by-Step Guide

Life is a Journey, Not a Destination

Ralph Waldo Emerson famously said, “Life is a journey, not a destination.” I believe the same applies to financial freedom. Many of us envision financial freedom as a final destination — one day, we’ll reach it, and suddenly, there will be unicorns, fireworks, and all our problems will vanish. However, thinking this way sets us up for disappointment.

Financial freedom, like life, isn’t a destination — it’s a journey. Each stage has its own set of adventures and lessons to learn from. In this video, I want to walk you through the seven stages of financial freedom. Each stage has unique value and provides a different level of financial independence. I’d love to know which stage you’re in and what you’re learning from it. Let me know in the comments below or shoot me an email — I’d love to hear from you! Also, if you could do me a huge favor and hit the like button, I would really appreciate it. It helps with the YouTube algorithm and allows videos like this to reach more people.

The 7 Stages of Financial Freedom

Stage 1: $1,000 Emergency Fund

The first stage of financial freedom is having $1,000 in your bank account as an emergency fund. If this sounds familiar, I borrowed it from Dave Ramsey’s Baby Steps. Dave Ramsey had a significant impact on my wife and me when we first got married and were trying to pay down our $105,000 student debt. Following his Baby Steps helped us feel like we were making progress.

Having $1,000 in cash may not seem like much, but it’s an important step in starting your financial journey. Studies show that more than half of Americans can’t cover a $1,000 emergency expense with their savings. By having this amount set aside, you’re already ahead of many. If you’ve reached this stage, give yourself a pat on the back — let’s move on to Stage 2.

Stage 2: Paying Off All Debt (Except Mortgage)

The pursuit of financial freedom requires that you aren’t weighed down by debt. If you’ve accepted debt as a normal way of life, you need to shift your mindset. Debt shouldn’t be normalized — especially for those pursuing financial independence.

My wife and I used Dave Ramsey’s Debt Snowball Method to pay down our student loans. This involves listing all debts from smallest to largest and aggressively paying off the smallest one first, regardless of interest rates. Once it’s paid off, you move to the next smallest, gaining momentum like a snowball. This method helped us eliminate debt and move forward on our journey to financial freedom.

Stage 3: 3–6 Months of Expenses Saved

At this stage, you should have three to six months of expenses saved in your checking account as an emergency fund. The specific amount depends on your personal preference and job stability. My wife and I prefer six months since we’re more risk-averse.

Having this cushion allows you to handle unexpected life events — whether it’s a job transition or an emergency like a broken water boiler. With your debts paid off, this ensures you won’t fall back into debt if something unexpected happens. Stage 3 provides mental and emotional breathing room and allows you to start planning for your long-term future.

Stage 4: One Year of Expenses Saved

This is a pivotal stage where you move from short-term survival mode to long-term wealth-building mode. Having one year of expenses saved gives you what J.L. Collins calls FU Money.

If you dislike your job, you can quit and search for a new one without fear of financial catastrophe. If your company is downsizing and you’re affected, you can take time off without panicking. In today’s world, where career changes are common, this financial cushion is invaluable. You’ll also start noticing the power of compounding — your investments begin working for you.

Stage 5: Five Years of Expenses Saved (Coast FI)

At this stage, you’ve saved and invested five years’ worth of expenses. If you reach this in your 20s, it’s what the financial independence community calls Coast FI. This means that even if you stop investing, the power of compounding will allow you to retire comfortably by age 65.

For example, if your family’s annual expense is $100,000 and you have $500,000 invested, at a 10% return, your portfolio will grow by $50,000 a year. That’s half of your annual expenses covered without you doing anything! If market returns continue at 10%, your $500,000 will double to $1 million in just over seven years.

Stage 6: Ten Years of Expenses Saved

Now, your portfolio generates returns equal to your annual expenses. Using our earlier example, if your annual expenses are $100,000 and you have $1 million invested, a 10% return generates $100,000 per year.

At this stage, your investments are working as hard as you are. Your financial security is well-established, but there’s also a risk — complacency. It’s easy to start inflating your lifestyle. Be mindful of your spending habits to ensure your financial freedom remains intact.

Stage 7: 25x Annual Expenses (Ultimate Financial Freedom)

This is the ultimate stage of financial freedom. When you have 25 times your annual expenses saved and invested, you have the option to retire completely.

The 25x rule comes from the 4% Rule, which suggests that withdrawing 4% annually from your portfolio allows it to sustain you indefinitely. For example, if your annual expenses are $100,000, a $2.5 million portfolio makes you financially free. You can retire, change careers, travel the world — the choice is yours!

If you feel like you’re late to the financial freedom journey, don’t be discouraged. Many people start pursuing financial independence later in life. My friend runs a website called Late Starter FIRE, chronicling her journey toward financial independence in her late 40s. I’ll link to her site below — check it out if you need some inspiration!

Final Thoughts

Financial freedom is not a one-time achievement but a journey with many stages. No matter where you are, the important thing is to keep progressing. If you’d like to learn more about my favorite Vanguard funds to help you on your journey, check out my video on 5 Best Vanguard Funds to Buy and Hold Forever here.

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