In this post we are going through 3 different levels of financial freedom. Let me explain what I mean by that. Financial freedom can be that you can cover all your expenses but are left with not much else. When you reach a higher level of financial freedom, you can cover all your necessary expenses and have money left after those.
Some say there are 10 levels. Others say there are 4. I think all we need is 3 different levels of financial freedom. We will go through all of them and how to calculate how much you need in order to achieve them.
We will also discuss some different ways you can accomplish that level of wealth required to reach your desired financial freedom level. Before we start, let me explain the 4% rule so this all will make sense.
What is the 4% rule?
The 4% rule means, that you should be able to withdraw 4% of your investments annually, without running out of money. When the stock market after inflation has returned an average of 8% annually, withdrawing 4% will allow it to grow while taking money out.
Keep in mind that past returns are not a guarantee of future returns. However, based on past data, this should be possible. Withdrawing 4% every year should allow your investments to grow overtime. Now, let’s get to the first level of financial freedom.
Level 1 of Financial Freedom
At this level, you can cover your necessary expenses and live, even without working. However, there is not much, or any money left after the necessary expenses such as accommodation, transportation, necessary bills and food.
This is a good place to start. When you don’t have to work anymore for money, you have more time left to figure out, how to reach the next level.
How to achieve Level 1 of Financial Freedom?
First, we need to know how much your living expenses are. You can simply follow your money spending for one month, while only calculating the things that are absolutely necessary. An example of this below.
- Rent: 500 $
- Transportation 250 $
- Bills 250 $
- Food 400 $
- Other necessary expenses 100 $
The numbers can be very different depending on your lifestyle and the place you live. This is just an example.
So, we ended up with a total of 1500 $ worth of monthly expenses, if we wanted to just stay alive and nothing more. We will apply the 4% rule for this, on how much you need to have saved and invested in order to achieve this level of financial freedom.
1500 * 12 / 0,04 = 450 000$
1500, which is your monthly expenses, multiplied by 12 months, so we get the annual spending, divided by 0,04, which comes from the 4% you will withdraw annually. We end up with 450 000 of investments just to survive.
I know that might sound like a lot, but it is doable. It doesn’t happen overnight, but saving regularly can get you there. But hey, is there a shortcut? I’m glad you asked. There are several ways you can speed this up, we will go through that later in this post. Now, lets see how much you need to achieve Level 2 of Financial Freedom.
Level 2 of Financial Freedom
Level 2 of financial freedom means that you will be able to cover your necessary expenses and live a bit more comfortably.
You don’t have to live in the cheapest possible apartment. We will upgrade our living standards and have some leftover money on top of the necessary expenses.
How to achieve Level 2 of Financial Freedom
Let’s do the math based on our previous numbers with upgrading our living standards a little bit.
- Rent: 850 $
- Transportation 400 $
- Bills 400 $
- Food 500 $
- Other necessary expenses 100 $
- Extra money 750 $
That comes to a grand total of 3000 dollars per month. Your rent increased a little bit as you moved to a nicer apartment. You will be able to spend more on transportation overall and add an extra Netflix subscription to your monthly bills.
Monthly budget on food didn’t increase that much, since there is only so much you can eat. Other necessary expenses stayed the same as well, but on top of all that, you will have an extra 750 to spend every month on whatever you choose.
Let’s use the same calculation as before, to see how much in investments you need to achieve this level.
3000 * 12 / 0,04 = 900 000 $
You might be thinking, that’s almost a million dollars. How can I ever achieve that amount? I know it is a lot. That is why not everybody is doing it. There are still ways you can make a million dollars; in fact, I have a post about 3 ways everybody can make a million dollars. You can read it here.
Level 3 of Financial Freedom
This is the final level of financial freedom on my list. Even that this is the highest level on this list, it doesn’t include super cars and skyscraper penthouses. It will allow you to live comfortably, have extra money and travel as you wish.
Again, this depends on where you live. You can apply these calculations based on real numbers that you get from your current living expenses and your desired lifestyle.
How to achieve Level 3 of Financial Freedom
Let’s do the calculations again, this time we will upgrade our living standards to the point that there really is no need to go any further unless you want to.
- Rent / mortgage: 1500 $
- Transportation 1000 $
- Bills 1000 $
- Food 1000 $
- Other necessary expenses 500 $
- Extra money 3000 $
I would say that you can live off pretty comfortably with this budget. I am aware that if you happen to live in one of the most expensive cities in the world, this maybe doesn’t get you too far. However, the place where you live matters. More about that later in this post.
Keep in mind that these are monthly expenses. 1000 dollars monthly for transportation is 12 000 dollars annually. You can afford a really nice car for 1000 dollars monthly, since you don’t have to change it every year, unless you want to.
If your car is very important to you, you can use the extra money budgeted for that as well. I have a post about how much you should spend on your car; you can read it here if interested.
So, how much in investments does this lifestyle cost you? Let’s do the math.
8000 * 12 / 0,04 = 2 400 000$
That is nearly 2,5 million. It is a lot, but it is doable. Remember, just an example, the real numbers can vary depending on where you live.
Shortcut to each level
Now, like I mentioned before, there can be shortcuts to these levels. You don’t necessarily need 2,5 million in savings to achieve this. Even if working and investing regularly is a good way to achieve this as well, it can be a very slow path.
Let’s say you would start an online business that would generate you 1000 dollars every month. With the 4% rule, that would equal 300 000 dollars worth of investments. Think, which one is easier, get 300 000 dollars in investments or create a business that generates 1000 dollars monthly?
I would say it is easier to build that business. Not easy, but easier and faster than saving 300 000 dollars. There are numerous ways to make money online from your home. They are not easy, but they are doable.
Let’s assume you manage to create that 1000-dollar monthly stream. You got the secret recipe to do it. Now you just double it. Do it over again or expand your current business. Double it first to 2000 dollars. Congratulations, you have reached the first level of financial freedom. Expand a little bit more and you reach the second level. And then the third.
Building your business online allows you to expand your business, without having to work extra hours. Your income is no longer tied to your time. This is one way to speed up the way towards financial freedom.
How to live like a king but for cheaper price?
I mentioned before that the place where you live matters a lot. With 1000 dollars, you might not get far if you live in New York. However, if you live in Thailand or other cheaper country, that 1000 dollars allows you to live a much nicer lifestyle than it would in a more expensive country or city.
If you managed to build up an investment portfolio or a business, that generates you 1000 to 2000 dollars per month, you can live off that very nicely in a cheaper country. This is one possibility to speed up your level of financial freedom.
I am a believer in keeping things simple. You don’t have to have 10 different levels of financial freedom, we can manage with just 3. Determine those levels for yourself and aim to hit a higher level. You can add another level in between any of these or above, what ever suits you.
If you are interested in this topic, there are two books I would recommend.
First one being 4 Hour workweek by Tim Ferriss. This is a great book to start your journey towards financial freedom. This book really can change your mentality and how you think about money in general.
Another is MONEY Master the game by Tony Robbins. This is a pretty long one, but it contains a lot of useful information about the topic.
If you don’t want to read long books just based on my recommendations, there is a YouTube channel called Swedish Investor. He does book summaries that are about 10 minutes long each, that contain the most important things from the books with great animations. Check out his channel. He has videos about both of those books.
This came out a bit longer than my posts usually are. I have a lot of posts about investing, personal finance, saving, and business on my site as well. If you found this helpful, check them out as well.
That’s about it, have a nice day.
This is not financial or investing advice. Past returns are not a guarantee of future returns. Always do your research before risking your hard-earned money.