Levels of Financial Independence – Stages of Freedom!

7 Levels of Financial Independence

The levels of financial independence are different stages towards an ultimate goal of having your investment income more than cover your expenses. For many people, if this can be achieved, it will allow them to retire living the life they want to lead and can be done at any age.

As the levels suggest, there are many victories along the way as you pass certain stages of financial independence. Some people may be happy to retire without making it all the way to the final stage, for others, even if they achieve the final stage, they may keep working.

In my view, financial independence, no matter what level you’re at or aiming towards gives you choices. This can be something as simple as wanting the luxury of going on an extravagant holiday each year, reducing your hours at work, or even the option of completely retiring.

In this post, I’ll run through each of the levels of financial independence, then highlight ways to help you achieve each level a lot faster.

Looking at all the different levels may look daunting, although just remember the most important thing to just get started and stay consistent. The levels are only there to act as celebratory milestones to help keep you motivated along the way and show you’re making good progress.

7 Levels of Financial Independence

Level 1 – Dependent

This stage is where your debt payments and lifestyle exceeds your income.

This could be because you’re a student and taking on more debt to fund your education or you spend more than you earn and are accumulating debt.

Level 2 – Financial Solvency

Financial solvency is where you are able to meet your financial commitments and don’t have to rely on anyone else for financial support. This means you’re no longer accumulating debt, your income exceeds your expenses and you’re actively paying down any debt you do have.

Level 3 – Stability

This stage is where you have paid off any high-interest debt such as credit card debt, car finance, and personal loans. You still have a mortgage, although it’s at a manageable level and your income exceeds your expenses.

You’ve also built up a small emergency fund to pay for any unexpected surprises.

Level 4 – Taste of Freedom

At this level, your income from your job and any investments significantly exceeds your expenses. This is usually when you have eliminated all debt including your mortgage or have built up a sizeable investment portfolio that is producing a good amount of income.

The reason why this stage is the taste of freedom is that you now have options regarding your job. With less reliance and dependency on the income from a job, some people decide to change their job to something with less stress, reduce their working week down to 3 or 4 days, or pursue something they’re more passionate about like starting a small business.

Level 5 – Security

This level is where your investment income, savings, and pension can completely cover your basic needs for the rest of your life. This includes household bills, transport, food, and clothing.

Many people aim for 25 years’ worth of expenses saved up and once achieved you can retire and never work another day in your life, sounds ideal to me!

Level 6 – Independence

The level above security is now where your desired standard of living is covered by your pension and investment income. This includes the pleasures in life that aren’t free, such as holidays, hobbies, and gifts.

Essentially living your definition of a rich life during retirement and this can also be done at any age, although remember you won’t be able to touch your pension until you reach a certain age! I go into more detail about a rich life further in the post.

Level 7 – Abundance

At this stage, your income from investments and pension is significantly above your chosen standard of living. You can afford to indulge in additional luxuries without worry and share your wealth with others.

Main Factors of Financial Independence

There are two main factors driving financial independence, the first is investment income and the second is your expenses.

Creating investment income is not an easy task, you not only need to diligently save your earned income, but you also need to choose the right investment vehicle that works for you. The better return you can achieve on your investments the smaller the overall investment size will be needed to cover your expenses.

These investments can come in any form and you may want to diversify into many different investment types to help manage risk. This can include stocks, bonds, property, or even things like crypto and rare art.

Your expenses also play a critical role in financial independence as you will need to be able to cover various aspects of your expenses at each level. The higher your expenses the more investment income you’ll need to cover it.

This also works the other way around, so the lower your expenses the less investment income you’ll need to cover each stage of independence.

For example, take level 5, security, where your investment income covers all of your basic needs such as housing, transport, clothing, and food. This is a huge milestone for anyone, however, the amount of money you need to save, and the investment income you need to earn to achieve this level can vary significantly.

For someone that has an average-sized house, possibly even with the mortgage fully paid off, an average car, and is careful with their money when buying clothes and food, their monthly expenses might be £1,000 per month or even lower.

For another person, they may have a very extravagant house, a flashy car, likes to wear all the expensive designer branded clothing, and dines out multiple times per week. Their monthly expenses to cover the same type of spending might be £3,000 per month.

If you were to assume a 6% return on investment, the first person that keeps their expenses low would need a £200,000 total investment pot to reach level 5. However, the person that spends significantly more money, would need a £600,000 total investment pot to cover the same type of spend.

Just by having different spending habits, one person needs to save 3 times more to achieve the same level of financial independence.

Now, I know there are flaws in this like the second person would effectively have a higher standard of living, although I hope you can see my point that your expenses play a significant role in how much money you need to amass to reach each level. Managing your expenses carefully can help you reach each level of financial independence that much quicker.

Your Definition of a Rich Life

I come across a lot of people online that promote life hacks that basically reduce their monthly expenses to practically nothing. This includes everything from living in a converted shipping container to growing your own food and selling your car to cycle everywhere.

The premise is that the lower you can get your monthly expenses, the less money you need to achieve financial independence and the easier and quicker progressing through the levels of financial independence becomes.

I don’t know about you, although personally, that doesn’t sound very appealing to me and I’d hazard a guess to say that’s the same for the majority of people.

What can massively help in progressing towards financial independence is defining exactly what your version of a rich life is so you have something to aim towards and help know where to ruthlessly cut costs.

For example, say you really like eating out at restaurants but don’t go out as much as you’d like in order to save money. There may be something else in your life where you spend a lot of money but don’t get much value out of it, for example, if you have a new car but aren’t really much of a car person.

Slashing costs here, doing things like getting a second-hand car, or possibly even dropping down to a single car household can save you thousands each year. Rediverting these savings back into eating out more often can mean that overall you don’t spend any more money, although can enjoy yourself a lot more and feel richer in the process.


Overall, each level of financial independence is a step towards the ultimate freedom of not having to work and having the choice to live the life you want to lead. You can retire at any level above level 5, although each person has their own preferences around what they want for retirement.

This post I’ve written on how much you need to save for retirement you may also find useful as it explores an estimated retirement budget which will drive a lot of the income requirements of financial independence.

If you do have any specific questions on investing, make sure to contact a financial advisor that can give you tailored advice for your circumstances.