You are officially financially free when you have enough money to sustain a secure lifestyle without fear of going broke or pulling overtime shifts at the office.

Being in such a strong financial position empowers you in several ways. Most importantly, it secures your future and fully lets you live in the present. And honestly, who wouldn’t want that? After all, you’re not made to work 9-5 all your life only to worry about money the day you retire.

This is why it’s very important to be educated about this concept to enjoy a stress-free life post-retirement. Rest assured, no matter how old or young you are, financial freedom could just be a few years away if you decide today.

Let’s jump into the seven stages of financial freedom.

What is financial freedom?

The idea of financial freedom is subjective. People have different responsibilities, ideologies, financial goals, etc., at different life stages. 

For a 20-something, financial freedom means earning enough to meet their personal expenses. As you hit 30, it evolves to earning a proper livelihood while creating an emergency corpus on the side. In the next decade, one might consider themselves financially free when they have built a strong investment portfolio while meeting bigger personal goals like buying a house, paying for higher education expenses of their children, etc.

Ultimately, the goal is to eliminate financial stress and achieve maximum flexibility with zero obligation.

Despite these age-based differences, at its crux, the definition of financial freedom is simple – having enough money to cover your expenses without compromising your desired lifestyle or precious time.

The 7 stages of financial freedom: where do you stand?

Achieving financial freedom is not a one-shot process. As broken down by experts, here are the seven stages:

Stage 1: Clarity

The first stage involves evaluating where your finances currently stand. Here, you would assess your earnings, expenses, savings, debt, financial goals, and targeted timeline for achieving them. Ideally, this is where you would create your blueprint for financial freedom.

Stage 2: Solvency

By this stage, you would have achieved some degree of financial self-sufficiency. You no longer rely on your parents, guardians, or partners to sustain your livelihood. You earn enough to meet your own expenses and help support the family. It may involve taking out a loan to cover heavy expenses or living paycheck to paycheck, but another person has no total reliability.

Stage 3: Breathing room

The “Breathing Room” stage is where the concept of surplus appears. Individuals at this stage don’t just get by every month. They start accumulating their savings and planning their investment goals. At this stage, some people also start indulging in small investment plans, like monthly SIPs or fixed deposits.

Stage 4: Stability

If you are here, you have at least six months of expenses set aside as an emergency fund. So, there’s ample financial security to back you in the short run in case of an unprecedented crisis. You probably also have paid away most of your high-interest loans and EMIs like student loans, car loans, etc.

Stage 5: Flexibility

By the fifth stage, individuals generally have enough money to exercise flexibility in their financial decisions and turn their focus on strengthening their emergency corpus. Ideally, they’d have accumulated at least two years of savings in cash or liquid assets like stocks, bonds, ETFs, gold, etc.

Stage 6: Financial independence

For most individuals, “Financial Independence” is the final stage of financial freedom. You no longer have any obligation to work actively to sustain your livelihood. If you are here, you only keep track of your savings and investments. Their returns are more than enough to cover all your expenses without any hiccups. 

Stage 7: Abundance

The stage of “abundance” arrives when the individual stops monitoring their investments as per market movements because they have “abundant” wealth piled up anyway. While those in stage six spend 4% of their retirement corpus (returns from savings and investments) per year, the ones who’ve reached the “abundance” stage don’t have to follow this rule and are free to exceed the limit without worry. 

Wrapping up

The journey towards financial freedom is dynamic and evolves with each stage of life. By understanding its different stages and remaining committed to your financial objectives, you can work towards realising your financial independence. It’s never too late to start and achieve that milestone, as long as you keep going.