The Financial Freedom Model

The Financial Freedom Model

Financial freedom means different things to different people, but a general consensus is that you’ve reached the most basic financial freedom when you have enough money coming in that you can do what you want in your spare time and enough tucked away that an emergency won’t be devastating.

A part of any sort of freedom is self-sufficiency, being able to provide for yourself. In order to be self-sufficient, you’ll have to earn enough so that you can live on your terms. You also have to figure out where you are before you get where you want to be.

What stage are you on?


Financial Freedom Model

Stage 1: Financially Dependent

This is where the vast majority of us start out. At this stage, you’re either totally dependent on another person or you’re dependent on a job, company to survive. That is;

  • 100% expenses.
  • Zero income.
  • Dependent on others.

To leave this stage:

  • Get a job.
  • Start studying on personal finance.

Stage 2: Financial Novice

Here, you’ve just started earning but you still don’t have a handle on your expenses. You’ve started racking up some debt and your expenses still exceed your income.

  • Some income.
  • Expenses > income.
  • Some debt.

To leave this stage:

  • Practice frugality.
  • Reduce your expenses.
  • Seek additional income sources.

Stage 3: Financially Underwater

At this stage, your debt has increased exponentially and your expenses still surpass your income.

  • Expenses > income.
  • An exponential increase in debt.

To leave this stage:

  • Stop acquiring debt.
  • Reduce your expenses.
  • Seek additional income sources.

Stage 4: Financially Precarious

Here, you have stopped accumulating debt, your expenses have reduced and you’re starting to build up your emergency funds.

  • Reduced expenses.
  • Some debt.
  • Some emergency funds.

To leave this stage:

  • Build an emergency fund that can cover 6 months of expenses.
  • Pay off your debt.

Stage 5: Financially Balanced

In this phase, people start to realize some financial stability. The emergency fund is now fully established and in this phase debt management is under control.

  • Zero debt.
  • Built a 6-month emergency fund

To leave this stage: Start investing

Stage 6: Financial Progress

This phase is where routine investing is occurring over time. In this case, should an emergency or an unfortunate unemployment situation were to occur, it would not cause financial ruin. There are investments in the bank to ride out a financial storm for multiple months.

  • Start investing.
  • Earning some investment income

To leave this stage: Build passive investment with a focus on investment income

Stage 7: Financial Freedom

This phase is where your basic living needs (home expenses, groceries, other small necessary items like insurance) are covered by the cash flow from your investments (the combination of dividends, interest, or selling some assets as needed) and/or from passive income sources like rental income or royalties.

  • Investment income > expenses
  • Freedom at last

Stage 7+1: Financial Abundance

At this stage you’re well beyond Financial freedom now, you can buy anything you wanted, travel more, and upgrade your lifestyle on your own terms – all without ever worrying about breaking the bank.

At this phase, you have a surplus – an abundance of cashflow whereby you can be more philanthropic to causes or events that make a positive contribution to the lives of others.

  • Investment income 10x > expenses
  • You have enough to give back to the society

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  • Faith Ajayi
    Posted 6th May 2020 1:10 pm

    With reference to the financial abundance stage; Do you mean I have to earn over 10 times of my expenses as investment income before I can give back to the community.

    • overwood
      Posted 8th May 2020 11:01 am

      Hello! At the financial abundance stage, your investment income can be up to 10 times more than your expenses. You don’t have to earn over 10 times before giving back, but at this stage, you have enough to cover different causes close to your heart and the freedom to embark on any philanthropic adventure without worrying about costs.

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