The 7 Levels of Financial Independence

Financial independence is often seen as all or nothing. Either your investment income covers your living costs or it doesn’t.

But financial independence (FI) isn’t that clear-cut. There are levels, and you move up them as you invest more. Each level brings more freedom and more financial stability.

The levels aren’t exact, and no single amount defines each one, because everyone needs a different amount. Still, I’m going to estimate the net worth and passive income an average spender would need at each stage.

For the passive income figures, I’ve used the 4% rule: you can take about 4% of your invested assets each year. So £100,000 invested gives about £4,000 a year, or £333 a month. The net worth figures refer to investments, not the home you live in. Read how much you need to retire early in the UK to see where the 4% rule comes from.

So, without further ado, here are the seven levels of financial independence.

Level 0: Financially struggling

Most people have struggled with money at some point. It often happens just after leaving home, when adult life turns into a never-ending stream of bills, but it can happen at any time.

Struggling with money is horrible. It creates a constant background anxiety that spoils everything else. You work hard and barely cover your bills, and you may have debts growing at an alarming rate.

People at level zero have no assets, no passive income and often a negative net worth. But that doesn’t matter much when you’re just trying to stay afloat. If that’s you, free and confidential help is available from StepChange and MoneyHelper.

• Net worth: zero or negative
• Passive income: zero

Level 1: Financially stable

At the next level, you earn enough to get by. You may still live payday to payday, but the wolves are no longer at the door. Spending everything you earn is now a choice. You have some spare income to save, but it takes discipline.

The best thing you can do at this stage is create a budget. Get good at managing your money, find ways to save more and pay down bad debt.

It’s also wise to build a small emergency fund of around £1,000, so an unexpected bill doesn’t push you into debt. If you want to move up quickly, read a couple of personal finance books. They’ll give you the know-how to reach the point where you feel financially secure.

• Net worth: £1,000 to £5,000
• Passive income: £0

Level 2: Financially comfortable

By level two, you’ve built up a full emergency fund, have the important insurance in place, your pension is growing and you may have some other investments.

With your finances in order, you’ll probably relax a little. Your attitude to money often changes. You go from valuing the security it gives you to using it to build a comfortable life.

You buy a house and a nice car. Then a bigger house and a nicer car. This level, full of consumer spending and comparison, is where much of the middle class lives.

With no immediate threats and no strong reason to save hard, many people stay at this level for decades, sometimes for life. There’s nothing wrong with a comfortable life or wanting nice things. But if you can resist spending for a few more years, you can buy the time to enjoy them.

• Net worth: £25,000 to £200,000
• Passive income: £0 to £500 a month

Level 3: Coast FI

If you build a decent pot of investments early in your career, you can “coast” for the rest of it. Your pot keeps growing on its own, so you don’t need to add much more to retire at a normal age.

You won’t have enough income to quit work, but you could go part-time. You could take a lower-paid job you enjoy, do seasonal work (snowboard instructor, anyone?) or travel and pick up odd jobs.

Coast FI lets you take long breaks, change career or try working for yourself. You have plenty of options when you’re not living payday to payday.

Example: £100,000 invested at 30 and left to grow at 5% a year after inflation becomes about £700,000 in today’s money by 70, without another penny added. Returns aren’t guaranteed, but it shows how powerful an early start can be.

• Net worth: £100,000 to £300,000
• Passive income: £330 to £1,000 a month

Level 4: Lean FI

Lean financial independence means your investments cover your essentials and a few luxuries, with no need for a job. It’s the first level of being truly financially independent. Without needing to work, you’re in effect retired.

Your time is your own. You could learn a language, travel, write a book or go fishing all day, as long as you stay fairly frugal.

Lean FI is where I am now. My investments cover my basic living costs and a few treats without working, but there isn’t much left over.

• Net worth: £300,000 to £600,000
• Passive income: £1,000 to £2,000 a month

Level 5: Fat FI

Fat FI is lean FI’s more extravagant big brother. You’re financially independent, with plenty of income left over for non-essentials. You can eat out often, holiday abroad, give generously and go shopping guilt-free.

You may still practise frugality, but you don’t need to. You can enjoy a good, comfortable lifestyle without a job to pay for it.

• Net worth: £600,000 to £1,200,000
• Passive income: £2,000 to £4,000 a month

Level 6: Financial freedom

True financial freedom means doing anything you want without thinking about the cost. Fancy a week in Barcelona? Book the next flight, first class of course.

This is the life you’d picture for a celebrity: more money than you’ll ever need, to spend however you like. Very few people get here. And most of us don’t need to be this rich to live our dreams, unless your goal is to have tens of millions.

If you’re chasing financial freedom, be aware that it comes at a cost. You’ll need to make big sacrifices, give decades to your career or business, and have some luck along the way.

• Net worth: £10,000,000 or more
• Passive income: £33,000 a month or more

Wrapping it up

Reaching financial independence takes years. There will be times when your motivation fades and you feel you’re getting nowhere. Breaking FI into levels turns a huge goal into smaller milestones that keep you going.

Remember, it isn’t financial freedom or nothing. The money you’ve already built up gives you choices long before you reach the top level. You could work hard for a few years and then coast. Or you could reach lean FI, quit a stressful job and reach fat FI doing something you love.

Money gives you choices. Know what they are and use them.

Disclaimer: This is not financial advice. The value of investments can go down as well as up.