Revealing The 3 Levels Of Financial Freedom

Many people talk about financial independence when it comes to money. This article can help you set more precise financial goals by revealing the three levels of financial freedom.

There are levels to pretty much anything. You can be in the lower, mid, or high tier regarding health and fitness. The same is true of financial freedom. There are different degrees of financial independence. Here are the three main types of financial freedom.

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The Debt Trap

The problem that many Americans deal with is being in some type of debt. Debt drowns your financial health. Yet debt is encouraged, from using credit cards to going to college.

According to USA Today, the average debt by age ranged from $25,851 to $39,345.

Source: USA Today via Experian, Average American debt statistics in 2023

Level One Of Financial Independence

Level one is baseline financial independence. While it is the first level, it is also the most challenging.

Making Your First $100,000

The primary goal of achieving level one of financial independence is making your first $100,000. This is often easier said than done. You have to find a way to make your first one hundred thousand dollars.

Building your money over time becomes easier once you have money to reinvest into other investments. You do not have that when you are just starting.

You can figure out how to make that first one hundred thousand dollars. It may be working at a job. It may be working two or three jobs. It may be turning a side hustle into a business. You want to find some way to make extra cash to invest in something that will help generate revenue for you.

Here are four ways you can work to reach that first goal.

First Work To Pay Off Any Debts You May Have

You want first to work to pay off any debts you may have. Debt holds you back from being able to save and invest money. Debt holds you back from financially being able to improve your future self.

You can follow the snowball or the avalanche method when paying off your debt. In the snowball method, you first pay off your smallest debts with the highest interest rates. In the avalanche strategy, you pay off your large debts first with the highest interest rates, then work to pay your smallest debts last.

Related - The Seven Steps To Get Out Of Debt

Follow A Barebones Budget

To help you reach the first baseline financial goal of $100,000, it helps to follow a barebones budget. You could follow the 50/30/20 or the 60/30/10 budget. A barebones budget takes into account only the necessities you need to survive:

• Housing (own, rent, taxes, maintenance, et cetera)

• Food

• Utilities (gas, water, electricity, Internet, phone)

• Transportation (gas and maintenance)

• Insurance (home, renters, car, health, et cetera)

Your shelter should not cost you more than thirty percent of your monthly income. You also want to include the cost of your home or renters insurance along with the utility bills into that cost.

You eat simple foods to save as much money as possible. You can eat chicken, pork, rice, beans, stir fry, and tacos. You can aim to spend one hundred dollars or less per week for one person. That breaks down to $400 monthly, depending on what you buy at the grocery store.

If you want to cut back even more, you can return to the ramen diet you may have had during college. You could also eat rice and beans. Bean and cheese burritos are another great option. You can look online to find cheap budget recipes.

You then want to work to pay off your car loan. You could decide to buy a quality used car with cash. You may be able to find a good used car for a few grand, depending on the vehicle, model, and where you live. A car is only meant to get you from point A to point B.

You can start with the starter plans when choosing your Internet or phone plan. Once you have the money to upgrade, you can invest if you think it is worth it, but not when you are just starting.

If you end up starting an online business, you can write them off as a tax write-off since you use them daily for your business (tax to your tax accountant first, though).

Related - 12 Strategies To Save Money At The Grocery Store During Inflation

Build Your Emergency Fund

You also want to ensure that you have an emergency fund to help you if something arises, like losing your job or a health issue. The general rule is to have at least a three to six-month emergency fund. You could decide to have enough to cover one year’s worth of emergency expenses.

You can use this calculator to determine what number you should have for your emergency fund. You can always add more to your emergency fund as you make more money.

Your emergency fund can then cover your necessities if you lose a job. You may want to save more if a health emergency arises. Healthcare is one of the most expensive costs for Americans.

An emergency fund can also help you so that you do not have to dip into the savings account you are building to reach your first $100,000 goal. You can leave your money in the account you are using to grow to get the first level of financial independence so you can later choose to invest it in other ways.

Research Ways To Build Passive Income Streams

As you build up your emergency fund and savings, you can begin to research ways to build passive income streams. You want to choose the one that makes the most sense to you and plays to your strengths. Some will require more work than others.

You then want to work to build passive income streams to come to your bare minimum costs each year. Some ways that you could make passive income streams are:

• Investing in the stock market

• Starting your own newsletter

• Starting a YouTube Channel

• Investing in the stock market

• Starting an online business.

It is up to you to determine which option works best for you depending on your risk tolerance and what you learn from reading and watching content from other people. Everyone will have their own opinions on what they say is the best option for getting passive income from investing in the stock market to starting your own online business.

You then want to work to have enough passive income to cover your basic living costs. You can calculate your numbers to figure out what those are once you follow a barebones budget. The cost of living and personal lifestyles vary depending on where you live.

Level 1 Financial Independence Goals

• Pay off any debts you may have first.

• Follow a barebones budget, which allows you to save more money.

• Save money to build an emergency fund.

• Work to build a passive income stream to cover your basic living costs.

• Work hard to find a way to make your first $100,000.