The six phases of financial independence

The six phases of financial independence

The term “financial independence” has many meanings to many people.

To some, this means the ability to work on your own terms.

To others, it boils down to not working at all but instead having “enough” to meet all needs and possible wants.

Where do I stand on this subject?  This post will tell you in my six phases to financial independence. 

Retirement should not be the goal, financial security and independence should be

Is retirement your goal?  To stop working altogether?  While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very productive.

As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled.  Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.

With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well.  To that end, I never really aspire to fully “retire”.

Benefits of financial independence (FI)

In the coming years, I hope to realize some level of financial security and eventually, financial independence.  For us, this is a totally worthwhile construct.  The realization of FI can bring some key benefits:

  1. The opportunity to regain more control of our most valuable commodity: time.
  2. Enhanced opportunities to learn and grow.
  3. Spend extra money on things that add value to your life, like experiences or entrepreneurship.

Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or you desire to get back to that woodworking hobby you’ve thought about – financial independence delivers a dose of freedom that’s hard to come by otherwise.

FI funds time for passions.

FI concepts explained elsewhere

There are many takes on what FI means to others. 

There is no right or wrong folks – only models and various assumptions at play.

For kicks, here are some select examples I found from authors and bloggers I follow.

  1. JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent sums of money but rather, enough money to buy a modest level of time and freedom for something else.
  2. Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.

*Based on research conducted by certified financial planner William Bengen who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.

For simplistic math, such bloggers calculated your “FI number” could be approximately your annual expenses x 25.  So, if you’re annual expenses are about $40,000 per year (CDN $ or USD $ or other), then your “FI number” is a nest egg value of $1,000,000. 

Using that framework, there are levels of FI some bloggers have adopted:

  • Half FI – saved up 50% of the end goal (in this case, $500,000 of $1M).
  • Lean FI – saved up >50% of end goal to pay for very lean but life’s essentials like food, shelter and clothing (but nothing else is covered).
  • Flex FI – saved up closer to 80% of the end goal ($800,000 of $1M), this stage covers most pre-retirement spending including some discretionary expenses.
  • Financial Independence (FI) – saved up 100% of the end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
  • Fat FI – saved up at or > 120% of your end goal (in this case $1.2M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.
  1. There is the concept of “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).”  They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”

Well said.

My six phases of financial independence

To the “Slow FI” valuable points, since we all only have one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it.

Catamaran Barbados 2019

(Picture from our catamaran cruise, Barbados 2019)

After reviewing these ideas above, among others, I thought it would be good to share what I believe are the six key phases of any FI journey – including my own.

Phase 1 – FI awakening.  This is where there is an awareness or at least an initial desire to achieve FI even if you don’t know exactly how or when you might get there.

(I had my awakening just before I decided to become My Own Advisor, triggered by the financial crisis of 2008-2009.)

Phase 2 – FI understanding.  This is the phase where people are getting themselves organized; they start to diligently educate themselves on what their personal FI journey might be.

(I would say it took me until my mid-30s to get my financial life in order through more financial education and improved financial literacy. It was a process that took a couple of years although I’m always continuously learning and improving. I don’t pretend to know it all.)

Phase 3 – FI funding.  In this phase, people start to realize some financial stability.  Maybe the emergency fund is now fully established.  Usually an approach to long-term investing has been solidified.  More than likely, student loan debts are being dissolved for the 20-somethings or 30-somethings OR better still, those types of loans are completely put to rest for good. 

In phase 3, debt management is under control – you might have a mortgage or a car payment but you’re learning to curb your financial behaviour for the better.

Maybe you’ve already made the crucial decision to become debt-free first or invest first.

This was my definitive answer to the paying your mortgage first or investing first debate.

The FI funding phase also means you’ve taken steps to start optimizing your financial life – reducing waste and excess.  It’s doesn’t mean you’re perfect but you do start to align your spending with your financial values.

(In speaking about my own FI funding experiences, my wife and I really upped our FI journey once we landed on our two-pronged investing approach:  owning a basket of dividend paying stocks for growing income AND continually buying more low-cost ETF units for long-term growth.  I believed then (like I continue to believe now) our hybrid approach will deliver a masterful 1-2 investing punch to achieve FI.)

To pause here, phases 1-3 are really about financial organization

Phase 4 – FI adoption.  This phase is where routine, but often diligent combinations of debt repayments + investing are occurring over time.  Somewhere early in your FI adoption phase, probably in your 20s and 30s, you’ve embraced the merits of having a cash emergency fund.  In this case, should an emergency or an unfortunate unemployment situation were to occur, it would not cause financial ruin.

In phase 4, in addition to the cash cushion, there are also investments in the bank to ride out a financial storm for multiple months or quarters, or maybe even a few years. 

With your FI brain fully engaged, you’re actively executing on your FI plan.  There is no longer any second-guessing about what to invest in, why; you’re not rattled by stock market noise or various reports.  You’ve carved out your FI path.     

You don’t have to have targets of Half FI, Lean FI or anything else because you continue to optimize your life on your terms.  Your process of planning and re-planning is working in your favour to reach your goal. 

Admittedly, because “I’m here” in this phase, I can tell you this is absolutely the longest one.

The growth curve feels like it’s taking forever.  Yet looking back, it’s tremendous to see how far we’ve come over the last decade – markets enabling of course. 

Now that you’ve fully adopted your FI journey, you’ve accepted that journey could take many years or even a few decades, depending upon your path to FI.  It is highly dependent on your savings rate, savings amount, and the ability to cut back expenses.

(My wife and I have determined that somewhere around age 50 is when we could be reasonably considered FI on our terms.  I hope to post a new financial freedom update on that front later this month.)

Phase 5 – FI security. 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 distributions, dividends, interest, or selling some assets as needed) and/or from passive income sources like rental income or royalties.

FI security doesn’t offer you cash for life, but it does cover many basic needs associated with it.

Based on how much you might have saved and invested, you could likely live a frugal existence for the coming decades.  FI security is on the edge of full-on financial independence.

(My wife and I aren’t there yet but we are getting close to realizing this phase.  For example, I calculated if we have no debt, we’d be in this phase now.  We’re optimistic that dividend income (without selling any assets) from our non-registered portfolio alone should cover our condo property taxes and our condo fees for life – sometime next year.  Those expenses are estimated to be in the range of $12,000 per year.  Those expenses will likely increase with inflation over time.  We’re optimistic that dividend raises from the companies we own will help offset those inflationary costs.)

FI security equates to a financial Crossover Point.  The Crossover Point was popularized in the book Your Money or Your Life.  This is the point whereby investment income matches or ideally exceeds common monthly expenses on a consistent basis.  Reaching your personal Crossover Point means you have a steady income stream for life.

Phase 6 – FI freedom.  You’ve made it!  This is what I consider the final phase in my FI journey where truly all expenses (basic and discretionary) are covered by existing and more than likely growing assets (if you did not significantly draw down your portfolio at all). 

You could live off distributions or dividends in the range of 3-4% in perpetuity. 

There is no need to work at all, although some people may choose to do so for social, physical, mental and other wellness benefits. (I intend to.)  Some of these wellness benefits even escaped a financial classic that sold millions of copies – The Millionaire Next Door.

As part of your FI Freedom Day, the income delivered to you (from your investment portfolio, from other assets such as rental income) cover everything you need and more.  Since you’re well beyond FI security now, you can buy those gently used vehicles every few years – if you wanted; travel more on your own terms – if you wanted; upgrade your lifestyle with better food decisions – all without ever worrying about breaking the bank.

At the frothy end of the FI freedom phase, you might have FI 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.

Oddly enough, you might not even be debt-free when you reach your FI Freedom Day.  This is because you could readily pay off any liabilities (e.g., rental properties) without any long-term financial consequences.

By phase 6, you’ve been so effective and efficient at your financial management processes over the years, they’ve become second nature and part of your DNA.

Six Phases of FI - My Own Advisor

Having enough thoughts

Whether you choose to share your hard-earned wealth with others, via a family legacy, bequeath, or on you alone, the choice becomes yours with the dawn of FI Freedom Day.

Ultimately good health is the best possible form of wealth but that’s a subject for another day.

When it comes to money management I’m convinced if you follow my six phases of financial independence, whatever you call your FI journey, I suspect you’ll find what you’re looking for at whatever pace you wish.

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

18 Responses to "The six phases of financial independence"

  1. Love this. Regarding the term noted above “F-you money”. The first time I learned of this principle was in the James Clavell novel, “Taipan”.

    Copy/Paste from

    A character in that novel, a lady executive has the objective to have “drop dead money”. The “drop dead money” is that amount of money that she calculates she needs so that she would have the freedom and the luxury to tell anyone to “drop dead” without worrying about her financial security. To accumulate this “drop dead” money she had been working hard for a businessman who had promised her a bonus equivalent to the “drop dead money” if she could pull off a successful acquisition.

  2. Ha ha Mark, you sound like a full-fledged member of the FI community now! Happy you’re part of it. 🙂

    It’s nice to see the milestones/phases of FI through a Canadian lens. Great article.

    PS: we’re also at Stage 4 and like you, are finding it to be the longest phase!

    1. I think I’ve always been FI-focused just that I’m getting much closer to realizing it 🙂 I’ve been posted dividend income updates for ~10 years so that was the plan all along to have some passive income to combat some living expenses. Things are getting rather real for us – which is nice.

      Phase 4 (executing the plan) does take some time but I think it’s also the most rewarding to date because it’s highly motivational to “keep going”.

      I’m sure you and your family feel the same!

  3. I enjoyed this and like thinking in terms of stages – it allows you to focus on the next goal. We’re in stage 5 in our early 50s and don’t plan to retire until we can achieve stage 6 and enjoy the fruits of our efforts. You are right, stage 4 was a very long one.

    1. Phase 5 is outstanding. Very well done. We’re firmly in Phase 4 right now.

      I figure we have 2-5 years to reach Phase 5 and then a few years thereafter to reach Phase 6.

      Just gotta be patient and roll with it and stay the course.

      Any plans once you hit Phase 6? Stop working? Part-time? Travel? Other?

  4. Good post on your journey Mark, and a template for others. Without some sort of school program to teach kids, we may continue to have low numbers of well planned retirement years. Good retirements may continue to be for those who have the right “personality type”?

    1. I’ve thought about that Paul. What makes our journey or any journey different? The right behaviours are key. Certainly a good job is essential. There are people that have far more wealth than I could ever imagine. I dunno, I think it all boils down to being serious about your plan and executing on it.
      Throw in some luck and I believe that’s the recipe. Thoughts?

  5. I also don’t believe in steps. My goal was the amount of dividends we would get from the portfolio. in order to reach it we set a goal and I created a spreadsheet of what it would take to get there. Then you invest the required amount and meet all other obligations with what’s left over. We exceeded our goals by a fairly large margin and are now happily “retired”. That means we can do what we choose. It’s the best phase.
    I enjoy reading your take on things, but for me it’s keeping it real simple. see my TFSA Strategy at dividend-café.com

    1. Well, I wrote steps because there is definitely a process to be aware, understand, act and continue to execute upon over time. It doesn’t magically happen that’s for sure!

      I’ve got a spreadsheet to identify my dividend income, you can read a bit more here *below* but we still nee to work full-time for a few more years. No biggie. I enjoy my job and the people I work with.

      Hey, I’m all for simple, trying to simplify my portfolio more as I get older for sure.

  6. I personally don’t like steps, especially when they are tied to capital appreciation. If you want to stick with what you actually save or invest, fine, then it’s a meaningful and measurable figure. Market value is a kite, floating up and down depending upon the winds of the market.
    Secondly, my only other step or goal was how much income my investments are generating and is that income growing. If it is than it’s a matter of watching the income grow till you are ready to relax and either live of the income or stop worrying whether it continues to grow or not.
    At that point what matter the paper value of what you’ve invested? It did its work and you are reaping the benefits.

    1. Market value is definitely like a kite! It will be interesting to see how I can stick to my plan over time when the market $hit hits the fan. It will happen eventually. This cheap debt long-term is not good.

      Always been a big fan of dividend income. I don’t see that changing. October 2019 should be higher. Keep you posted.

  7. I assume we are in Phase 5. We can retire now but we have to adjust our lifestyle to spend less. If we want to maintain our current lifestyle then we need to save more.

    Three more years according to my plan. My DH will be 58 at that time. Not an early retirement, but still pretty good I guess.

    1. That’s impressive, phase 5. Not quite there yet with financial security but I suspect we’ll hit that mark in another couple of years.

      I hope within <5 years there is no debt and the other major FI goal for phase 6. We’ll see!

      Onwards and upwards for you May.


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