The six phases of financial independence

The six phases of financial independence

I’ve recently updated this post this summer to include more links to related content on my site and a link to my recent dividend income update. I hope you enjoy it. 

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

To some, it means not working at all. 

To others, financial independence covers all needs and many wants.

To others still, it means the ability to work on your own terms.

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 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While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very useful.

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” – cease to work. 

Benefits of financial independence (FI)

In the coming years, I hope to realize my desired level of financial independence. 

We believe the realization of FI will bring about 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 whatever you desire – financial independence delivers a dose of freedom that’s hard to come by otherwise.

More succinctly: financial independence 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.

  • JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent large sums of money but rather, enough money to buy a modest level of time and freedom for something else. I suspect that money threshold varies for everyone. 
  • 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.

Recall the rule:

*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.

In some ways, the 4% rule remains a decent rule of thumb.

Why the 4% rule is actually (still) a decent rule of thumb

For simplistic math, 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. 

Here are some other quick ways to determine your financial independence number.

Determining Your Financial Independence Number

Are there levels of FI?

For some bloggers, the answer is “yes”:

  • Half FI – saved up 50% of your end goal (e.g., $500,000 of $1M).
  • Lean FI – saved up >50% of your end goal; income that pays for life’s essentials like food, shelter and clothing (but nothing else is covered).
  • Flex FI – saved up closer to 80% of your end goal (e.g., $800,000 of $1M). This provides financial flexibility to cover most retirement spending including some discretionary expenses.
  • Financial Independence (FI) – saved up 100% of your 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.

There is this concept about “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.

I’ve been on a path to semi-retirement for a couple of decades now. Whether you call that a modern path to “Slow FI” or other I’ll leave that tagline up to you!

My six phases of financial independence

With a similar line of thinking related to Slow FI, since we all have only 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.

FI awakening might consider self-reflection questions or thoughts like the following:

  • I would love to retire early or retire eventually…
  • I can never seem to get off this credit card treadmill…
  • I wish I had some extra money to travel…
  • Wouldn’t it be nice to buy X guilt-free?

(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.

In this phase, they might set goals or get a better handle on what goes into their financial plan. Even if your plan is not perfect, it’s a start.

They might start asking some deeper questions like:

  • Why is money important to me?
  • What is my money for?
  • How do I know I’m doing it right?

What is a Financial Plan? What should it cover?

What is a Financial Plan and what should it cover?

(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 for younger investors, student loan debts are being put to rest. In phase 3, debt management is under control. Sure, you might have a mortgage or maybe even a car loan but by this phase you’ve learned to manage 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 definitive answer to paying down your mortgage or investing

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. You’ve already started to automate any savings for investment purposes. This will accelerate your path to financial independence…

(In writing 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. This was an investing approach we know we could stick to for the long-haul – and still do.)

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 phase 4 however, beyond cash savings, you now also have investments in the bank to ride out any major financial storm for multiple months or quarters, or maybe even a few years. In this phase, most of your financial plan is complete and you’re sticking to it. Things seem like they are on autopilot. You spend little time sweating the small stuff financially. 

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 or why. You’re engaged. Ideally you’re not rattled by the stock market noise. You’ve learned to tune out financial experts who think they can predict the financial future. (Newsflash: they can’t!)

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.

Now that you’ve fully adopted your FI journey, you realize achieving your goals while simple is not easy.. It takes multi-year discipline but you are absolutely getting there…

Simple but not Easy

And the good news is – you know the formula by now:

  1. Save early, save often. Maintain a modest savings rate.
  2. Automate your savings for wealth-building. 
  3. Diversify your investments, although own mostly stocks over bonds. 
  4. Minimize your investing costs.
  5. Rinse and repeat until wealthy.

(My wife and I have determined that sometime in the coming years, we should be financially independent. I’ll keep you posted of course!)

Financial Independence Update – April 2021

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.)

We keep tabs on our monthly growing dividend income here.


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.

I’m getting very close to my Crossover Point. 

“$27,212 in annual dividend income translates to earning $74.55 per day from part of our portfolio, doing nothing at all.”

June 2022 Dividend Income Update

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). 

I believe most dividend investors can live off of distributions or dividends in the range of 3-4% yield 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 covers everything you need and maybe a little bit more. At the frothy end of financial independence, 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. Also at the top of end of FI, you might have a tax problem to navigate – how to draw down your portfolio you’ve worked so hard to accumulate. 

Make sure you check out my dedicated Retirement page where I list a bunch of free retirement calculators.

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.

When you reach FI freedom, you’re a money savvy pro. You’ve been so effective and efficient at your financial management plan for so long, financial literacy is now part of your DNA.

Six Phases of FI - My Own Advisor

The six phases of financial independence summary 

When it comes to money management I’m convinced if you work through 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.

Happy saving and investing.


Further Reading:

Why I prefer #FIWOOT – Financial Independence, Work On Own Terms!

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

26 Responses to "The six phases of financial independence"

  1. Great read Mark but You know what throws me off Mark? Is no one ever considers or mentions taxes when figuring out what they need to actually have cash in hand. Drawing down 4% or $40,000 like your example probably draws 30% tax when combined with CPP. And how does the 4% rule work when. RRIF at 70 years old starts drawing down 5% which gets larger each year until there is little left. Taxes apply here as well. The best plan is to retire with a tax problem not an income problem. Then you are FI.

    1. Ah, very smart Paul.

      It’s interesting because I was just having this conversation with someone on Twitter re: you must consider the tax consequences of any portfolio drawdown plan. Most drawdown reports that I’ve done and do, including for my own portfolio, are determined in after-tax dollars.

      Otherwise, you are missing or rather ignoring such as huge factor.

      I’ve always told others if you have a tax problem in retirement, then that’s ideal and a “good problem to have”. So, totally agree.

      We believe our basic expenses will be $5k per month on average after-tax, without major international travel.


  2. Hi Mark
    Great piece of work! Did not know all these different FI stades and levels. I like to see them, its motivating.
    My wife and I set end of 2024 as our big goal to achieve FI. Currently, we are on our way to half FI (total wealth is around USD 1 Mio., but passive income not yet covering 50 % of our spendings). But I am sure we could be even lean FI quite soon. We are working on adding a rental property to our investments which should generate nice additional passive income.

    1. Thanks Shape! It’s something I developed myself given I feel there is a logical progression of sorts how one might get from A to B per se.

      Total wealth of $1 M USD is very good. We’re hoping for >$1 M investments or about $800,000 CDN but we’ll also pensions, other assets, and a paid off home too. That’s the plan anyhow!

      2024 is getting close isn’t it? That when we can likely work part-time as well.

      Thanks for your comment!

  3. Good breakdown Mark. One FI concept you didn’t mention that I like, and am using, is Coast FI. It is that point where you have the freedom to choose your work and schedule, as you only need to earn enough for your expenses. Maybe that’s part time, being an entrepreneur, or maybe it’s the work you always wanted to do. Regardless, you no longer need to save/fund your investments, as they will compound and provide you with a full FI lifestyle at a calculated point in the future. Of course like any of the steps you mentioned, they’re personal and can be used on a sliding scale depending on ones needs and wants. Cheers

    PS. I’m surprised Chrissy didn’t mention ‘Spouse FI’…should be self explanatory. LOL

    1. Thanks my friend.

      Coast FI is a good concept – I like it – freedom to choose your work and schedule…very much aligned to my #FIWOOT really. For me, that’s part-time work in hopefully another 3.5 years. Ultimately I can be in phase 5 in the coming years – and then phase 6 a few years after that whereby I wouldn’t need to work at all. Really striving for the ability to live off dividends and distributions in the future. That’s ideal 🙂

      Yes, I’ve heard of Spouse FI or Partner FI or Relationship FI. I won’t get that choice – I semi-retire and my wife will want to as well!!! No free pass for me. Ha.

  4. Hi, Mark,

    Thanks for the articles. I never planed and executed this financial independence journey based on the well-thought plan. Now, looking back after reading your articles, I did see a pattern along the way: immigrated to Canada in early 30s, working self-employed as a consultant for a few years, and seriously started creating a secure financial future in late 30s, mainly in the real estate investing, those will be phase 1-4. Now, we are in Phase 5 with real estate portfolio and stock portfolio, supporting our daily expenses, we are still learning and adjusting to optimize the financial picture, and above all, to create a well-balanced life with meaningful purpose and peace of mind.

    Years ago, when I started investing journey, my mentor said to me: overnight success from outside, 20 years hard work from inside. At the end of the day, it is not the end result of financial freedom matters, it is the person you become to along the journey matters. If you stick to your plan, rule and execute it well, the result will come, for sure.

    1. Very kind words Angela 🙂

      Interesting though, whether you realize it or not – you have a plan per se with your pattern of “seriously started creating a secure financial future in late 30s, mainly in the real estate investing…” So, you’re deep into the accumulation phase and that takes time. It’s a get wealthy eventually strategy but how quickly time flies.

      Phase 5 sounds great for you: “still learning and adjusting to optimize the financial picture, and above all, to create a well-balanced life with meaningful purpose and peace of mind.”

      You clearly have some things figured out since once you realize the journey is the most important part, things get better 🙂

  5. 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.

  6. 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!

  7. 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?

  8. 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?

  9. 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.

  10. 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.

  11. 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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