How to Create a Financial Freedom Plan and Achieve It

The Big Picture on Creating a Financial Freedom Plan:

• • Financial independence is achieved through a series of stages, beginning from a negative net worth and progressing through financial solvency, stability, and halfway to financial independence. Crafting and following a financial freedom plan is crucial for success. 
  • There is a distinction between “leanFIRE” and “fatFIRE.” LeanFIRE involves covering basic living expenses through passive income, making work optional but maintaining a modest lifestyle. FatFIRE, on the other hand, allows for a more luxurious lifestyle, providing greater financial flexibility and the ability to enjoy more discretionary expenses without financial stress.
  • Financial freedom is not just an end goal but a means to regain control over one’s life. It enables individuals to pursue meaningful work and design their ideal lifestyle, following passions and interests without being constrained by financial worries.

Much has been written about the stages of financial independence (FI) to define financial freedom and the milestones along the way.

These steps for creating a financial freedom plan are easy to understand but a bit harder to reach.

The good news is that it gets easier as you go. Like riding a bike, the first few pumps are the hardest.

What Is Financial Freedom?

Financial freedom is defined as having enough resources—be it from income, investments, or savings—to meet and exceed all your needs and obligations while living comfortably or needing to work. The concept not only covers your day-to-day needs and wants, but also any unexpected expenses without hitting your resource limits.

Here are the oft-praised benefits (both physical and psychological) of having total financial freedom: 

Stages of Your Financial Freedom Plan

As you plan your escape from the rat race, expect to tackle the following stages in your financial freedom plan.

Stage 1: Negative Net Worth (In the Hole)

Many of us start our journey below $0, with a negative net worth.

If you’re not familiar with how net worth is calculated, it’s simply the sum of your assets minus the sum of your liabilities (debts). You have a negative net worth if you owe more than you own.

No bueno. But we all have to start somewhere. I’ve been there myself.

Whether it’s consumer debt, credit cards, student loans, personal loans, upside-down real estate investments, or other types of debt, you’re underwater. That’s what comes of lifestyle creep and trying to keep up with the Joneses.

Consider it a one-way ticket to staying broke no matter how much you earn.

Stage 2: Financial Solvency

You jump off the train once you realize you’re on the fast track to nowhere.

You can then start building an emergency fund and tackling your high-interest debts. Typically, emergency funds are worth 3 to 6 months of your expenses. 

So, the next time you get hit with a surprise $1,000 car repair, it’ll still suck, but it won’t throw you into a panic. At this point, between your emergency fund and shrinking consumer debts, you’ll be able to absorb small financial shocks.

Word to the wise: you can supercharge your savings rate by house hacking. Getting rid of your housing payment opens up lots of extra money to hit your financial goals faster.

Try the debt snowball method to knock out each debt individually and build momentum as you go. This method allows you to pay off your debts as quickly as possible.

The higher your savings rate, the faster you’ll pay off your debts and move to the next level of financial freedom.

Case Study: The Importance of Sticking To Your Financial Freedom Plan

Check out this case study of how one man house hacked a duplex and covered his monthly payments with rent from his neighbor. The story is fascinating, so I suggest you read it in its entirety.

But if you want the Cliffnotes version, a 27-year-old insurance underwriter from East Lansing, Michigan, achieved financial freedom through house hacking with no prior real estate or renovation experience. Despite initial mistakes and dealing with city inspectors, he got through it with careful tenant screening and accurate cash flow calculations for successful house hacking.

Stage 3: Financial Stability

You’ve reached financial stability once you pay off all your unsecured debts. You probably still have a mortgage and perhaps a small car loan, but no high-interest loans.

By now, you’ve scaled your emergency fund to at least two months’ living expenses and perhaps as many as 12 if you have unstable income or expenses. You can handle all the curveballs life throws at you, even if they still sting when they hit you.

You can put each paycheck’s savings toward investments rather than your emergency fund or paying off debts. This is where the fun begins.

You can start investing for passive income, from stock dividends to real estate crowdfunding to rental properties. If you need some fresh ideas, start with these passive streams of income from real estate.

Don’t ignore your retirement accounts, either. If your employer offers matching contributions to your retirement plan, you instantly earn a 100% return on your investments. But even if they don’t, consider maxing out your Roth IRA for tax-free compounding and withdrawals in retirement.

From here, you can watch your net worth and passive income grow each month.

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Being a landlord? Less fun.

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Stage 4: Halfway Point (Half FI/Coast FI)

You’ve calculated how much money you need to retire, and you understand concepts like safe withdrawal rates and the 4% Rule.

When your net worth gets halfway there—what some FIRE pundits call “half FI”—you’ve reached the next milestone in financial freedom. As an aside, we use “FI” and “FIRE” synonymously, the latter standing for financial independence/retire early.

Despite how it may seem, you’re much closer than halfway there. Because each investment produces additional income and growth, it adds to the amount you can invest each month. These compounding returns mean it’ll probably only take you half as long to reach full financial independence as it took you to get where you are today.

In other words, if it took you ten years to reach half FI, it’ll probably only take another five years to build up the other half of your target nest egg.

There’s another concept worth mentioning here, known as “coast FI.” Coast FI means that if you stopped investing today, you’d still be able to retire on time. The compound interest and returns on your investments would get you there on their own.

For example, if you have $500,000 invested and want to retire with $1 million, it will take you around seven and a half years to reach your goal if you earn 10% on your investments. That’s without you investing another cent.

Play around with this compound interest calculator to see how powerful compounding is.

Stage 5: Financial Security (Lean FI/LeanFIRE)

Working technically becomes optional when you can cover your basic living necessities with passive income from investments. You won’t be trippin’ the life fantastic, spraying champagne all over people at black-tie galas, but you could survive without ever working another day in your life.

People in the FIRE community call this stage of financial independence “leanFIRE” or “lean FI.” For some, it’s the end goal. They don’t need trips to Europe or filet mignon dinners. They want to live simply in a quiet corner of the world and do their own thing.

Most want more flexibility and “freedom” in our financial freedom, so we keep investing money. But if you don’t mind a modest lifestyle on a tight budget, this can be the end of the road for you.

As an additional thought, I’m a huge proponent of lifestyle design and using your passive income to help you change careers to something you love rather than tolerate. That could mean taking a huge pay cut to switch to a dream job, starting your own business, or something else entirely. But when you can cover your basic monthly expenses with passive income, you have the freedom to quit your high-stress day job and never look back.

Stage 6: Financial Independence (FI or FIRE)

When you can cover all your living expenses—including discretionary expenses—with passive income from investments, you can retire without losing your lifestyle.

Welcome to financial independence!

It doesn’t have to require passive income, either. You could reach a net worth that supports you at whatever withdrawal rate (e.g., 4%) you decided on. A 4% withdrawal rate should last at least 30 years, but if you want your nest egg to last longer, plan on a 3.5% withdrawal rate.

Reaching financial independence isn’t about getting rich. It’s about retaking complete control over your time.

Most people who reach financial independence live a middle-class lifestyle, but they do work they love rather than slaving away in corporate hell.

Pursue financial independence to retire at 40 or at any age you like. Here’s how much you need to save to retire quickly.

Better yet, pursue FI as part of a larger effort to switch careers to do fulfilling work you love.

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Stage 7: Financial Freedom (Abundance/FatFIRE)

Financial freedom shoots the moon if financial independence lets you continue living your previous lifestyle without a job.

People sometimes use financial freedom and independence interchangeably, but the definition of financial freedom, as I see it, is a life with few fiscal limits. You can afford luxuries like traveling around the world and fine dining without a second thought. You can effortlessly pay for your children’s education.

While many financially free people still live a middle-class lifestyle, they don’t have to. They are wealthy, at least by conventional standards.

Some in the FIRE community refer to this as “fatFIRE” instead of leanFIRE. You can expect to live comfortably without another cent of active income.

The longer you work and invest, the fatter your nest egg and passive income grow. But don’t continue working a miserable job to reach fatFIRE. By the time you reach half FI or leanFIRE, switch to the work you love. From there, every day feels like financial freedom.

Your Total Financial Plan: Define Your Ideal Life

As long as you work a job you don’t love, you’re in the rat race.

The FIRE movement gets a bad rap because critics assume followers want to lie on a beach sipping margaritas for the rest of their lives. But they’re missing the point entirely: reaching financial freedom is about retaking control and putting yourself in a position to do meaningful work rather than drudgery.

Work that doesn’t always pay well. Or if you’re starting a business, that comes with risk. I know all too well how harrowing the lean first few years in business can be.

I challenge you to dream bigger than just retiring. What would your dream life look like? How would your dream work? How would you change the world for the better if you only needed half the income to keep living your current lifestyle?

As progress through your financial freedom plan, start actively creating your dream lifestyle. It took me years, but I eventually built several sources of active income I could earn from anywhere in the world on my schedule. I spend ten months a year overseas and the other two months visiting family and friends in the US.

All the while, I continue investing and growing my net worth and passive income.

The irony is that when you design your ideal lifestyle according to your goals and values, you no longer want to quit and retire. You want to keep working forever because you love what you do.

In other words, the value of financial independence and early retirement lies in the pursuit, not in reaching a target number.♦

What are your financial goals? How do you define financial freedom, and what stage of financial independence are you aiming for? Share your financial plans below!

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