You’re sitting at home getting ready to leave for work. You pause, wistfully dreaming about a day when you never have to return to that place again, and reluctantly finish putting on your shoes. As the thought of escaping the bland grey walls of your cube continues to swirl in your head you slowly trudge off for another day of shredder projects and “right away boss!”

You’re dreaming of financial freedom (otherwise known as financial independence).

For the lucky few that were born into a life of privilege and unlimited money you may never have that feeling. For the rest of us, it probably crosses your mind more often than you’d like to admit.

So what is financial freedom and how can we reach the peak of its glory?

What is the financial freedom ladder?

In short, the financial freedom ladder is the rungs you must climb to reach the pinnacle of success, Financial Independence. Sure, you may skip a few rungs on the way up, or you may fall down and have to claw your way back up again, but the crowning glory of reaching the top means you never have to work another day in your life (although you may choose to work).

What does financial freedom mean?

Before we go through the 5 steps of the ladder, it is important to define what financial freedom is and what it is not.

My favorite definition is this:

Financial freedom is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent upon others.

What financial freedom is.

Financial freedom means not being dependent upon others.

Freedom from dependency is the most alluring part of finally reaching FI. You are no longer dependent on anyone. Not your employer, your parents, your siblings, or the government. No, you’ve made it. You call your own money shots. How you choose to spend your time is now completely up to you.

Financial freedom means having more time to dedicate to your passions

Have you always wanted to learn to ski? Have you always wanted to learn latin or write a book? You’re in luck, reaching FI means you now have the luxury of time to pursue your dream.

I’ve found 1,000 different cheese tasting tours. I’ll be going on every one.

What financial freedom is not.

Financial freedom does not mean having to quit your job.

Imagine this. You reached FI and took the early retirement route. You get bored and decide you want to go back to work. Guess what, you’ve earned that right. If you want to continue working after reaching financial freedom, do it.

Financial freedom is not a one size fits all magical number.

I wish I could tell you that having X amount of money in the bank would guarantee you peace of mind and security the rest of the your life. I can’t. No one can. Your needs in life, future medical setbacks, investing strategy, earning power, and spending habits will define the number you will need to feel comfortable in life.

Take your time when determining what the number should be. It’s easier to adjust your spending needs before you retire than after. If you run out of money after calling it quits you may find yourself once again looking for employment.

Financial freedom is not an excuse to play video games and eat Bon Bons all day

As alluring as it sounds to seclude yourself from the world, park your butt on the couch and spend all day playing video games and eating junk food, it’s probably not going to do much for your mental health. Then again, you call your own shots now…

Financial freedom is not an absolute and can be taken away.

There are no absolutes in this world. A devastating medical injury, war, and/or long-term collapse in the stock market could put large cracks in or crush your your nest egg. These exogenous events are impossible to control. You could work forever living under these fears. If you are comfortable accepting these low probability risks, you can then focus on what you can control. The most critical variable to monitor and adjust as necessary once you’ve hit your personal “magic number” are your expenses. If you keep your expenses under control, you are likely to maintain sufficient financial resources for the entirety of your life.

The 5 Steps of the Financial Freedom Ladder

Now that we know what financial freedom is and what it isn’t, we’ll take a deeper look at the 5 steps in the ladder.

The Foundation

Financial Freedom Ladder Step 1 – The Foundation: Enough money to provide the essentials… food and shelter to yourself and your family.

The freedom ladder starts with the most basic of human needs: Food and Shelter.

We need food to sustain us and shelter to keep us warm. Perhaps you have the money to provide these items or you are borrowing. The food may be sporadic and the shelter may be basic and/or temporary. In any case, you need it. It’s no coincidence the bottom of the financial ladder corresponds to the bottom of Maslow’s hierarchy of needs.

For those who aren’t familiar, Maslow’s hierarchy of needs is a theory comprising a model of basic human needs. The bottom of the pyramid starts with the basic human needs of food, water, warmth and rest. Without meeting those basic needs in life we are stuck in a cycle of their endless pursuit.

If you’re reading this article, you mostly likely passed this financial hurdle years ago (or maybe never faced it). Don’t take it for granted. Be thankful for the things you have in life as others aren’t so fortunate.


Financial Freedom Ladder Step 2 – Security: Enough money to take care of your family, your health and feel safe, wherever you are.

Security is distinctly different than having enough to cover the basic foundation of human survival. Once you have enough money to provide basic food and shelter, the needs begin to change.

The next step in the ladder is to ensure you have enough money to regularly provide food, procure permanent shelter in a safe and secure location, and can take care of your health care needs.

What does it mean to feel secure?

Safety and security is a very personal assessment. My level of safety needs may be drastically different from yours. For some, it may mean living in an RV traveling the country. For others, it may mean living in a secure access building with a 24/7 guard restricting access to the building. For others, it may mean living in a gated community and having a state of the art security system wired throughout.

At this stage of the financial freedom ladder, you need to have enough money to feel safe wherever you are living and wherever you go (which includes any vacations or trips to work).

What does it mean to be able to take care of your health?

Taking care of your health can mean different things to different folks. It will also vary based on your resources. Here are a couple of common things that people spend money on to take care of their health:

  1. Preventative care – Eating healthy, regular exercise and doctor check-ups.
  2. Health plan – Purchasing a health plan for issues that come up. There are many different plans and options out there.

To have enough money to satisfy this rung of the ladder, you should have enough funds to feel you are safe and take care of your health as best as you can (some health issues can’t be fixed).

It is important to note that when you are in the early phases of the financial freedom ladder, you may have a negative net worth and you’re likely accumulating costly debt.

Debt Elimination

Financial Freedom Ladder Step 3 – Debt Elimination: Enough money to eliminate any debts you’ve accrued – credit cards, school or auto loans, mortgage, etc.

Once you have food, shelter, security, and can take care of most health issues, it’s time to start attacking any debt you’ve accumulated in the process.

There are many ways to tackle eliminating your debt and I will not go into them in detail. There are tons of resources out there you can pull up on google to get you started. Here are a couple of high-level tactics that people sometimes use to help them eliminate their debt.

Ideas to reduce your debt

  • Pick one debt and focus all your efforts on paying it off (normally choosing the highest interest rate first, however some like to go with the snowball approach).
  • Consolidate all your credit card debt into one place, hopefully negotiating a lower interest rate at the same time.
  • Ask your lenders to adjust your interest rate to a lower amount. You never know if you don’t ask.
  • Start a side-gig to start making extra money to reduce your debt.
  • Sell things you don’t need to help pay down your debt.
  • Build up an emergency fund to help prevent going further into debt.

Whatever strategy you choose, don’t wait. Start chipping away at your debt today and be cautious of your spending in the future to prevent it from getting worse.

I know what you’re thinking, not all debt it bad!

Why not all debt is bad

Do not mistake this rung on the ladder for suggesting that all debt is bad. It is not. There are many strategies to wealth building and having a mortgage or other debt can be a critical part of your overall strategy. For most of us with a negative net worth and “bad debt”, we need to focus on chipping away at it and getting to a positive net worth.

Here are a few examples of “bad debt” that are typically not good for anyone:

  • Credit Card debt
  • Auto loans
  • Time-share loans
  • Pay-day loans or cash advances
  • Borrowing from a 401K
  • Taking out a loan to buy expensive jewelry, vacations or other “nice to haves”

Here a a few examples of “good debt” that are usually positive and can be used in a smart way as part of your Wealth Accumulation strategy.

  • Mortgage payment
  • Student loans
  • Loan to start a business
  • A home equity loan to pay off higher interest debts
  • Paying for medical bills

In each of the “good” vs “bad” debt items above, there is an argument to be made for or against paying off the debt quickly. Let’s look at an example when you wouldn’t want to pay off a mortgage, vs when you would.

Example: You have a 3% mortgage interest rate and the stock market is returning 7%.

Verdict: Keep the mortgage by making minimum payments and put the rest in the market. You get to pocket the extra 4%.
Example: You have a 8% mortgage interest rate and the stock market is returning 2%.

Verdict: Pay off the mortgage as fast as possible by putting extra money into paying off the loan.

Whether or not you should use debt as a key strategy in your climb up the financial freedom ladder is a personal choice and highly dependent upon the circumstances you fall in. In general, if you have a lot of “bad debts” you’re probably going want to work as hard and as fast as possible to reduce and ultimately eliminate them.

Wealth Accumulation

Financial Freedom Ladder Step 4 – Wealth Accumulation: Enough money to build a positive net worth and grow your nest egg in search of financial freedom.

You’ve been chipping away at your debt and you feel ready to start saving. At this point, you may have crossed over from a negative net worth to a positive one. Congrats on that accomplishment!

It’s time to supercharge your savings and help make that balance grow. Here are a few things to get you started when you’re in this phase:

  • Max out your retirement funds (401K, IRAs, etc)
  • Tally up your monthly expenses and be ruthless in finding ways to cut them back and save money
  • Buy used things vs new whenever it makes sense for your needs
  • Find cheaper housing by downsizing, moving, or potentially re-financing
  • Spend more on the things to you love to save money later
  • Get an advanced degree, take a class or hone skills in your craft

A time to take financial risks

At this stage of your financial journey you should have a positive net worth, an emergency fund and be fairly secure in your financial situation. If there’s ever a time to take more risk to boost your finances quicker, this is it. You should feel empowered to think outside of the box and try things you may not have been able to in the past. For example, maybe it’s time to start that new career, build up your side-hustle, or take a pay-cut to gain valuable experience which will help you get an even better promotion later.

Just make sure you’ve thought through the pros/cons and risks of each new thing you want to tackle before diving in. After all, you don’t want to sink your hard-earned cash into a losing venture that plummets you back down to the start of the ladder.

At this phase, don’t give up! It may be slow, but the payoff is worth it.

Financial Freedom

Financial Freedom Ladder Step 5 – Financial Freedom: Enough money to live on your own terms, forever.

Wahoo! You made it!

Whether it took 5 years or 25 years to get here it doesn’t matter. You made it!

What will you do now?

  • Will you start a new hobby?
  • Will you quit your job?
  • Will you celebrate with your friends and family?
  • Have you prepared emotionally for this day?

One of the biggest struggles newly minted FI folks have is the emotional response to finally hitting their magic number. If you’ve been solely focused on the numbers side of FI and neglected the emotional component you may want to check out some of the emotional challenges I’ve had during FI. You can find my emotional money section here.

Now that you’ve found your way to the top, your only job it is stay here. This is not a time to be complacent and throw your disciplined spending out of the window. If your newly found financial freedom becomes an excuse to “treat yourself,” you just find yourself falling back down the financial ladder quicker than you made it to the top.

Tips to stay at the top

  1. Don’t forget what got you here
  2. Do a regular check-ups of your finances at least once per year, preferably quarterly or even monthly
  3. Make sure you update your financial plan as your goals and life events change. You may find your financial needs are turned upside down.
  4. Be wary of “friends” and “family” that prey on your financial success and ask for loans or hand-outs. You may hear things like “you’re well off, you don’t have to work, you can help me.” Remember that “financial freedom” does not equal “rich”.
  5. Don’t be discouraged if things change and you get knocked down a rung. Keep your eye on the prize and climb back up!

Read: Delaying early retirement to support your undeserving family.

Other things to keep in mind

  • Life is messy, just like finances. You may find the lines are really blurred on the way to the top. You may still have debt even though you’ve made it to the top or you may be in the wealth accumulation phase but don’t feel safe and secure at night. Don’t be discouraged. It is perfectly natural to have a windy road to the top and no two experiences will be the same.
  • It is important to know that whatever your aspirations are and wherever you are in the financial freedom ladder, there is no shame in being on any rung. You get to control where you aspire to be and how hard you’re willing to work to move between rungs.
  • There is no right or wrong way to live your financial life. If you’re lucky enough to make it to the top, I encourage you pay it forward (in any way you choose), to help others find their way too.

Do you want to climb the financial freedom ladder?

The information contained on this website is for entertainment purposes only and references only opinions of the author. Nothing contained within should be considered professional, financial, legal, tax, psychological, health, safety or investment advice. Seek advice from a duly licensed and/or registered professional that can help with your specific situation.