Ascend Fortuna’s Ladder: Mastering the 7 Levels of Financial Freedom And Financial Independence

Fortuna’s Ladder to Financial Freedom Level 1: Clarifying Your Vision of Financial Independence

Imagine a ship setting sail without a destination. It’s likely to be tossed around by the waves and winds, right? The same is true for your financial journey.

But just like that ship, the destination may change over time. Sure, French Polynesia sounds great when you start your round-the-world sailing adventure, but you may get stalled out in the Mediterranean and pivot to a European RV tour. Hey, it could happen.

The initial stage of financial freedom involves:

• Gaining financial clarity
• Comprehensive evaluation of your personal finances
• Establishing financial goals
• Formulating a budget (or not, more on that below)

The aim is to comprehend your current financial position and chart a course to your desired destination. Think of it as setting the coordinates for your financial ship, giving it a clear direction to sail towards.

Assessing Your Finances

You can’t begin a journey without knowing your starting point, and the journey to financial independence is no different. It begins with assessing your finances. This involves:

• Conducting a financial audit to track both your fixed and variable expenses
• Enhancing your financial literacy to make informed decisions
• Developing a habit of regularly tracking your financial progress

Think of it as a medical check-up, but for your finances. You’re getting a clear financial picture of your financial health, understanding the state of your cash flow, and identifying areas that need attention. This step is crucial as it lays the foundation for your financial stability.

Don’t judge yourself here. Just write it all down. If there are expenses that make you cringe, know that are working toward either not making the same decision again or being able to afford those luxuries with ease.

Setting Financial Goals

With a lucid understanding of your financial condition, the next step is to determine your financial objectives or long-term financial goals. These are the destinations you want your financial ship to reach. Your goals could be anything from saving for a dream vacation, buying a home, or planning for retirement. The key is to make your goals specific, measurable, and time-bound. This approach not only creates a sense of urgency but also provides a clear plan for achievement.

Bear in mind, these objectives serve as your compass, steering your financial journey and providing motivation to persist.

Creating a Budget

This is my least favorite step. I’ll tell you why after I present the reasons for doing this.

Imagine trying to stay within the speed limit without a speedometer. Sounds challenging, right? That’s what trying to manage your finances without a budget is like. A budget functions akin to a financial speedometer. It aids in monitoring your income and expenses, helping to prevent overspending and ensure alignment with your financial objectives.

It involves listing all your monthly expenses and projecting how much you can spend in each category. Then, you’ll verify them by reviewing bank and credit card statements from previous months. Regularly reviewing your budget helps you stay on track and make adjustments as necessary. Remember, a budget isn’t about restricting your spending; it’s about understanding and managing it.

I don’t like them because I have found that budgets require a level of time and scrutiny that I simply don’t have. However, I’m not a chronic over-spender (my upbringing and scarring from a money-scarce house did me well there I guess), so I don’t naturally spend way more than I make.

That being said, I do go back and look at my expenses every few months to see if my general feelings about how much I’m spending match with my reality. Do what works for you, but find a way to analyze your regular spending habits.

Fortuna’s Ladder to Financial Freedom Level 2: Foundation of Self-Sufficiency

Armed with a clear financial outlook, the next phase is to achieve self-sufficiency on your way to reach financial independence. This stage is all about standing on your own two feet financially. It’s composed of three essential thresholds:

1. Earning enough to cover all your expenses without relying on external financial help. Think of it as learning to swim. At first, you might need floaties or a lifeguard to keep you afloat. But with time and practice, you learn to swim on your own, becoming one of those financially independent folks.

2. Establishing an emergency fund. This is part of the essential foundation of financial security, because you never when what can happen to your paycheck. The construction of an emergency fund functions as your financial safety net, ensuring you have enough money during unforeseen circumstances.

3. Eliminating debt. You’ll want to get to the point where you aren’t paying to borrow money (except for your primary residence, likely). The attainment of personal finance self-sufficiency requires debt elimination.

Building an Emergency Fund

An emergency fund resembles a lifeboat for your financial vessel. It’s a buffer against unexpected expenses like unplanned medical bills or job losses. Building an emergency fund involves making small savings contributions and using windfalls such as tax refunds or bonuses.

The size of the fund should be tailored to your needs, typically covering around three to six months’ expenses. Remember, an emergency fund isn’t just a safety net; it’s a peace of mind fund. It’s there to ensure that even in the face of financial storms, your ship stays afloat. It’s the rebar in your foundation.

Eliminating Debt

Debt is like a leak in your financial ship. It can slow you down and, if left unchecked, can even sink your ship. That’s why eliminating debt, including credit card debt, is a crucial part of achieving financial security. This involves formulating a plan to pay off high-interest debt, such as credit cards.

Strategies like the snowball method, where you pay off the smallest balance first before moving on to the next, can create momentum and psychological wins. It’s about taking control of your financial situation and steering your ship away from the stormy waters of debt.

Fortuna’s Ladder to Financial Freedom Level 3: Stepping Up And Taking Your Financial Independence To New Heights

With the establishment of a firm foundation, the subsequent phase is to ascend to the launchpad. This stage is all about:

• Gaining financial breathing room
• Increasing your income
• Optimizing your expenses
• Starting to invest

Think of it as filling up your ship’s fuel tank, checking the engines, and preparing for launch. You’re getting ready to take your financial journey to new heights.

Increasing Your Financial Income

Fueling your financial ship involves increasing your income. But now that you aren’t paying debt, this gets easier and easier.

This could involve advancing in your career, selling personal items, or renting out unused assets. Each of these strategies can supplement your income, contributing to the forward momentum of your financial journey.

But remember, earning more doesn’t mean having more. It’s also about managing your income effectively and directing it towards your financial goals. This is where you need to be super careful to not let non-intentional lifestyle creep come in. For instance, Ramit Sethi, author of I Will Teach You To Be Rich suggests putting 25% of every raise into a “celebration” bucket, and investing the remaining 75%.

Related Podcast: Unconventional Passive Income Tactics to Fuel Your Real Estate Ambitions

Optimizing Expenses

While fuelling your financial journey, it’s equally vital to streamline your expenses. This involves creating a more refined budget, eliminating unnecessary costs, and adopting money-saving habits. By doing so, you’ll have living expenses saved, which can be thought of as streamlining your ship, reducing drag, and ensuring efficient use of your fuel.

Starting to Invest

As your financial ship gains momentum, it’s time to start investing. Investing is like adding rocket boosters to your ship. It’s about putting your money to work for you, generating passive income, and growing your wealth over time.

Commencing investments early and utilizing tax-advantaged savings and investment accounts can facilitate exponential growth of your wealth.

It is essential to start investing as soon as possible, so don’t skip this step!

Start Real Estate Investing Early

One of the powerful rocket boosters you can add to your financial ship is real estate investing. By starting real estate investing early, you can create a passive income stream that grows alongside your career income.

Whether through crowdfunding platforms or rental properties, real estate can be a key engine of financial growth.