The 3 Stages of Financial Freedom

Perusing through some of my older posts I found three mini entries where I talk about how we must go through 3 increasingly difficult milestones to reach the pinnacle of financial freedom. I think it’s worth posting again to remind anyone who wants to be financially free some day to ask themselves what freedom really means to them, and then create a plan to make it happen. I’ve combined the contents of all three posts into this one entry here for easy navigation.


To me, financial independence can be broken down into 3 stages.

Initial Stage:
You can quit your main job (primary source of income,) but still have to do some other kind of work, albeit less demanding, to make the same as you spend.
Example: A school teacher spends $30K/year. His rental income, part-time blogging, and investment income, adds up to $30K/year. He can quit his full time teaching job and not have to change his spending habits for the foreseeable future, assuming he continues to blog, maintains his rental property, and not sell any of his investments. Some people call this stage soft-retirement.
True Stage:
You literally donโ€™t have to do ANYTHING to make money and still get to enjoy your current lifestyle.
Example: A school teacher spends $30K/year. His rental income from his apartment is collected by a property management company and, after fees, is directly deposited to his bank account every month. Combine this with his investment income from a balanced portfolio of high quality funds, he gets $30K/year. He can quit his teaching job and be free of any money making responsibilities.

Perpetual Stage:
Like the True Stage, except you have extra wiggle room to deal with emergencies, inflation, and unforeseen future expenses.
Example: A school teacher spends $30K/year. He has a $2,000,000 income fund portfolio giving him a 5% return every year. However, he will only use 2% of this income for spending, and put the remaining 3% back into his portfolio to counter the effects of price inflation and lifestyle inflation. The 2% income he can spend is $40K ($30K for his expenses plus an extra $10K for emergencies if he needs it, or it goes back into his investments if he doesn’t.) He is now truly financially independent and can ride the ups and downs of the market and theoretically should never run out of money for as long as he lives.

-assume all numbers are after tax.


Original entries from March 2011

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Modest Money
07/23/2012 6:22 am

That kind of financial freedom would be pretty sweet. I keep trying to jump into the initial stage but have faced various setbacks each time. So I’ve come to realize that it really needs to be a gradual transition unless that income source is very reliable. Plus the longer I keep working, the more I can grow my investment portfolio. It’s just so tempting to stop working for the man and do my own thing. If only the money was good enough at this point.

07/23/2012 7:24 am
Reply to  Modest Money

Finding that reliable sources of income other than a main job can be difficult. Haha, in a way you’re ahead of me as far as the first stage to financial freedom.

Daisy @ Add Vodka
07/23/2012 6:59 am

I don’t know what the definition of financial freedom is, but to me it’s not really quitting my job. I know lots of people dream about that, but it’s just not for me. I have to work to feel productive.

07/23/2012 7:26 am

I’m sure with time you will have a very good understanding of what your definition of freedom is ๐Ÿ™‚ Who knows, maybe it’s quitting your 9-5 job some day and starting your own HR or Consulting firm.

Chase Miller
Chase Miller
07/23/2012 7:07 am

This is a great explanation of where I’m headed. To accomplish this I plan on going to college without taking out any student loans. My friends think I’m crazy for not committing to my dream college when they accepted me. I’m willing to give up in the short term to have freedom in the future!

07/23/2012 8:10 am
Reply to  Chase Miller

You’ll have the last laugh once you reach freedom way before your friends do ๐Ÿ™‚ I’m still working on the first stage but I’m more than half way there now. With time and dedication anything is possible.
07/23/2012 4:06 pm

I think this is where I hope to be someday – having all these passive income streams taking care of me and my family while I have no obligation or involvement with them. I definitely think its possible to achieve, but not without hard work (and sometimes more effort initially than anything else you could do!)

07/24/2012 12:22 am

I think it’s possible to achieve too. Hard work is the price to pay, but like anything else in life if something is not worth sacrificing for then it’s probably not worth it anyway.

Myrina Stein
Myrina Stein
07/24/2012 3:50 am


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After seeing this, I would like to request you something. I love to write financial articles and I would like to contribute article for your site if youโ€™ll give me the permission. I can give you an original guest post and I assure you that it will be published only in your site. If you want, you can suggest me the topic also and I will write accordingly.

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07/25/2012 8:05 am

It would take years and years for the average working Canadian to save even up to $1 million dollars, unless they have extremely high income or unlocked the secrets to other income streams. I have a friend who wants me to sign on board on a up and coming rewards card system… where it is popular in Europe, but just starting out in N. America. Of course there is a “down payment” to make this happen.. all my other friends are calling this pyramid scheme and all when I tell them about it. But I hear stories of ppl who got started are generating great income from this… just need to get ppl on board with this program. Sometimes, you need to step outside the box to go after your dreams even though there is naysayers all around… I’m still thinking of it LOL.

07/25/2012 8:12 am
Reply to  agentfang

Maybe this is a chance to unlock your other income streams ๐Ÿ™‚ I have 3 income streams right now. I plan to have one more by the end of this year, and then another one next year. There are actually a lot we can do even if we are average working Canadians. Rental income, blog income, royalties, selling virtual goods, even rewards card systems lol. You never know what opportunities are just around the corner. I know a guy who is a sales person for some affiliate drug company online. I don’t even know what he does exactly but it seems like anyone can join the program if they have the time to network. Let us know if you decide to use the reward cards program ^_^

07/25/2012 1:10 pm

Haha, my one other income stream is dwindling down to nothing nowadays at my PT job. What’s your third income stream? I know you have ft work and tutor as a side job.

Seriously, if I join this… will you consider going to a presentation?!! My friend is super serious about this, and trust me he’s the goal getter type who’s on an accelerated path to reaching his goals.. For example, think of this as the beginning stages of Visa/Mastercard, they need promoters. For ppl who join in early.. they reap all the rewards! The only bad thing is I don’t know how to network to get ppl to sign on… >_<

07/25/2012 1:34 pm
Reply to  agentfang

3rd income stream is from dividends, which wasn’t a whole lot last year, but just recently I’m over $400 per month on average so I thought I’d count it as a proper income source now.

07/25/2012 2:00 pm

Oh right, I figured out the third… dividends! SILLY ME.

08/05/2012 9:57 am

I love how clear and precise the description of those stages is. When you see it clear, it’s easier to climb up those stages – so thank you so very much for making this post. Until I read it, I didn’t even know that I’m actually in the initial stage of Fin. Freedom (keeping Perpetual in sight;-)

08/09/2012 3:43 am
Reply to  Maria

Great job. You look younger than me so you’re obviously doing something right if you’re ahead of me in my own game, lol.