7 Levels of Financial Freedom: Which One Are You Stuck In?

I find a lot of retirement advice kind of useless. Just save money. Okay, save for what? When do I get to use it? How much? Why do I have to wait until I'm 95 years old to buy a new pair of pants? I want to show you something different. I want to show you exactly where you stand and how you can reach financial freedom. Now, I know that this is often decades away for people, and you have a lot of other things you'd rather focus on. A lot of you want to buy a freaking truck that you can't afford, but we're not getting into that in this video. What you don't want to be is a few years away from retirement realizing, I don't have enough. But once you get specific on where you are going, you can actually work backwards and start taking steps to make it happen. Today, I'm going to break down the seven levels of financial freedom. You're going to see where you currently fit in and the specific steps you need to take to get to the next level. So let's dive right in. Level one. At this level, you're not making enough to cover basic living expenses, and it's very likely you have high interest debt as well. I'm not going to sit here and lecture you and tell you this is a bad place to be. You already know that. What I can say is the most important thing to do at this level is to focus on earning more money. Now, I want to show you a comment I recently received because somebody saw one of my videos and said, Oh, duh, if I don't make enough money, I need to earn more money. And my answer is yes. And I think that this comment is so revealing because when people are in tough financial situations, they often believe that there is some magical solution that will get them out of it. Some magical credit card or some magical math that's going to help them do. There's no magic in personal finance. The best thing you can do if you are not making enough money is to specifically build your skills to increase your income. That could mean learning new skills. It could mean getting a second job, taking on more responsibility at work, starting something on the side or asking for a raise. It's going to be difficult. There is no doubt getting from this level to the next is challenging, but it's also the most important thing you can do when you move on to the next level of financial freedom. Level two. Here you have enough to cover the bills, but there's not much left at the end of the month. Often people in this category are also carrying some sort of debt. The problem here is that a sudden job loss or even an unexpected car repair could set you back. And so the priority here is to start building an emergency fund and start paying down that debt. Now, when I tell people about an emergency fund, the most common response is how can I save money? I'm just trying to get by. What I will tell you is that if you set money up to automatically go to an emergency fund, you will not miss it. If you put $100 a month or $200 a month aside, you literally will not even know that it's gone, but it will be silently building up in your emergency fund. Please trust me. There are so many people I talk to who say the exact same thing that you were thinking about. I can't save an extra $150. Outrageous. Okay, start with $50. You will not miss it when you set it up to go automatically to a savings account. So maybe on the days you get paid, you have $50 transferred to a different account, or maybe you set up a rule. Anytime I get unexpected income, like a tax refund, 80% of that money is going right to my savings account. I will also say that it's worth spending time looking at your spending. You can cut discretionary spending in a way you didn't even think possible. For example, when I talk to people and ask them how often they eat out, whatever number they tell me, the real number is usually three times higher. Most people have no idea. There are also ways to stretch spending. For example, maybe if someone's getting a haircut every four weeks, they stretch it to six weeks, and over the course of a year, that actually adds up into substantive money. Get creative. My point is that most people do not think about this. They simply accept, oh, I don't have any money. That's not acceptable. We need to make a plan to start shoveling money aside to an emergency fund, which helps us get to the next level. For the debt, same thing. You want to automate that money to avoid late payments, to build your credit score up, and most importantly, to pay that debt off. That's important because if you've been paying on time consistently for a while, sometimes you can actually negotiate a lower interest rate with your credit card company. Use this script. Hi, I've decided to get more aggressive in paying off my debt, and I would like to request a lower APR. Other cards are offering me half of what you're offering. What can you do? The representative's going to go, sorry, I can't do that, but it looks like I can't increase your credit limit. Would you like to proceed? Put yourself on mute as you curse them. Stay calm. As I said, other cards are offering me half of what you're offering. Is there anything you can do? Oh, let me see what I can do. Great news. I just checked. It looks like you've been a customer for seven years. You've been on time with your payments, so I can lower your APR from 27% to 20% effective immediately. Wow. Sometimes this works, sometimes it doesn't, but it's important for you to ask. And if this does work, a five-minute call can save you thousands of dollars over the course of your debt payoff. If you're not successful, try again in six months, but most importantly, make your debt payoff plan. When I was on Matt Hussey's podcast a few months ago, he asked me a great question. He said, should women who earn a lot of money search for someone who earns the same amount? I love this topic because these are some of the conversations happening behind closed doors that we are afraid to talk about publicly, but I've always loved shining a light on some of the taboo topics that exist around money. And guess what? Matt and I are going to be sharing answers to these types of questions live on stage, September 26th in LA. It's going to be honest because if we want to live our rich life, we have to shine a light on these types of questions. We will leave you rethinking ways that you can improve your current relationship, or if you're dating, you'll walk away with a lot that you can bring to your next date. Bring your partner, bring your Tinder date, bring your friend, it's going to be awesome. Get tickets at iwt.com slash events. Let's move on now to level three. You finally have enough to cover your monthly expenses and you have money left over. This is where you can really use systems to build your finances and start setting yourself up for financial freedom. And you can also actually start enjoying the money by spending it guilt-free. Here's what I want you to do. Take a few minutes, break your spending down into four categories. Have you done this already? First, you have your fixed costs, which include your rent or mortgage, utilities, any debt, groceries, car payments, all the things you need to keep the lights on. I recommend keeping your fixed costs between 50% to 60% of your take-home pay. Next, you have your investments. I recommend 5% to 10% of your pay goes towards this. Now, ideally, it's all automated. You set it and forget it. And ideally, it's more than 10% because this is where the real wealth is created. For example, if you're already contributing to your 401k, contribute enough to get the employer match. If you're already doing that, maybe look into starting a Roth IRA or go back, follow my ladder of personal finance and simply start investing as much as you reasonably can. Next category, savings. This includes your emergency fund, maybe saving for a down payment or a car, maybe even saving for an awesome vacation two years from now. 5% to 10% of your take-home pay, ideally more. And finally, my favorite category of all, guilt-free spending. You want to buy cosmetics. You want to eat out. You want to travel. You want to buy a piece of art. You want to go bowling. Like any suburban kid did growing up. You have 20% to 35% of take-home pay for guilt-free spending. That's a lot. And I think this category is really important. It's something that the frugality community often misses. They are so focused on saving and investing aggressively and living for tomorrow that they often forget the point of a rich life is to live a rich life today and a richer life tomorrow. Yes, spending money meaningfully is a skill. You don't want to reach retirement and then not be able to enjoy it because you never actually learned how to spend money. I've had guests on my podcast who have a seven-figure net worth and yet they are afraid to buy blueberries or spend $40 more for a direct flight. Again, I'm telling you right now, it's okay to spend money on the things you love as long as you can afford it and you love it. Like I like beautiful clothes, but I don't really spend a lot of money eating out. Your rich life is yours, not anybody else's. You get to choose. That's why dedicating 20 to 35% of your take-home pay to guilt-free spending is a good guideline for you to start building that spending muscle. All right, that brings us to level four. There is something really special about building a rich life where you can sleep well at night, where you are not over leveraged, where you are not constantly worrying about something going wrong and you lose it all. I read a lot of books, biographies of people who were in real estate. They built massive skyscrapers. They were developers. They made tons of money over 15 or 20 years and then with one bad deal, it was all destroyed. I never want to get in a position like that. I remember going to Omaha, seeing Warren Buffett speak, and he basically said something that blew my mind. He said, we have set up Berkshire so we will never run out of money. I thought that is the ultimate financial flex, to have the confidence and competence to create a life where you know you're not going to run out of money but it also means that you have to be willing to make trade-offs. You can invest super aggressively in the most aggressive alternative investment. You might make more money in the short term but eventually over time, you might blow up. I don't want that and I don't want that for you either. I would rather accept a slightly lower return but manage my risk very carefully. What does that mean for you? Do you have an emergency fund? Do you have six months of expenses? That's what I used to recommend. Recently, because of moronic tariffs, I increased that number to one year because in my opinion, that is the level of risk that is happening in the economy and therefore, I want to be prepared for it. Now, if you put your emergency fund in a high-yield savings account, that's a lot of money. That money could be invested and you could be making a lot more money from it and this is where I want you to really think about your risk tolerance. Risk tolerance means if you have an emergency fund, it should probably be in a high-yield savings account, not invested. Now, people who are perennial optimizers, you know, these credit card hackers, etc., they find this advice really hard to follow because they're like, what about the yield? What about the yield? I could be making more by having that $10,500 in the market instead of sitting in a high-yield savings account not earning enough. That's not the point of an emergency fund. If and when something goes wrong in life, you do not want to have to liquidate investments or wait three days for the money to transfer. You want that money right now and this is what I mean by having freedom, by being willing to create safety around yourself. Now, that emergency fund can be used for lots of things. Or if you have an illness in the family where you just have to get on the soonest flight without looking at the cost. One of the key differences between the rich and everybody else is that people living a rich life plan before they need to. So, in my opinion, save up for a year of emergency fund. If that seems like a stretch, start with a month, three months, then six, then work your way up. The key here, automate the savings and make sure that it is consistent with those small steps and good habits. Moving on now, level five. At this stage, things are going pretty well. You got some momentum. Your system is working for you. Savings and investments are accumulating. You have built the skill of spending guilt-free on things you love and you can look around at least once a year. You go, oh, I've experienced a moment of awe, which is exactly what I want for you. This is when you can actually start thinking longer term and I encourage you to get really specific, for example, about your retirement. What do you wanna do? You wanna travel? Okay, that's a nice word. That doesn't tell me anything. What seat do you wanna sit in on the airline or are these road trips? How many times a year? Is it a week at a time, eight days, 10 days, months at a time? Are you backpacking? Are you taking trains? Are you sleeping in the freaking train station like I did when I was backpacking across Europe only to almost get robbed? Or are you flying, staying in nice hotels? Where are you gonna live? What are your hobbies gonna be? What do you want your relationships to look like? A lot of people will realize as they start to dream about their retirement, they're very aspirational. I wanna garden, I wanna become a master gardener. I go, cool, when was the last time you planted a single thing? They go, no, I haven't done that, I've been busy. If you want your retirement to look a certain way, your life leaves clues and if you have not cooked a single thing in your life, it is probably unlikely that you're gonna turn to a master chef in retirement. It's possible, but very unlikely. This is why I want you to push to get specific. That's why a lot of vague advice that says save for retirement really falls short because once you get specific, you can actually ask yourself, do I actually really wanna do that? Do I actually want to travel two months a year? Maybe your answer is no. That's okay, but it actually makes it clear how much you need to save per week, per month, per year. Then you can use something like the 4% rule, back of the napkin, that will tell you how much you need to save. For example, 4% is the amount you can safely withdraw from your investments each year for a period of 30 years to cover your expense and the things you wanna do. This table, for example, is a good guideline. This is overly simplified, but it'll get you started. If you think your annual expenses might be $80,000, then you need $2 million as your financial freedom goal. If you wanna spend extravagantly at $160,000 a year, you need to double that retirement amount to 4 million. And you wanna factor in things like work. Some people wanna work part-time. Okay, cool, then you might only have 20 or $30,000 in expenses to cover. Some people wanna work a long time. Some people wanna retire. Some people don't plan and they get injured or they have to take care of an elderly parent and life comes at us. Again, you wanna plan for not just the worst, but also the best. I want your retirement and your journey towards it to be enjoyable. Now go back to how much you're on track to have saved by your retirement age. For most people, that's age 65. Does it get you there? Well, you can use our retirement calculator. Just go to Ramit calculator. Search for that on Google. You can assume a 7% return, which already factors in inflation. Please don't comment about inflation. I already factored that in with 7%. Now you will know if you're gonna have enough. And if you're not gonna have enough, that's okay. At least you shined a light and you can start to invest more. Maybe if you're investing 10%, you need to invest 12% or 15%. Maybe you need to earn more money. The point here is at least you know, and by getting specific, you can work backwards to where you are going. Level six. You know, every one of us has an area of life that we love to spend money on. I call them money dials. I'm gonna give you about 10 examples right here. Most people, the most common money dial or area they love to spend money on is food. People love to eat out. They love restaurants. They love delivery. They love it all. There's health and wellness. There's travel. There's convenience. Now, chances are you are already spending some of your money on one of these areas. But you know, one thing that most people don't think about is actually turning that dial up. It's like me when I was working out in college. The first time I ever worked out, my buddy in college took me to the gym. He showed me some exercises. The problem is I never learned So there I am for six months doing a 30-pound dumbbell press, literally not realizing you're actually supposed to move the weights up. It never occurred to me. Sounds silly, but that's how most of us think about money. Many people I know are still eating at the same restaurants they ate at when they were 21 years old. They're taking the same style of vacation they took when they were 23 years old. Same things. And their money has increased a lot. And I go, is vacation important to you? They go, yeah, I love travel. It's my number one money dial. I go, then why would you not actually spend more on the things you love? And they look at me like I'm crazy. Hey Ramit, not everybody needs to stay the four seasons all the time. That's not my point. There are so many different things you can do with money to create magical experiences. If you're in a different city, you can arrange a cooking class. You can go to a farmer's market with a chef, pick some vegetables, cook it in their house. It's really magical experience. There's so many different ways you can use money to create a rich life. The point is, very few of us ever think about turning that dial up, just as I did not think about increasing the weight. But that is the point of money. The point of money is not to save it and hoard it. The point of money is to use it to live a rich life. In my own life, for example, I spent money hiring a posture coach so that I could learn how to stand and walk properly. They came to my house. We worked on posture exercises for six weeks. It totally transformed the way that I experienced back pain, walked, even slept. And this is all because I gave myself permission to turn up my money dial on health and fitness. Here's a question I have for you. If I gave you $25,000 right now to spend, you had to spend it. Where would it go? Your answer will give you a good idea on what your money dial is. Now, before we move on, if your money dial is food, health, travel, or convenience, I want you to hit subscribe. Costs you nothing, but I will show you how to build the skill of spending money on the stuff that you love. Let's keep going. Level seven. My wife and I did a fundraiser a few years ago for families that were being separated at the border. And something really amazing happened. We hosted an event in New York and I went to my community online. I said, hey, we're raising money for this. Like 50 or $99 donation, something like that. We kind of showed the organization where it was going towards. The level of interrogation I got from people, where exactly is the $50 going? Show me exactly. Show me their report. I want to know. Show me exactly how the funding is going. People become like freaking inspector gadget. They want to know every detail. They want to know org charts, organizational spendings. They're looking at a P&L for the first time in their life. And while we did this fundraiser because we cared about the cause, I realized I want to show you that you can be a philanthropist today. Think about that. When I say the word philanthropist, what do you think about? Like Andrew Carnegie, somebody wearing a freaking top hat, some old person who doesn't look like me or you. That's a philanthropist. That's those people. No. When you give $50 to a cause that matters to you, whether a local community garden or kid who's raising money, selling chocolates, you're a philanthropist. And that's what this level is really about. I want to challenge you to use your money to create meaning that can be a legacy that can be giving it today. You know what? Actually, I want to try something new for the first time ever on YouTube. My wife and I talk about this all the time. We have money that we donate and I want to get you involved. We have an organization that we donate to. I want everybody here to donate any amount. It could be $10. It could be $1,000. And just post the amount below in the comments. That is going to turn us, all of us, into philanthropists like that. And best of all, it is a good cause that's going to help people in need. Leave your comment below. I can't wait to see how we are going to do this together. So now in the comments, let me know which level are you at right now and what action step, what single action step are you going to take to get to the next level? For more financial strategies that you can use right now, check out this video next.