Joshua Sheats' 7 stages of financial independence

Kathryn Nielson  ·  Jun 27, 2018

Financial independence, according to Joshua Sheats of the Radical Personal Finance podcast, is not a one-and-done thing. It’s ongoing.

“The financial services industry has sold the American public a bill of goods that’s basically saying that until you have millions of dollars in the bank you’re not going to be financially independent,” Joshua says. “That is not true.”

The following seven stages form the basis of his philosophy on financial independence, and each one, he argues, is valuable and an achievement because it represents a degree of that independence:

1. Financial Solvency: We all start at financial dependence, the stage where we are dependent on other people or charitable donations. Financial solvency is the first stage after that: “Being able to support yourself on your own income without the aid of others and being current on all of your bills. This is the stage where parents are often teaching their 18-year-old children how to be financially dependent on themselves.”

2. Financial Stability: Next, build a buffer. For the Dave Ramsey followers, that means creating an emergency fund. The purpose of this stage is to “insulate yourself financially from always being dependent on other people or other systems,” Joshua says.

He recommends a savings of $10,000 that is available and accessible. He believes that amount of money can make a huge difference in a person’s life. It’s the difference between leaving a job you dislike and taking one better suited to you; the difference between leaving the state you’re in for one you prefer.

“In the U.S. about two thirds of the population, given 24 hours, could not put their hands on $1,000 without borrowing it,” says Joshua. “If we can just help people from having zero dollars accessible to them to $10,000 accessible, that would dramatically transform most people’s lives.”

3. Debt Freedom: Do whatever you need to pay off your debts. Freedom from debt coupled with financial stability puts you in a completely different place. “There’s no life decision that can’t be made” in that situation, Joshua says.

4. Financial Security: At this stage, you can cover your basic needs with investments. The biggest mistake people make with retirement planning is starting with an ideal that isn’t realistic, according to Joshua. For example, if you need $5,000 a month to live on after you retire, but you want to live on $8,000, the financial advisor runs the numbers and figures out you’ll need $2.7 million available by the time you retire. Because the number is so high, we end up doing nothing and saving nothing.

“I say take it in small stages,” Joshua says. “Look at your basic expenses, not your ideal life, and see if you can find a way to cover those basic needs with investments.”

5. Financial Independence: Now your investments can cover your current lifestyle expenses. You can now choose whether to work. “The key at this stage is simply to know that it’s up to you,” Joshua says.

6. Financial Freedom: You can start considering goals beyond the lifestyle you’re living such as purchases or experiences you may want or even philanthropic goals. “The important thing is to clarify these goals and fund them with your investment income,” Joshua says. “At that point in time, you’re truly financially free in every sense of the word.”

7. Financial Abundance: Joshua says that not only is this the most challenging stage of the financial journey, it’s also the most important one. “You’ve accumulated wealth beyond the amount needed to fund your own lifestyle expenses with a comfortable margin of safety,” he says. “Now you have to decide how to responsibly manage the surplus.”

Read why Joshua Sheats joined Samaritan Ministries.