Four Phases of Financial Independence

Financial Independence is a long road for many and the advice is often the same: spend less than we earn and invest the rest wisely. The end result is what many consider to be financially free: where our assets provide enough income to cover our expenses.

There are four phases which represent a path from being stuck to reaching personal finance mastery. The end result is the master black belt who demonstrates his combat skills in an effortless, artistic expression of physical and mental harmony.

These phases do not represent the steps from being broke to being a millionaire. These stages come first, before the transition to becoming materially wealthy. I’m convinced these phases must be reached before one reaches financial independence in a healthy manner.

Along the road to achieving this larger goal are smaller milestones we should hit if we are to insure ourselves of maintaining financial independence.

If you’re a fan of psychology or emotional intelligence you will likely have come across various topics on learning a new skill. Malcolm Gladwell, bestselling author, is commonly credited with popularizing the 10,000 hour rule in his book Outliers. A more in depth analysis that provides more scientific proof was discussed in the book, The Talent Code, by Daniel Coyle.

Both excellent books and the premise is the same: it takes 10,000 hours of dedicated, smart practice to master a skill.

The reason why the majority of quick rich schemes and lottery winners end up worse years after they hit it big is because they skipped the steps I’ve outlined here. Whereas, if we take the time to transition from 1 to 4, then achieving financial independence is a permanent accomplishment unless we get struck by lightning or suffer a similar unfortunate event.

Mastering personal finance includes understanding our own emotions and beliefs. In my relationship with my girlfriend, we used to hold ourselves back from feeling happy or great because we felt guilty or undeserving. We both were experiencing lifestyles that were better than those enjoyed by our parents.

We have since grown through this stage and have shifted our perspective and focus on realizing the benefits associated with being in a better financial position to care for our parents as they become older. This was a stressful period for us but a step in the right direction.

While this is our personal situation, I have found similarities amongst many individuals who feel some negative emotion as they get closer to achieving financial independence.

Sure, this list primarily focuses on Financial Independence, but it also relates more generally to learning about personal finance. FI allows an individual to achieve enough wealth early enough to do more with their time than the standard 9 to 5. If we want to retire early, start up our own business, or quit our job to work for less pay in a more desirable location/industry, those are all options that become available.

Without further ado, here are the four phases and how they relate to pursuing financial independence:

Four Phases of Financial Independence

Phase One: The Matrix

The first phase begins before we become a beginner.

This is the phase where someone is plugged into the matrix without realizing they are part of the machine. They do not seek out ways to maximize their wealth by reducing their spending or increasing their income. Often, there is no money put aside for investments and so learning about investments doesn’t make practical sense given there is no potential return to be made.

Many people are jolted out of the first phase by a single event.

The story I often hear is how personal finance becomes valuable only after a difficulty or turbulent event in life. For me, my journey began when I graduated with 45k in debt thanks to student loans and witnessed my parents income disappear during the Financial Crisis. These two events sparked my interest in learning more about money so that I could remove that stress in my life.

Other common events include: purchasing a home, combining finances after marriage, having a baby, saving for college education, or suffering from a major setback such as the loss of a job or even worse, the loss of a close family member or spouse.

These events all have the power to push us into the next phase of our lives and with that typically comes greater responsibility.

The first phase ends when we see the benefits of not only personal finance, but begin to understand the possibilities associated with achieving financial independence.

Phase Two: Rookie Year

I use the term ‘year’ because this phase is often short lived.

As I mentioned above, the common advice is to live within our means.

If we want to achieve wealth sooner, then we need to find ways to live well within our means.

The difficulty (and where mistakes often occur) is in taking these initial steps.

It can be hard to break free from previous financial habits, especially if they have been engrained in multiple generations. For my family, cars have been a big purchase. They resemble a status symbol in terms of how an individual is doing in their job.

In my working career, I’ve moved closer to work so that I could walk. Avoiding the need for a car might be inconvenient on days when I need to rent a car for a day, but this single decision has put my financial independence date closer by at least 20%, or about 10 years.

This car example is just one small piece that occurs when we move through this “Rookie Year”. We start to identify similar purchases we might be making that don’t provide the type of security and confidence that comes from learning about personal finance.

Outside of our expenses, we also face risks with where we begin to invest our money. Pursuing financial independence means we have excess cash flows that can be used for whatever we want. If our aim is quit our job, then that’s one of the benefits afforded by smart investment decisions. For others, they might want to funnel that excess cash into developing a business. And for some, the pursuit might be to afford a family vacation next year.

My experience through this phase was that I read dozens of books on the latest and greatest investment techniques. I then read a few books by Warren Buffett & John Bogle who recommended buying a slice of the ENTIRE market. By following this approach, we can put our money to use and still have all our time left to increase our income, find new ways to save money, or enjoy our time elsewhere.

Investing in the market for the long haul can be simple and getting started has never been easier. The rules of the game have been relatively unchanged for decades, and technology has made it possible to manager a portfolio from a handheld device with the touch of a button.

But just because it’s “age-old” and easily accessible doesn’t mean there’s nothing to it. A word of advice (a warning, really): It is not uncommon to be approached by professionals who claim to know what is best for our money. Without having had much experience, it is easy to view these professionals in the same way we view doctors.

Quickly, we learn this period is a stressful one because we understand that there is A LOT more to learn. I’ve had the common thought of “I wish I knew this before I…” on many occasions.

Luckily, the core principles remain the same and if we focus on the fundamentals, then we will quickly pass through this phase with limited stress.

The best approach through this phase is learn as much as we can from the mistakes of others. If we make one ourselves, then brush it off, learn from it, and move on.

Phase Three: Competency

This phase represents the 10,000 hours I discussed above. This isn’t to say we will diligently work on personal finance and perfecting our portfolio, but this is the phase most of us will spend the bulk of our time in. Reason being that this is where we transition into becoming financially wise, not only with our investment approach and our spending habits, but more critically, with our emotional intelligence.

We begin to notice where there’s an opportunity or where a situation is too good to be true. Arriving at this understanding still requires a lot of work as we think through our options and weigh all the various factors.

Competency is also the first stage where we often are solicited by friends or family for personal finance advice or even asked for money. This phase can create enormous amounts of stress and each family is different.

It has been my experience that it is best to focus on making ourselves strong before we make others strong.

This stage is commonly the first time we can demonstrate modesty and humility with money. When we begin to accumulate enough money for a lifetime at an early age, some individuals will see this as a stockpile of money that can be used today. Friends and family may start to view us in a different light. Some will look up to us and ask for advice, but others might resent our success and be envious of our situation.

Phase Four: Mastery

The fourth stage is Mastery.

A quote from the famous jazz icon Charlie Parker sums this phase up perfectly and I don’t need to add more than this, “Master your instrument, master the music, then forget all that shit and just play.”

What phase along these four do you find yourself in?

The most important take away is understanding that these phases vary much like a spectrum. My girlfriend and I fluctuate between stages 2 and 4 at about a 45, 45, 10 ratio.

By embracing my unconventional approach to paying down my student loans, I feel I have mastered the mechanical steps that can help me reach financial freedom. I’ve learned how a budget can work side by side with my lifestyle instead of against it.

Most importantly, I’ve incorporated my financial planning with my girlfriend to come up with common goals we both are now striving for. In short, we have embraced new ways to live a frugal life.

Does this mean we’re done now?

Not even close. There are phases to gaining Financial Independence, but it should not be seen as a “phase” in and of itself, but rather as a lifelong process of building wealth. It is not like building furniture — we don’t put the pieces together and leave it sitting pretty in the livingroom. It’s more like getting a puppy. We brought it home, now we have to raise it; our state of wealth must be cared for with discipline.

We have a LONG way to go in terms of the emotional aspects of accumulating wealth & sticking with our budget. Of course, there is always room to expand our income, but our focus most recently has been on decreasing the amount of money we spend.

With that being said, one of the joys we have been pursuing has been to find frugal hobbies that help us enjoy our path to Financial Independence.

In this regard, I may never truly reach a level of mastery, but I have seen a track record of improvements made each quarter going back to when I started tracking in 2011. The best approach I have found is to focus in on the bigger items we can improve in the span of a few weeks or months. Not only does this help in terms of monetary gains as a % of the period before, but also in terms of feeling happier and more at peace with the decisions we make related to our personal finances.

Master Distiller

P.S. As the first quarter of 2016 is coming to a close, I will be posting up our financial net worth. I’ve noticed A LOT of personal finance bloggers post up their numbers on a monthly basis and I may adopt such an approach. Either way, check back again Saturday afternoon or subscribe to my newsletter to receive it earlier.

33 comments… add one
  • amber tree Mar 29, 2016, 2:05 pm

    Hey Distilled Dollar,

    Although I am only Really into FIRE for less than 2 years, I do consider myself in the Mastery stage. Are we FIREd? Nope! But I do think we have the plan and the mechanics in place to just play.
    In some areas we might be in competency. Not all our expenses are frugally tuned.
    Finally, since I granted myself playmoney, I am in my Rookie year with my options.

    • Distilled Dollar Mar 29, 2016, 7:40 pm

      That’s the benefit of this spectrum. It can apply to multiple portions of our lives in different ways.

      The benefit to being in the zone of being able to ‘just play,’ is that you can enjoy it. Following this approach removes the chances of becoming financially independent after burning bridges and being left with a hollow victory.

      I checked out your site on options and it looks interesting. I’m definitely a passive investor, but I’m curious to see how your options strategy plays out. Best of luck!

  • The Green Swan Mar 29, 2016, 2:13 pm

    Very true, I can totally picture myself as I moved through some of these phases. I’d say I’m probably in the Competency stage myself. As you described, personal finance is a field of constant learning and adaptation. Could I have done this better or that better, definitely. But I focus on how I can refine my craft and do better going forward.

    Breaking out of the Matrix was such a huge first step. That was when I saw the light and my eyes opened to a whole new world. This was the most pivotal moment for me. Then it was time to find my basis, set some goals and get to work!

    Great post, Matt. Keep ’em coming!

    The Green Swan

    • Distilled Dollar Mar 29, 2016, 8:01 pm

      I agree, there’s always more to learn. Even if we become masters of our financial independence, then we can learn how to help our friends & families. Often, these people don’t want any help, so we learn where we can help.

      Your last sentence about getting to work also resonates with me. Learning about personal finance only has benefits when we start to put what we learn to work.

  • Larry Green Mar 29, 2016, 2:29 pm

    I quite enjoyed the stages that you have used here. Complete Mastery is a lifelong pursuit that I find important to strive for. A key to moving along the spectrum is straight out of Your Money Or Your Life, “No shame. No blame.” If you are currently in Stage Two, it can at times be frustrating that you are not further along or did not start sooner, but the past is gone. Thanks to Distilled Dollar, you can see the stages ahead so just focus on those. Your time will come if you keep trying.

    Thanks for sharing!

    • Distilled Dollar Mar 29, 2016, 8:08 pm

      Your Money Or Your Life is high on my ‘to read’ book list. I’ve been hearing great things about it. Thanks for sharing the quote!

  • Apathy Ends Mar 29, 2016, 8:34 pm

    Great post – new reader to your site and will be getting them via email moving forward

    Breaking out of the matrix – similar situation for me, I had over 80K in student loans and it was a HUGE wake up call, we have been smart with debt since (only low interest auto loan and a mortgage)

    We go back and fourth between stages 2 and 3, I dedicate a lot of time to our finances and am working on the “10,000” hours but every once and awhile I will stumble across something that I missed or changes my approach

    • Distilled Dollar Mar 29, 2016, 11:27 pm

      Thanks for the comment and glad to hear you subscribed!

      The good thing about student loans is that it helps spark a lot of people, us included, into learning about personal finance early on. From my exposure to my peer group and friends of friends, I’ve noticed the healthy money habits are being developed by those who had to manage their income & expenses right at the start.

  • Ty @ Get Rich Quickish Mar 30, 2016, 5:57 pm

    Good post, Matt, thanks for taking the time to write it. I love this concept of phases and your analogy of building wealth vs. furniture is spot on!

    Out of curiosity, what are some of the frugal hobbies that your and your girlfriend have?

    • Distilled Dollar Mar 30, 2016, 7:13 pm

      Thanks Ty! Your comment and the others I have received make me feel like it was more than worth the time it took to write this behemoth post. The word count is almost twice as long as my other articles.

      Funny that you should ask about my frugal hobbies as I was just wrapping up another post about this topic. In short:
      Cooking: saves money and my girlfriend loves when I cook for her. Plus, there is real joy to figuring out how to cook well for myself and others.
      Reading: I frequently find free audiobooks via youtube. Before this, I used to spend hours at my local bookstores combing through the $1 book section to find gems.
      Long Walks: Sounds cheesy, but my girlfriend and I try to walk around Chicago. We see some great scenery and get some exercise too.
      Blogging: This ones new! Haha, but the time I spend blogging has definitely become a frugal hobby (minus the small hosting fees). My girlfriend might call it a 2nd job as it does take up a lot of my free time.

  • Kalie @ Pretend to Be Poor Mar 30, 2016, 7:00 pm

    Interesting description of the different stages of financial mastery. I’d say we’re currently in stage 3. I agree that FI needs to be pursued in a healthy manner, with appropriate emphasis on all areas of life, not just money. Great post!

    • Distilled Dollar Mar 30, 2016, 7:17 pm

      Thanks Kalie! I agree, money shouldn’t be the end all be all.

      One of the negative aspects of following this path is it can create a lot of friction between old and new habits, so making that transition smoothly is tricky.

  • Allan @ The Practical Saver Apr 1, 2016, 9:34 am

    You absolutely nail the keys or phases for one to gain financial freedom. I particularly like the first stage. I believe that the first stage is the most important. For me, without going through an experience or without a reason to start becoming financially free, then, it will hard for someone to become financially free.

    I don’t think I’ll ever become a master. Life has too many lessons to teach me. Life goes to many changes and these changes sometimes come unexpectedly. The only thing that I do know is that I will always be better than I was yesterday and be a better decision maker in whatever financial matters I or my family will face.

    • Distilled Dollar Apr 2, 2016, 5:02 am

      Your comment reminded me of the quote from Hemingway, “There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.”

      That’s the beauty of this all. As long as we make those 1% improvements each day or each week, then we can start to stack up the progress over time.

  • Pamela Apr 2, 2016, 1:38 am

    Wow this is a great post. I have never seen a financial journey outlined this way. I think there is definetly alot of truth to the idea that many people change their financial situation when a major negative event occurs in their life. I love Warren Buffets saying “only when the tide goes down do you discover who has been swimming naked”. I think this is what happens to alot of us. I know thats what happended t me. good post!

    • Distilled Dollar Apr 2, 2016, 5:29 am

      Thanks Pamela! I’m glad you enjoyed the post. Funny enough, I came close to not publishing this post, but I’m glad I did.

      That is a great quote! I hope part of this post helps at least a few people when they feel washed up.

  • PadAdventure Apr 14, 2016, 7:50 am

    definitely resonates with many readers journey, excellent post. It’s a constant struggle at times as well, to not slip, to make the right decisions, and spot on with the causative event. thanks.

    • Distilled Dollar Apr 14, 2016, 9:46 pm

      Thanks! I see more and more people making the right moves but still ending up with a lot of stress along the way, myself included. I hope this post helps out at least few people! Thanks for reading and leaving a comment!

  • Kurt Apr 14, 2016, 10:57 am

    Never thought about the process to FI in this explicit way, but interesting approach. For me, I think I’m stuck at Competency. I guess that’s better than being stuck at Rookie Year. :/

    • Distilled Dollar Apr 14, 2016, 10:02 pm

      Competency is a great place to be, imo. It is actually the phase I find myself the most comfortable in at this stage. Since I’m young at 27, I feel I should be learning and I should be putting in the work to find out more about personal finance or about myself.

      To some degree, mastery is the final goal, but I’ve also found it is elusive. To me, its like calling my cat over to hang out. She doesn’t hang out when you want her to. She only heads over if you don’t ask her to.

  • FinanceSuperhero Apr 14, 2016, 1:56 pm

    Great work, Matt. Question for you: how typical do you think it is for people to be in-between phases?

    • Distilled Dollar Apr 14, 2016, 2:54 pm

      Can you give an example?

      I can see different areas of my life being in different phases, but I’m having a hard time picturing what it would look like to be in between a phase.

      • FinanceSuperhero Apr 19, 2016, 9:02 am

        Circling back to this discussion a bit late, but your response clarified my question. Like you, I feel I am in different phases in various areas of my life. I am glad I am not alone in this!

  • Santhosh Apr 15, 2016, 11:14 pm

    Hi, very well written article. I agree with the phases and I am somewhere between two and three. The matrix would resonate with most of us, for me it was not having a decent networth after years of working.

  • Matt Spillar Apr 19, 2016, 3:21 pm

    Hey Distilled Dollar, I found your blog through Rockstar Finance, really enjoyed this post a lot about the different phases of FI. I definitely feel like I’m in the competency stage right now, with a lot more to learn. Will be reading more of your posts and have subscribed via RSS. Keep up the great work man!


  • Cathy @MonetizeMyMins (Twitter) May 5, 2016, 4:51 pm

    I also see myself fluctuating between phases depending on the exact sort of information I am working with. While I am quite skilled in some areas of personal finance, there are others that I haven’t had as much experience. I am always learning, growing, and am ever curious in my pursuits. I don’t think I will ever be in complete mastery of all aspects of my financial life, but I look forward to adding more and more to that list as time moves forward. Thanks for a wonderful, thought provoking post.

    • Distilled Dollar May 10, 2016, 5:59 am

      I agree, the goal can be to learn more as we go, but I don’t see myself becoming a master in all areas of personal finance. To some degree, if we go through the phases and become a master in one realm (such as how I feel about student loans right now), things will change over time and the landscape will be different in years to come.

      It is similar to asking Richard Branson how to start a business from scratch. He has some guiding principles and ideas that will help, but when he started his business, the business environment was different in his day and he might not even remember all the details at this point.

      I appreciate you taking the time to read the post Cathy.

  • ZJ Thorne May 15, 2016, 9:17 pm

    It is great that you realize that you cycle between the phases. Wisdom comes in many forms and involves re-learning sometimes. Not growing discouraged when you go back temporarily helps to cha-cha forward again.

    • Distilled Dollar May 16, 2016, 6:28 am

      Having set backs should be a natural part of any process. I’ve enjoyed reading more blogs and hearing more stories of spending blunders or mistakes instead of hearing the fully optimized lifestyle posts. People aren’t perfect and mistakes happen. Not being discouraged is exactly the right approach!

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