Rethinking “Wealthy”: The 5-Step Ladder From Middle Class to Financial Freedom

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What does “wealthy” mean, anyway?

Almost no one even thinks of themselves as “wealthy.” No, really—only 28% of millionaires consider themselves rich.

Even our conceptions about what being wealthy looks like are mostly wrong. Fancy cars? Sprawling houses? Nannies and second homes and $10,000 oven ranges? As a culture, we’ve bought into the mythology preached by reality TV.

A third of Americans live hand-to-mouth. Not so surprising—until you learn that over two-thirds of them are middle-class or richer. It’s even worse among Millennials earning six figures, 44% of whom live paycheck-to-paycheck.

These rat-racers, desperate to keep up with the Joneses by showing off luxury cars and oversize homes, often have no financial security.

“Wealthy” is not only a vague term; it’s a useless one because it tells us nothing about what’s going on behind the scenes of a person’s finances. A person can earn $200,000/year and be broke, living hand-to-mouth. Another can earn $40,000 and achieve financial independence.

Forget the flash. Here are more specific steps, a ladder that someone in the middle class can climb to create true financial freedom.

The 5-Step Ladder From Middle Class to Financial Freedom

Step #1: Financial Protection

Those high earners living paycheck-to-paycheck have no financial protection at all. If they lose their job, they are up a gnarly-smelling creek without a paddle.

The working and middle classes can start their climb by building financial protection. First, they need an emergency fund, which can cover 3-6 months’ minimum mandatory expenses.

Minimum mandatory expenses include housing, basic groceries, necessary transportation, and utility (gas, electric, water) bills. It doesn’t include dinners out, cable TV subscriptions, a fancy car, beer, Netflix, etc.

Related: The Secret the Rich Understand About Building Wealth (And No, It’s Not All About Cash Flow)

Before creating an emergency fund, first tackle your most expensive debts by snowballing. You should have a $0 balance on your credit card debts at the end of each month.

It’s easier to reach financial protection with lower expenses—it leaves with you more of your paycheck to save, and your emergency fund doesn’t need to be large. Just imagine how quickly you could get there if you lived on half your income!

Beyond an emergency fund, insurance matters too. Financially protected families carry health insurance (of course), but also disability and life insurance if the household is dependent on one earner.

Emergencies happen all the time. Build a financial buffer to protect yourself from the next one—not for if it comes, but for when it comes.

Step #2: Financial Security

When a family can cover its minimum mandatory expenses with income from their investments, they’ve reached financial security. It usually takes years, but once again, the lower your minimum mandatory expenses, the easier it is to get there.

Families build financial security by investing in income-producing assets: rental properties, dividend-paying stocks and funds, bonds. After achieving financial protection, they can start investing aggressively for income.

House hacking is great way to leapfrog there faster. By removing your housing payment from your mandatory expenses, you leave the much lower costs of groceries, utilities, and transportation. With shrewd investments and a lean budget, you can cover these costs in no time.

As you’re pursuing financial security, you should also be investing in retirement accounts. IRAs, 401(k)s, and similar retirement accounts offer great tax benefits and create a diverse second layer of long-term security. These equity-based investments serve as an excellent counterbalance to more immediate income-producers like rental properties.

Step #3: Financial Contentment

Being able to cover your minimum living expenses with your investment income is an incredible feeling. It’s the first glimmer of invincibility—you could be fired tomorrow and never work again and survive indefinitely!

But not comfortably. After all, the texture of life is made up not of eating ramen noodles every night, but in being able to travel, to grill up a ribeye, to enjoy it with a glass of Haut Medoc.

It gets easier from here. After reaching financial security, you now have substantial income from your investments. If you can avoid lifestyle inflation, that means you have a huge portion of your income that can go toward even more investments.

Don’t give in to the temptation to go out and buy a ski chalet in Aspen or a BMW M3! You’ll slip back a step on the ladder. Instead, keep building passive income from investments, so that it can cover increasingly more of your total lifestyle expenses.

As more of your discretionary expenses can be covered by your investment income, you’ll reach financial contentment. Which is only a short hop from financial independence.


Step #4: Financial Independence

When your investment income can cover all of your monthly expenses, you are no longer dependent on a job. Not just the minimum costs, but the fun stuff too. Dinners out. Travel. Entertainment.

Congratulations, you’ve reached financial independence!

You can retire any time if you want. My uncle, a financial genius, used to call this “f#%k you money”—you aren’t dependent on your boss, your job, the government, or anyone else. You can tell off the entire world and then go make yourself a cup of hot cocoa, put your feet up, take a nap, and not worry one whit about what anyone in the world thinks.

If you own more than a handful of rental properties, you might want to think about hiring a property manager. Or not—maybe you’d rather quit your day job and just manage your rentals instead.

Related: Stop Swinging for the Fences: How I’m Building a Multi-Generational Wealth Engine the Low-Risk Way

But if you quit your day job now, you probably won’t reach the final step.

Step #5: Financial Freedom

Up until now, you’ve stayed disciplined, maintained a tight grip on lifestyle inflation. Sure, you enjoy some traveling, and you like eating good meals sometimes. But as you’ve built financial security and independence, you’ve still had to maintain a budget.

The top rung of the ladder means that you’ve graduated beyond that tight budget that’s been so helpful for you. You now have enough income from your investments that you really can go buy that ski chalet if that’s what you really want. Building financial freedom means that you can have just about anything you truly want—and you can afford it.

To come full circle, attaining financial freedom is to truly become “wealthy,” if we have to use that vague, unhelpful word.


Much as I like the ladder metaphor, it’s missing something: momentum. When climbing a ladder, each step takes just as much effort as the one before. But that’s not true in working toward financial freedom.

With each step it actually gets easier. Instead of a ladder, imagine standing on a bicycle, preparing to ride. The first pedal rotation is hard; it takes a firm stomp of your feet. Your quadriceps scream as you force the pedal down. The bike isn’t very stable or balanced at first either, without having achieved spin stabilization.

The next rotation is slightly easier, as you gain a little speed, a little stability, a little momentum.

After a few grinding rotations, you can start upshifting to a higher gear. You build momentum, and eventually you reach a comfortable cruising speed.

It’s no different as you start saving and investing a higher percentage of your income. It’s no fun to live a modest, low-expense lifestyle while your friends live it up and show off their new Audis and Acuras. But as you trim your expenses down and simultaneously start earning more, your investments will help you start creating true financial protection, then financial security, and one day, you’ll wake up and realize that you are no longer dependent on a job to keep living your lifestyle.

A disciplined person living in a modest house who bikes to work can achieve financial freedom much faster than the flashy yuppie droning on about their country club membership. Forego the flash, create stable long-term wealth, and sooner or later, your spend-happy friends will be asking how you did it.

Isn’t it time we rethought our definition of “wealthy?”

We’re republishing this article to help out our newer readers.

What are you doing to climb towards financial freedom? Willing to share where on the ladder you are? What’s worked well for you, and what’s been tough?

Don’t be shy!

About Author

G. Brian Davis

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their living expenses. Through his company at, he offers free rental tools such as a rental income calculator, free landlord software (including a free online rental application and tenant screening), and a free masterclasses on how to reach financial independence within 5 years.


    • G. Brian Davis

      Thanks Damon. It’s all too easy to lose sight of our long-term goals, when we’re inundated every day with “urgent” but not actually very important items demanding our attention. Gotta keep a firm eye fixed on the bigger picture goals!

  1. Enrique Pisfil


    This kind of puts Dave Ramseys mentality of building wealth and buying houses in cash only when you can afford it and combines it with BP’s mentality saying you can buy a house by financing or figuring out a way to own the house, love it love it love it!

    • G. Brian Davis

      Thanks Rachel, and I agree, trying to jump straight to financial independence is extremely daunting. I think a good first goal is trying to cover housing costs, then expanding to other mandatory expenses, and outward from there. It doesn’t happen overnight, but it does happen, if you take it one step at a time!

      • I strongly believe if you don’t have to focus on housing or housing cost it frees you up to take risk and explore of career opportunities or entrepreneur ventures.

  2. Great article. I’ve met a lot of intellectually dishonest people when it comes to money and finance. Some say it’s “unseemly” to discuss such mundane things as money, but how else to you learn viable ways to financially protect your family.

    “When you don’t respond to bad behavior, you get more of it.”

    • G. Brian Davis

      I totally agree – the kind of people who don’t talk about money are the kind of people who aren’t very good at keeping it (no matter how much they make).
      If we want our kids to grow up financially savvy, we need to teach them ourselves. Lord knows the public school system isn’t going to do it!

  3. Great article. My experience with reaching financial security made me focus on the similar path. For me I added a couple of caveats.
    1- Don’t get married
    2-Don’t have kids
    3-Don’t go college, instead learn a trade
    Realize that the greatest university in the world is the internet.
    4-learn to live and thrive on a small portion of your income. Invest the rest.
    5-always be grateful for all you have.
    6-start yesterday!
    7- be good

    • G. Brian Davis

      I agree with most of those, although I don’t regret getting married one bit. In fact, I would never have been able to start my businesses at and without the stability provided by my wife’s income. I also do want children, although I recognize that they do come with additional costs. Still, I want to share the same things with my kids that I’ve shared with my own parents.

    • Chris Thorgesen

      If you are playing a game of CASHFLOW you are correct, getting married and starting a family are drains on the budget.
      However, there is much more to life than chasing dollars. Do not store up for yourself treasures on Earth, for where your treasures are there your heart will be also.
      It is fine and wise to ensure a future for yourself and your family and create the tool of wealth for yourself that can be used as an instrument to help others, for it is more difficult to help others if you cannot help yourself.
      Getting married was the single best thing that I have ever done. We have 10 children and my wife stays at home with them. I am a perfect example that you can indeed leave the rat race while 1. being married, 2. having kids, 3. going to college.
      I am not saying everyone should get married or that everyone should have kids and I am definitely not saying everyone should go to college, but the guidelines you promulgate are a recipe for disaster and depression for most people.

  4. I am working on this. I am acquiring my first property via Land Contract at the end of the month. Killer deal in a suburb near Akron, Ohio. I have been along this mindset for a while now, while friends of mine are buying $275,000 houses, I am figuring out ways to do my first flip and purchase $50k-$90k houses to buy and hold. Still working on the financing and investing knowledge yet but this keeps my on track. Good read!

    • G. Brian Davis

      Thanks Willie, and it sounds like you’re on the right track! Best of luck with the first few deals, and if you’re looking for some free video training on passive income from rentals, check out (full disclosure, it’s my site).

  5. Camilla Sauder

    BDR–Before Dave Ramsey, back when we were just getting started, we learned to live BELOW our means with no debt on one income all the while giving generously. When the bank told us we could qualify for a $200,000 house, we bought a $100,000 house and paid it off in five years. That kept snowballing with subsequent moves and appreciated markets so much so that we found ourselves at 40 with a $300,000 house paid off and the means to put our kids through college. With our last move, we had money left over once we bought our house and thus began our foray into the rental house market. We made a goal to purchase enough houses with cash so that my husband could retire within five years. So here we are in our early 50’s with no debt, 20 rental houses and my husband doesn’t have to work. And, I might add, this year we gave more money to charitable organizations than we used to make!! We have been very blessed.

    • G. Brian Davis

      That’s fantastic Camilla! Congratulations on building such an incredible rental portfolio with so little debt. Not easy to do… but it gets easier with every new acquisition! Like you said, it’s all about living below your means and putting a large chunk of your income into investments.

  6. Ralph R.

    I gotta disagree with the don’t get married thing. Its just like anything else in life. You can do anything in life that you want, BUT you need to do the due diligence first! I would say its better to say don’t get divorced. a little due diligence could prevent the divorce. Anyhow I started over 11 years ago. I moved to Alaska with $40 dollars, a dog, 3 duffel bags of clothing, and a 3 month temporary job working for a commercial Salmon fisherman driving a truck. I was 51 years old and finally figured out I needed to look at how a poor decision today could effect me at some point in the future. Due diligence if you will.

    It has taken 11 years, but I have reached a point that would be a high 2 or low 3 on your Ladder. I cannot quite pay all my expenses yet, though if I house hacked one of my duplexes I could. Self managing would help too. Your assessment of gaining momentum is spot on. I added 2 properties last year, for 3 units. The fourth unit in 14 months will be under contract early next week. The snow ball has almost doubled in size in a little over a year.

    I am doing the buy and hold thing and often tell people to build a strong wide base in the early years. Its the same as the foundation to your house. I compare RE to a truck in low gear. Its slow to get moving but you can’t stop it. once its moving you can shift gears and its own momentum will keep it rolling over a lot of rough stuff. The faster you go the harder it is to stop!

    Most of the people I work with are nay sayer’s. Many make more than myself, and live hand to mouth or pay check to pay check. They all have new snow machines, 30-40K boats and on and on. My boat and snow machine are both paid for as well as in top condition. When they start in on me I just agree I am probably going to go broke due to high property taxes or because of whatever reason they can think of. When we have a shorter pay period or have to take a furlough Day (we must take 2 a year) they cash in PTO so their pay check isn’t short. I think differently about it. I’m going to wait till the last 2 days of the year, and take 2 years worth at once! those 4 days plus a weekend will give me a weeks vacation and not cost me any PTO. It brings a certain peace knowing while I still cant quite live off of my investments I could work at any minimum wage job and still do pretty much whatever I wanted.

    • G. Brian Davis

      Congratulations on building a strong financial foundation Ralph! Sounds like you’ve built some great momentum, too.
      I’m a little confused by the marriage comment – I’m not against marriage at all, in fact I’m happily married myself!
      Best of luck with that fourth property you have under contract, hope it’s a grand slam for you.

  7. Susan Maneck

    Is getting rid of credit card debt always the way to go? Granted your day to day living expenses should not lead to credit card debt, but we are investors here and credit card balance transfers are the cheapest money out there. I doubt if I could have bought eight houses and a condo without them.

    • G. Brian Davis

      Credit cards are one more tool in the toolbox, albeit one that many people don’t use properly. I financed a home purchase on a credit card once, and don’t regret it. Using credit cards is not inherently wrong, but leaving high credit card balances for more than a few months is where people run into trouble. It’s extremely expensive to keep debt on them long-term, and is hell on your credit score.
      So my attitude is to use them, but not to leave debt on them for long.

    • G. Brian Davis

      Thanks Tyler! Yeah no one gets rich overnight (and the few who do don’t stay rich). But by taking it one rung at a time it keeps you focused on your long-term financial goals without them being overwhelming.

  8. G. Brian Davis

    Hi Raza, that’s a challenging market for investing. While I don’t presume to know anything about your finances or about the market specifics in Toronto, you might consider investing in another nearby market instead of in Toronto itself. There are dozens (if not hundreds) of markets within an hour radius of where you live, I’m sure – one of them is probably a winner.
    Best of luck, and I’ll shoot you an email as well.

  9. Jonathan Cope


    Nicely done. Your piece is terrific. Thank you.

    Your final paragraph evokes much of the free-spirited contrarianism of Mr Money Mustache. A terrific image of gaining both one’s freedom and wealth simply, while the majority of the fortunate remains in the conventional struggle for lack of thought, will or discipline. No judgment on the others, but it is a pleasure to gain freedom, and even more so unconventionally.

    Have you given thought to hypothetical stages 6 and/or 7?

    What meaning and purpose does life offer to those who gain their freedom or, even more challengingly, gain their freedom early? What might one want to achieve as a matter of wealth or contribution once meaningfully free of needing to work?

    Camilla, above, notes philanthropy as one path. But I expect many desire to build more, in the spirit of Elon Musk’s journey. There are fewer texts on what one might do in stages 6 and 7. There is Andrew Carnegie’s piece on the obligations of the wealthy, and there is Buffett and Gates on painting one’s work picture and giving.

    Let us know, however, if you have thoughts or come across other content concerning what is after stage 5, as some of BP’s community will certainly be faced with the challenge through their good fortune and discipline.

    Thank you again for the great piece.

    Best regards,

    • G. Brian Davis

      Thanks Jonathan!
      I have given quite a bit of thought to what the theoretical next steps are, and it makes me happy to hear you exploring those questions as well. I rather liked the way Tim Ferris approached it in The Four Hour Workweek – he basically said go have fun with your new freedom for a while, travel, do things on your bucket list, etc. But you can’t backpack around for the rest of your life, and a certain point, you’re confronted with the question of what to do with all of the time and money you find yourself with.
      Which is about the right time to (drum roll…) go back to work! Except this time it’s completely untethered from money, it’s only about meaning.
      I personally plan to become either a winemaker or novelist. Or both. I will also spend a great deal of time raising my children, teaching them about money, and helping them create their own businesses or sources of income. I can’t wait!

  10. John Murray

    Great article! I’m currently at step 4. Day job is gone for 2 years, manage and leverage $3M of rental properties, have $36K per year of defined benefit, $1.5M in IRA and two years away from Social Security ($36K per year) Married for 32 years to the best person in world. The momentum for step 5 is increasing and the future is bright!

  11. Wayne Bodley

    Thanks for a great article Brian. 10 years ago my family and I did our first house hack and we’re in the second one now. We just took cash out of the original house and bought a house for cash in Missouri for my daughter and her family. The best part is the original house still cash flows $500/month even with the refi and has 45k in equity. Even if I never attain financial freedom that’s immensely satisfying.

  12. Hi Brian, Excellent article! Our family with 3 little kids is managing to go to France for the 10 month off season after buying properties and quitting our jobs (paramedic, env. tech), it was an 8 year journey. But the costs to live awesomely in the South of France are the same as living in our $300,000 house in Nova Scotia, I describe those costs here if anyone wants any motivation!

  13. Jerome Kaidor

    I guess I’m on rung 4 or 5. Haven’t had a W2 job since 2003. My wife got laid off last year.
    “Do I need to find another job?” “No”.

    Lately I’ve been thinking about wealth. For me, wealth doesn’t mean Lear Jets or private islands – or $15,000 suits. It means having plenty of rubber bands. Huh? Yup. Rubber bands, Xacto knives, toilet paper – not having to scrimp or run out of any of that stuff. Band-Aids – the real ones, not the import copy ones. The freedom to buy any cooking gadget my heart desires. “Sous Vide machine? Done!”

  14. John Murray

    One year later Brian, Have $3.6M in rental properties and beginning to liquidate my rental inventory, close next Wednesday . Working on taking a big passive loss this year, pay recapture but no capital gains. One year away from Social Security. Have another property lined up to liquidate after the first of the year and will repeat until inventory is liquidated and mission accomplished. Only in America!

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