What does “wealthy” mean, anyway? Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free 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. Momentum 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?” [Editor’s Note: We are 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!