8 Stages and Levels of Financial Independence
vemuda.com - Financial freedom is something many people aspire to have. Imagine being in a financial position where you don't need to work unless you want to. Imagine never having to worry about money, having the option of quitting your job without repercussions or even retiring sooner than anticipated and spending your time doing what you love.
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You see, attaining financial freedom means that, for once in your life, you can freely do the things you are passionate about, without having to worry about money since you have enough money to cover your expenses comfortably.
The truth of the matter is that, when it comes to financial freedom, it rarely and usually doesn't happen overnight, and there are stages to be followed to attain it, which is what I'll be talking about in this post.
But first, I have a question for you: How far are you on your journey to financial freedom? Knowing where you stand can help you figure out where to make your aspirations much more straightforward.
Now, without any further ado. Let's begin with the first one.
1. Financial dependence
Consider yourself in the dependent stage if you earn less than you spend or if you currently don't earn anything at all. If you still rely on your parents or any other monetary help from a third party, such as maybe an uncle, family member or a friend, you're a dependent.
You, me, and just about everyone have been dependent on someone at one point or another. This stage on our list usually encompasses people who are still living with their parents (usually students) or a bachelor or bachelorette struggling to pay their living expenses.
If you don't plan prudently for example, in retirement, you may also end up being fully financially dependent. However, this time you will likely not depend on your parents but on your children. Once you get a stable job or source of income, you will leave this stage.
2. Financial solvency
Solvency is the survival stage, and this is when your expenses are lower than your earnings. In this stage, you're capable of fulfilling your financial obligations like paying bills and having some but not much leftover.
However, in this stage, you are still vulnerable to any unforeseen events. It means that despite having a grip on your financial obligations, you don't have a financial buffer, to withstand a financial shock, such as maybe a large car repair or a huge medical bill.
In this stage, you're still trying to survive, but you can manage basic things on your own.
If you're a student, your first step toward financial stability is to get a job that will allow you to make enough money so that you won't have to rely on your folks for necessities.
If you're earning money but still struggling, reaching this stage may require getting a higher-paying job, increasing your income somehow, or even reducing your expenses.
So, as you regain control over your finances, you enter into financial solvency. To get here, you may have found full-time employment, or perhaps you found a better paying job to support your lifestyle.
Most of the time, the transition from dependency to solvency involves cutting back on perks or extravagances. It's always important to recognise the achievement you've made regardless of how you got to this stage.
3. Financial stability
This stage is marked by your ability to save money each month. The financial stability stage involves building a base-savings that could support you in the event of an unexpected emergency or new life circumstances.
Here, you can start saving once you can comfortably fulfil your financial obligations consistently, pay off any debts, and minimise costs.
At this point, it's typical to have a few debts. You might still be in the process of paying off your mortgage or school loan, but you've paid off a majority of your consumer debt, and there's no need to incur any further debt.
The extra cash may be used during emergencies or as a financial reserve. Because, after all, you are still financially vulnerable to any unforeseen event, maybe a car that breaks down, unemployment or a severe illness.
To be financially stable, you will need to have a financial buffer that can withstand these shocks without significant impact on your lifestyle, for example, savings that can cover six months of your monthly living expenses. You want to attain this stage because you want peace of mind.
In this stage, you should no longer see money as a safety net, but as a tool that you can use to build the life, you have always dreamed of.
4. Debt freedom
In this stage, you've established enough stability in your expenses and managed to start setting aside money for an emergency fund. Since you've paid off most of your consumer debts, the next step is to start working through the high-interest debts. Settling even one high-interest loan can mean one less item to worry about and put that money into your savings.
This means you're working on paying off any investment debt, a student loan, or the mortgage on your car or house.
If you get it right in this stage, you should have enough money and means to not only survive but, start thriving. You don't live a hand-to-mouth existence anymore. You have cash reserves that can be a good fallback during an emergency, and you're almost debt-free.
This is when the value of money is more than just a safety net and is now a means to help you create a much better, more comfortable life. In addition, you can start using your money for investing purposes.
5. Financially secure
Financial security means having enough financial assets to cover your expenses, emergencies, and retirement without ever worrying about it running out.
In addition, people who are financially secure typically do not have consumer debt and can consistently save money for future needs while meeting all their monthly financial obligations. In this stage, you should start building a solid investment pool that more than meets your expenses.
To achieve financial security, you need to start hanging onto money, paying off high-interest debt, and saving money strategically for different goals. Such as an emergency or rainy day fund, retirement, investment, and things you want.
To accelerate your progress, it helps to focus not only on ways you can save money, but also ways you can earn more, such as pursuing a higher-paying career or developing a business in which you can earn money on the side.
In stage one, the Financial Dependence stage, your goal was to learn how to live within your means and pay off your debts. Now that you have achieved it, your goals change.
In the thriving stages, your income begins to detach from your lifestyle, meaning that, your lifestyle can be supported by your investments instead of your pay check.
Once you are able to pay your basic expenses with your investment income, you have reached the Financial Security stage.
6. Financial reliability
This stage primarily consists of seeing the importance of a solid investment. If you've regularly been putting money away between stages two and four, you'll have invested in solid assets that can provide short, medium or long-term returns.
Therefore, you should be able to reap the benefits of your investments. If your investment income is sufficient to meet your essential primary living costs, you have achieved this stage. However, this doesn't mean that you can now resign from your job. It would be best if you still worked more to cover your expenditures.
7. Financial freedom
In this stage, your investment income should be adequate to cover your required costs as well as additional extraneous for the rest of your life. You might even be ready to quit your job and do the things you've always wanted to do without having to worry about money both now and in the future.
Sometimes this stage is broken down depending on whether your savings can partly fund your lifestyle or allow you to live more abundantly than you currently do.
There isn't a specific or fixed figure that will tell you that - You have now attained financial freedom because everyone lives a different lifestyle.
Financial independence is the ultimate goal for most people, and this means your basic needs and some comforts can be met by your investment income.
Your lifestyle and paycheck are nearly completely detached at this point, and you could stop working altogether if you chose to. You can start thinking about goals other than your current lifestyle, such as something you want to buy or experiences you'd want to have.
The most essential thing is to define these objectives and support them without your investment income. You are truly financially free and independent at his moment in every sense of the word.
8. Financial abundance
Believe it or not, this is an actual financial stage, and it carries a relatively significant burden with it. Because your accumulated wealth surpasses your lifestyle needs, you now have to decide how to properly manage the surplus.
In this final stage, you have enough funds leftover from your passive income to invest in other businesses, purchase more properties, give to charities or even establish your own. Financial abundance gives you the freedom you have always wanted without worrying about your income taking a hit.
At every stage of the financial independence process, it's important to have trusted advisors that can help you create a strategy for leaping into the next financial stage of your life.
While financial freedom may seem like a goal, it is in fact, a journey. Being aware of the stage you are at in this journey is necessary to enable you to employ the appropriate strategies.
It's worth noting that, the destination is very personal, which is why you have to set your own goals that define that ideal future you're working towards.
Well, thank you so much for reading! I hope you enjoyed this post and let me know your thoughts with a comment down below. With that said, have a great day, and see you in the next one.