6 Stages of Financial Independence

By itself, income will not bring independence if you live beyond your means: spend more than you receive and accumulate debts. What matters is exactly how you manage your finances: what goals you set, how you save and spend money.

If you have an average income now, this does not mean that you will never become independent. Just don’t take financial freedom like “all or nothing.” Move towards it gradually, moving from one stage to another. Remember that every step, even the smallest one, brings you closer to peace and new opportunities.

Stage#0: Dependence

At this stage, you are completely dependent on others. We all start with it, because in childhood we cannot suit ourselves with money. Someone lives in such a way all the time of study, and someone even longer.

However, you are in a dependent position not only when your parents or partner provide yourself, but also when you spend more than you earn. For example, you use payday loans or borrow from friends to make ends meet. In any case, you rely on someone or something to cover your expenses.

If you are stuck at this stage because of debts, try to negotiate with creditors for a reduction in the interest rate or other change in conditions to make life easier.

Stage#1: Solvency

This is the first stage of the survival phase. You have achieved it if you are able to pay all the bills and do not rely on anyone’s help. You may have debt (for example, on a credit card), but you make contributions every month and do not add new debts. Someone reaches this stage while still studying, and someone never at all.

To move on, try to pay off high-interest loans first. Think about how you can increase income or reduce expenses in order to pay off these debts faster.

Stage#2: Stability

At this stage, you regularly fulfill your financial obligations, have already paid off some of your debts and have learned how to reduce spending. Now it is important to create a financial safety cushion. It will save you from new loans in case of unforeseen expenses.

Start saving at least 5% of your income every month, and eventually increase the amount to 10%. Make this process automatic so that there is no temptation to spend money on something else.

At the stability stage, you may still have a large debt, for example, a mortgage, but you have freed yourself from consumer loans, and you do not need to take out a new one.

Stage#3: Independence

Now you manage your expenses and don’t live from paycheck to paycheck. You have also set aside some amount in the reserve fund. Thanks to this, you do not depend so much on your work. If you lose your current place or want to leave yourself, you will be able to live in peace for some time.

After this stage, you will move from survival to prosperity. Money will not become a safety net, but a tool with which you can build the life you want for yourself and your family. The next step to do this is to invest the funds that you are saving.

Stage#4: Confidence

You are at the stage when the investment income covers basic needs (housing, utilities, food, transportation costs).

Nevertheless, you cannot yet not work at all and live on passive income. It will be enough for the most necessary needs, but not for a comfortable life. To move on, keep increasing your income and investing money.

Stage#5: Absolute independence

Gradually, the income from investments grows to what can support your current standard of living for the rest of your days. Now you can afford to leave your main job and not worry about anything. You have enough money to travel, do creative work or something else that you have been dreaming about for a long time.

For many people, this stage is the ultimate goal. It is impossible to check whether you have reached it or not, focusing on a specific amount, because everyone has a different lifestyle and different requests.

Stage#6: Abundance

At the last stage, passive income provides you with interest. You don’t just have enough money, there are even more than you and your family need. At this stage, many decide to build their own business or do charity work.

Now it’s time to think about the skillful management of not only finances, but also assets. Decide how you will control the sources of passive income, how you will distribute the profits from different investments, to which of your loved ones they will subsequently pass. And do not forget to treat money wisely, so as not to go back several stages.

Category: General

Tags: finance, financial literacy, loan