I was talking with my co-worker about financial independence and I notices we have different ideas about it. He thought that if he was financial independent he could drive sports with pretty women in some paradise island and that he would have millions on top millons cash in some safe. In my idea it’s much smaller, just to have enough that it will generate income that I can get by. Mine is million on top of millions smaller in the amount money it will take to be financial independent.
But this got my thinking is there actually different levels or stages of financial independence and I do think there is. So I went on the search for what these might be and I found this really good video on YouTube about them. So, there is six stages of financial independence, or seven, depends how you calculate them.
Stage 0 – Dependence
This is actually the starting point when thinking about stages of financial independence. At this stage you depend on others or taking on debt for surviving your financial obligations. You are spending more than you make and if you don’t find a way out of here you will never be able to be financial free. When you start earning more that you spend or you start spending less than you make, you take the first step to becoming financially free.
Stage 1 – Solvency
This is the stage where you can meet your financial obligations without help from others or from needing to take on more debt. You are spending less then you make. You might have some big debt payments still, but you can manage them. Also, I think that not all debt is bad to have, those comsumer debts, like credit cards and such are bad but your mortgage is not. I myself are struggling to be in this stage, I spend less then I make, sometimes there is problems but my buffer can handle those, and most of my money goes in to paying off debt. With hard work on saving and being frugal I hope to reach next stage soon.
Stage 2 – Stability
This is the stage where you have paid off all your comsumer debt, or bad debt. You have buffers so when you have suprises, your buffer can handle those without needing to take on more debt. This is stage at the moment I’m working towards. There is some distance before I will reach it but with hard work and frugal habits I should reach it.
Stage 3 – Agency
This is the financial independence stage where you can live and work as you choose. You have paid off all the debts or you could do that if you wanted to. There is actually reason why you should not pay off all your debts.
Stage 4 – Security
This is stage you reach when your investments can cover your basic expenses, like housing, food, clothing. It’s not finest life style, but you could stop working and live like this for rest of your life. This is the stage that I was thinking about when I was talking with my co-worker. People dream of different things.
Stage 5 – Independence
This is stage where your investments can cover your current lifestyle, I presumed that your living a lifestyle now that’s over the basic, like most of us are. At this stage you would not need to change anything but the working part, you would not go there anymore.
Stage 6 – Abundance
This is now stage that my co-worker where thinking about, being so rich that you can do anything you want, when you want it, for as long as you want it with whoever you want it with. This is something I did not even dream for myself, I’n not interested being the richest man in the world. I think I would just try to good with the money that goes over what I would need to be financially independent on. Like start a charity or something.
Comment on where are you at the moment and what stage are you hoping to reach, I would like see what others are driving for.