It’s fair to say that building wealth is nothing short of a progressive journey. Before you achieve exclusive financial freedom, you’ll have to go through different stages of creating real wealth, all of which are threaded together. Knowing where you stand will make it easier for you to come up with a strategic financial plan so continue through the stages below and use each stage to lead you to your dream rich lifestyle!
Stage 1: Zero To Spare
The first stage of true wealth is called zero to spare, and this is the starting point of every wealth-creation journey. At this stage, an individual is 100% dependent on one stream of income, usually a 9–5 job. Likely, someone in this stage is coming straight out of college and just secured their first stable job after a seemingly endless search. As a result, this is where individuals begin to cut financial ties with their parents and start living on their own.
Although crucial, this transition from a dependent student to a financially independent adult isn’t usually easy. Suddenly, you are responsible for paying your own rent, electricity bills, among other expenses, all of which were initially covered by your parents.
To add on that, this is the stage where one is probably saddled with college debt and other forms of consumer debt like credit card bills. Consequently, a big fraction of your monthly salary will be going towards getting these debts out of the way and covering your living expenses. As a result, your income is strained at this stage, making it impossible to save or invest. Since you can only boast of zero to no savings, the thought of quitting your job to launch a business or investment would be laughable in this phase. But as gloomy as this stage sounds, it is the foundation of every wealth-building journey.
This stage shapes your spending habits and contributes significantly to sharpening your perception of money and wealth. If you remain focused on your long-term financial goals, this is the stage where you master the art of delaying gratification and living within your means. If you’re currently in this stage, don’t worry. Living paycheck to paycheck is a reality for most people. As long as you make concerted efforts to increase your income and save diligently then this stage will come to an end paving the way for the next one.
Stage 2: The $20 Bill Rule
With time, you’ll master good money management habits, which will usher you to the next stage. Also known as the $20 bill rule, the second stage of real wealth is where your smaller purchases and bills become a non-issue. Unlike in stage 1 where you’re pinching your pennies, in stage 2 flashing out a $20 bill won’t make you cringe. Turns out, this is the point where you completely stop worrying about bills that cost less than $20 and similarly small purchases that would initially give you sleepless nights.
Although budgeting is still a crucial part of your financial life, things begin to loosen up in stage two. Here, you’re probably settled into adulthood and living solo; hence all you have to worry about now are the recurring expenses. As a result, small purchases won’t bear much significance to your bank account. Such expenses include eating out occasionally, going to the movies, or paying for an internet subscription. This is where living on your own starts to gain pace, and you realize things are not as bad as you thought they were.
Regardless, it’s not all fun ang games in this stage. Even as the pinch of smaller purchases wanes, you start making plans for bigger purchases. Plans of buying your first car or taking out a mortgage are somewhere in sight at this stage. The only thing holding you back is that you still have a few debts to think about; hence your freedom is still limited.
One trick of surviving stage two is strict budgeting. Take advantage of the slightest chance of reducing your spending, and channel the saved money toward your loans.
Stage 3: The $1000 Rule
The third stage of true wealth takes place when you are able to save $1,000. In this stage, you are making a reasonable income and are keeping your expenses to a manageable level which allows you have to have money left over when the month ends. This is the point where most people achieve financial stability as they debts are minimal, and they can start to grow their wealth using their disposable income.
Career-wise, stage 3 is where your prospects will shine brightest. With a satisfying job at hand, most people are usually ready to start thinking about investing or early retirement. Take note that your financial journey’s biological clock starts ticking at this stage; hence you’ll need to double your efforts.
This is where you’re most likely to secure a promotion or a salary raise. As a result, a tax-advantaged retirement fund will begin to look more enticing. You are probably considering different investment vehicles, and as you do so, don’t forget to prepare for financial emergencies.
Even with a steady job, an emergency fund is a significant highlight of stage 3. Typically, setting aside 6 months’ worth of living expenses is a sure-fire way of cushioning your income portfolio from unforeseen financial thunderstorms. With a ballooning emergency fund to back you up, you will find investing easier at this stage, so don’t miss out.
Also, be ready to face some tough financial choices at this stage. From where and how to invest your money, to crucial career decisions, this stage will test your susceptibility to creating and sustaining wealth. Before you choose an investment strategy, consider your individual goals and the time horizon you’re working with. If your goal is to achieve financial independence fast, go for cash-producing assets such as real estate.
Making a wrong move at this stage will only set a bad precedent for your overall net worth, so take it very seriously. Also, stage 3 is where your financial goals will become more defined. This is where you create a blueprint for your wealth journey, and if you do it right, you’ll easily escape common financial mistakes. So, be smart with the money decisions you make with your money at this stage.
Stage 4: Earning How You Please
The next stage of real wealth is earning how you please. Ideally, this stage is characterized by sufficient investment income to support your lifestyle, even in the absence of a steady job. The only reason why people choose to retain their jobs is because of the need for investment diversification. Having seen your initial investments bear good fruits, you’ll be compelled to test new waters in the investment world. Your salary will give you a significant boost to do that.
Unlike in the three stages above, quitting your job won’t be a cringe-inducing scenario in this stage. If you had set up a business, chances are high that it’s drawing bountiful profits at this stage, and now you’re thinking of expanding it. In the case of appreciating assets, it’s probably multiplied two-fold by the time you’re reading this. The drawn capital gains are nothing short of impressive.
Debt is not a sticking point at this point and time, and your net worth is steadily ticking towards the right end of the spectrum.
You could choose to down your work tools, and it won’t serve a severe blow to your earning potential.
However, this isn’t the best time to quit your job yet.
Stage 4 is a pretty comfortable stage to be at, and this is because your destination is now nearer than your starting point. Just because you are making enough money to quit your job for a bit doesn’t mean you go ahead and do it. Downing your work tools is a huge undertaking that warrants intensive planning from your end. The good thing is that at stage 4, you are headed in the right direction, so keep saving.
Stage 5: Unlocked Time
In stage 5, an individual is fully enjoying the financial rewards of passive income. By this time, working for someone else is entirely off the table, and most people resort to being their own bosses. If you love your freedom, then this is the stage where you’ll have plenty of it. Besides fully controlling your schedule, remote working is a possibility worth exploring at this stage. Unlike the previous stages, the level of financial independence is highest at this point. This is because, at this level, a person can effortlessly afford the lifestyle they’ve been dreaming about without any hassle.
Additionally, your net worth can take care of two years of living expenses without needing you to lift a finger. Technically, you can take a two-year vacation to your favorite holiday destination without worrying about making money, and still have a blast.
At this stage, individuals tend to wind-back the tape and assess how far they’ve come. If they feel like they’ve checked most things off their list, they’ll pat themselves on the back and re-arrange their priorities. Although not a stage of lifetime financial freedom, stage 5 is very close to you waving the work culture goodbye for life!
Stage 6: Abandoning The Budget
Also referred to as the stage of financial independence, stage 6 is where you actually amass enough wealth to last you a lifetime. Your wealth-generating machines are attracting a cash inflow that surpasses your annual expenses by a considerable margin, and you don’t even need to budget. You’ve saved enough money to afford anything you want without having to plan for it. Most people dream about this stage.
Well, if you ask me, the joy of affording both basics and luxuries without sweating is a beautiful place to be financially. Your family doesn’t have to worry about a single thing because your money is enough to provide them with everything they need. To add on that, this is the stage where you’ve saved up enough money for your dream retirement. No wonder this is the stage where individuals go big with their risks and opportunities.
If you’ve been dreaming about traveling abroad for a year, this is the time. Maybe you hold a desire to own a lavish beach house or ditching your career to pursue your interior design hobby. Whatever it is, this stage offers you the independence of taking big risks without being skeptical about hurting your net worth. Since material stuff like cars and houses will be out of the way, this is the stage where individuals begin to seek fulfilling life experiences. To some, this can translate into spending quality time with friends and family without worrying about how much money they have in the bank.
According to wealth experts, you can achieve this kind of financial independence by following two routes. The first route is investing heavily in cash producing assets such as real estate and waiting for it to appreciate. The second route is saving up to $1 million and living off the interest that will accrue over time. Whichever method suits you best, just go for it.
Stage 7: Total Freedom
The final stage of true wealth is the stage of attaining exclusive financial freedom. If you’ve ever wondered what it feels like to have zero worries about money, then this is it. This is the stage where your wealth-generating machines are earning way more money than you will ever need. Once you get here, your only worry will be how to steward your wealth.
We are talking the kind of wealth that stems from founding big companies-think Amazon, Tesla, and Microsoft. Even if their founders decided to go on a full-fledged spending spree, buying private jets and fancy sports cars, it would be impossible to deplete their wealth. Getting here means you are living your best life.
Do you remember how I mentioned the importance of delaying gratification in stage 1? Now, this is where it all pays off. Your sacrifices ultimately pay off at this level, leaving you with just one thing to achieve- building a legacy. At this stage, most individuals start pursuing meaningful pursuits like philanthropy, or even writing a book about their lives. It’s only a small fraction of the world’s population that makes it to this stage. However, this doesn’t make it impossible. With the right financial plan, you can also outlive your wealth and leave behind a fortune for your dependents. If you are like Bill Gates and Warren Buffet, you can also donate a big chunk of your riches to charity.
There you have it! The 7 stages of true wealth.