It’s easy to want financial freedom but difficult to visualize how to get there. Find out where in the 5 stages towards financial freedom you are in today and read what helped me personally through the different stages.
We often get stuck in one stage of our financial life far longer then expected. Our optimism gives in and we think it is impossible to climb out of our current situation. We read books of other’s success but understand realistically all journeys are not the same.
For full disclosure, I am still on my journey towards financial freedom. I’ve embarked on this journey 2 years ago but have already made more progress during those 2 years then the last 15 years of my life.
What changed during those 2 years? It’s simple, I got older, more mature, and found my purpose for wanting financial freedom. Making small changes to my mindset created new habits and behaviors that helped me get back on track towards financial freedom.
5 stages towards Financial Freedom
♦ Stage 1: In the Negative
In this stage, your income is not supporting outgoing expenses. You need support from family members or take on additional debt from credit cards. In this stage, you also risk snowballing into more debt and moving further away from keeping your head financially above water.
Like many Americans, I was in this stage far longer than I originally expected. From my personal experience, the biggest factors that helped me pay down debt and move to Stage 2 was reducing my monthly rent significantly and working multiple jobs.
♦ Stage 2: Surviving
Most Americans are in this stage. Here, you are cash flow neutral. You are living paycheck by paycheck with no room to save. According to a 2017 study by careerbuilder.com, 78% of workers are living paycheck by paycheck.
It wasn’t until my late 20s that I started to be cash flow positive. Continuing education played the biggest factor for me to move into Stage 3. I knew I needed to stand out and become more marketable at work so I read up on all the latest trends in my industry, got up to date with the latest technologies, networked, went to conferences, brushed up on my communication and presentation skills, and eventually got promoted and switched companies multiple times. I made sure with each switch my scope of work was broadening and my salary was jumping at least 15-20%.
♦ Stage 3: Comfortable
Arriving to stage 3 is a difficult accomplishment and something to be proud of. However, it is at this stage when you get too comfortable that you risk regressing back to stage 2. Increasing in age and the number of dependents play against you in time if you do not accelerate through this stage into the next.
I am currently still in this phase and can easily see how I could regress. Future expenses with the potential of having more children. Multiply that with costs of family trips, braces, toys, education, sports equipment, hobbies, and more. Trying to fit those expenses against a salary that will reach a ceiling automatically throws me back to living paycheck by paycheck.
What I am doing to move to the next stage is making sure I accelerate through here as quick as possible. Although we have the luxury to live comfortably we created a tight budget and act like we are living paycheck by paycheck. I am continuing my education and getting my Masters. I created automatic withdrawals into investment accounts and savings. Every dollar I invest will only be used to create more income. In this stage, no investment will ever be taken out for frivolous expenses.
Today in addition to my salary, we have created an additional cash flow of $800 monthly.
♦ Stage 4: Financial Freedom
Welcome to Financial Freedom. Very few make it to this stage. Here you have an overflowing amount of income coming in from multiple sources. Having more income streams also gives you the freedom to quit your job and hedge against market downturns.
You are able to plan for family vacations, cover all living expenses, and continue increasing deposits into your savings and investment portfolio. You are not worried about paying for your child’s tuition. And you have a sizable emergency fund to last at least a year.
♦ Stage 5: Luxury Living
Here you have the opportunity to create an investment portfolio for multi generational wealth transfer. You can spend on multiple lavish family vacations each year, buy expensive cars, purchase vacation homes. You also continue growing your savings and have a well diversified portfolio. Your emergency fund has increased to a point that all retirement expenses are covered. You have cash easily accessible when presented with new investment opportunities.
Be careful of False Luxury Living
Its easy to make a mistake and think you are in the Luxury Living stage but actually still be in the Financial Freedom stage. Or more dangerously think you are in financial freedom but actually be in the Comfortable Stage.
I fall victim like most Americans to sacrifice future happiness for immediate joy. I don’t buy affordable cars. And my watch collection could easily be sold today for a new Honda Civic. But I do believe in finding a balance that works for you as long as you understand which stage financially you are in. When reading a new financial planning book, match your personal goals to a plan that fits your family.
Comment below and share your story and tips on where you are today. What helped you move into the next stage?