The 7 Stages Of Financial Freedom

"Money is a terrible master but an excellent servant." PT Barnum.

When I first heard of financial freedom, I quickly pictured a beach, cocktail in hand.

Don't even try to deny it. You've been there too, haven't you? 

Over time, I have come to a very different understanding of financial freedom. 

So, what is financial freedom?

What I have learned is that financial freedom for you right now can mean something very different than what it means for me. For example, financial freedom could mean being debt-free to one person at the moment, but to another person, it could mean being financially independent. 

It is a process and has different stages of advancements that go from financially surviving to financially thriving. 

And here's the best part. Each stage of financial freedom gives you more control over your finances and your life.

Perhaps unsurprisingly then, at the heart of financial freedom is investing in yourself and managing your money well. Your money mindset, financial goals, and money habits will propel you forward through the various stages as you become more and more financially savvy. 

Ready? Let's get down to it and discuss the 7 stages of financial freedom. Perhaps you'll even get to find out what stage you are on! 

The 7 Stages of Financial Freedom

  1. Stage 0: Dependence
  2. Stage 1: Solvency
  3. Stage 2: Financial stability
  4. Stage 3: Debt freedom 
  5. Stage 4: Financial security
  6. Stage 5: Financial independence
  7. Stage 6: Abundance

Stage 0: Financial Dependence

Take a wild guess - what do you think the financial dependence stage is all about?

You might have guessed it! 

In this stage, you are entirely or to some capacity financially dependent on someone else to sustain your lifestyle. 

News flash: We all start out here. We all depended on our parents for financial support at one point or another. We still might be dependent on them, or on other people such as our siblings. 

You are in this stage if: 

  • If your expenses exceed your income.
  • If your debt payoff exceeds your income.
  • If someone else pays for your needs and wants. 

Related: 5 signs that you are living beyond your means

Stage 1: Solvency

Solvency is the first stage of the survival phase. Here, you have moved away from financial dependence and now live pay-check to pay-check. You make enough to pay all your bills and make debt payments, and you have your spending in check. If you’re in this stage, you are already way ahead of the curve - 40% of Americans struggle to pay for basic needs like food or rent!

At this stage, it is perfectly normal to not have an emergency fund. If an emergency came up, you would likely have to borrow. And you wouldn’t be alone either. Nearly 4 in 10 Americans would need to borrow to cover a $1,000 emergency.  

Related: Emergency funds: What you need to know

Stage 2: Financial Stability

You reach financial stability when you’ve gotten rid of high-cost debt such as credit card debt and other consumer debt. You might still have other debt such as a mortgage and student loans, whose payments you are on top of. 

You also have an emergency fund in this stage to take care of unexpected emergencies because let’s face it, life happens! 

Stage 3: Debt Freedom

Ahhhhhh! Sweet sweet debt freedom. This stage marks the transition from financially surviving to thriving, where money is no longer a safety net and becomes a tool for change in your life - to help you achieve the life you have always envisioned for yourself and your family. You can start to direct your money towards savings and investments more vigorously. 

You move from negative net-worth (where you owe money) to a net worth of zero. You reach this stage when you have finished paying off your personal debts and have zero debt left. Student loans? Paid off! Car lease? Done. Consumer debt? Yup, that too, gone! 

Stage 4: Financial Security

Hopefully, throughout prior stages 2,3, and now 4, you have constantly been dedicating some money towards savings goals and investments as per your budget. 

Related: 7 reasons why you absolutely need a budget

At this stage, your investments bring in enough income to cover your basic essential needs such as housing and food - for the rest of your life! If you got fired tomorrow, you would still be able to survive, albeit without comforts beyond your needs. 

Stage 5: Financial Independence

As you continue saving and investing money between stages 4 and 5, you investment earnings continue to grow. At some point, this income from your investments becomes more than enough to cover your current lifestyle. This, friends, is financial independence. 

At this stage, you have the option to retire as you will be able to support yourself and your family financially beyond just the basics - you will be able to afford comforts too. 

Stage 6: Financial Abundance

In the financial abundance stage, you have enough investment income to support not only your basics and comforts indefinitely, but an additional surplus that you can dedicate to whatever you would like - from buying more property, donating to causes, to building a building empire! 

Final Thoughts

Finances can be hard, so it is easy to feel overwhelmed. We all feel like hitting the snooze button on our finances sometimes. But when we do, our only job is to notice this and try to get back on track. 

You might be wondering why this is important. 

Because no one cares about your financial situation more than you. If you don't take ownership of your finances, if you don’t start acting now, you will wake up to a mess of a financial life.

Figure out what financial freedom means to you, then start by setting up some SMART goals and a financial plan - try to be proactive with your steps to financial freedom, whatever that means to you right now. You can do it! 

The 7 stages of financial freedom (Steps to financial freedom)

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