The Stages Of Financial Independence: What’s Yours?

Ever wondered how you are travelling along on your financial journey? These seven stages, as created by Joshua Sheats, will help you to figure out where you are at and what to do next.

Knowledge will contribute to making your finances sustainable.

Stage 0: Total Financial Dependence

We all begin at this stage as children who are completely financially dependent on our parents.

Then as we get older we learn how to go from being financially dependent to being self supporting.

Sheats doesn’t hold a positive view of adults who move back in with their parents and become financially dependent on them once again. His advice is for these adults to get back on their own two feet and become financially solvent.

Another way adults remain financially dependent is when they rely on government payments or charity.

Stage 0 of the 7 stages: financial dependence
Stage 0: Financial Dependence

Stage 1: Financial Solvency

Financial Solvency is the ability to support yourself on your own income without help from others, and with the ability to be up-to-date on all your bills.

Some people will think that if they have reached this stage of Financial Solvency by being able to pay their bills on time, that this is it – and financial progress stops. Sometimes they are not aware of what the next step is, or if one even exists.

Beware of your peers. If the people you hang out with are having trouble paying their bills, and you are up-to-date with yours, then you may fall into the trap of thinking you are doing okay.

However, if you change your perspective and your reference group to people further along in the finance stages, suddenly you’ll realise how much more forward you can go.

Studies show that we tend to copy the five people who are closest to us. If the closest people to you are struggling financially, you’re not expected to get a new spouse or friendship group to make progress.

You can read books and blogs, watch YouTube or read articles, or listen to podcasts about personal finance. Getting to know another virtually can be a great way to help increase your knowledge base.

Stage 1 of the 7 stages: Financial Solvency
Stage 1 of the 7 stages: Financial Solvency

Stage 2: Financial Stability

This stage of Financial Stability is about being able to pay all your bills on time, plus have an emergency buffer of savings.

The problem with not having an emergency fund, or Mojo as known by followers of the Barefoot Investor, is that unexpected problems can really knock you back financially.

In the event of a financial problem and without a cash buffer, you may find it hard to get back on track or to get ahead.

The other aspect to having a lack of money behind you is that you could miss out on opportunities. An example of this is being offered a better job, but in a another town or city and you don’t have the money to move there.

Having money opens up opportunities.

Joshua Sheats
Stage 2 of the 7 stages: Financial Stability
Stage 2: Financial Stability

Stage 3: Debt Freedom

This stage is about having no ‘bad debt’.

Bad debt is defined as consumer debt. These debts are attached to items that decline in value such as cars, furniture, appliances, technology and clothing etc.

It includes car loans, credit cards, AfterPay, ZipMoney and payday loans.

Bad debt is sacrificing your future needs for your present day desires.

Suze Orman

Sheats says it’s important to pay off any consumer debt, unpaid debt or debts accruing a high interest rate.

It’s important to note that mortgages are considered ‘good debt’ particularly if they have a low interest rate.

The beauty of having low debt or no debt is that your life will have so much more flexibility and freedom to do the things that are important to you.

Stage 3 of the 7 stages: Debt Freedom
Stage 3 of the 7 stages: Debt Freedom

Stage 4: Financial Security

Financial Security is reached when you have enough money coming in from your investments to cover your basic cost of living.

Expenses such as housing, bills, cars and insurance would be covered, but not fancy overseas holidays.

Think frugal living paid for by investments.

Investment income is a passive income which needs little input from you. It could come from things like dividends from the stock market or real estate rental income.

A great benefit about reaching this stage of Financial Security is that it gives you the freedom to do things such as start a new job or business, or move to another area without having to worry about money.

Stage 4 of the 7 stages: Financial Security
Stage 4: Financial Security

Stage 5: Financial Independence

This stage is where all your lifestyle expenses, including discretionary spending, can be met by investment income.

You have the ability to stop working and be able to continue to live the same lifestyle.

Although, not everyone decides to quit their job when they reach this stage as they may enjoy working. Another option is being able to do volunteer work to help others and the community.

Financial Independence gives you choices and self direction over your life.

Stage 5 of the 7 stages: Financial Independence
Stage 5 of the 7 stages: Financial Independence

Stage 6: Financial Freedom

Think about all your dreams and goals – Financial Freedom gives you the ability to fulfil them.

At this stage, income from investments allows you buy a new motorbike, take the entire family on a holiday or anything else you desire.

Perhaps you have a philanthropic goal to help others.

The choices are endless.

Stage 6 of the 7 stages: Financial Freedom
Stage 6: Financial Freedom

Stage 7: Financial Abundance

Financial Abundance is the stage where you have far more money than you will ever need. This amount of money is way beyond just lifestyle expenses.

It’s beyond having covered all your dreams and goals.

This stage, ironically, is not about the money anymore. It’s about the impact you would like to make.

Abundance is about responsibly managing your wealth in a way that creates more joy for you and for others.

Have a look at this long list of notable philanthropists and how they’ve used their financial abundance for the betterment of the world.

Stage 7 of the 7 stages: Financial Abundance
The final stage: Financial Abundance

Our Story

August 2019

I’m writing the date as this feels particularly like a diary entry.

When I revisit this post in the future, hopefully I’ll be saying, wow, look how far we’ve come since then!

Currently, our finances are floating somewhere between Stage 2: Financial Stability and Stage 3: Debt Freedom.

We are still quite early on in our journey towards F.I.R.E., also known as Financial Independence Retire Early.

At the moment we are living off one and a bit wages, doing our best to reduce or delete expenses, and hit a savings rate of 10%.

This savings rate will not help us to reach financial independence before retirement as we are already in our mid-40s. We will drastically need to up our savings rate to 50% or more.

Our plan is for myself to return to full time work in 2020, as all our children will be at school.

Then with two wages coming in, we will live off one wage which we know we can do. The other wage will be used to pay down the mortgage and invest in index funds in the stock market.

Where We Are At

So, back to now. We are at Stage 3: Debt Freedom, in our financial pathway. We have no consumer debt, unpaid debts or debts at a high interest rate. Our only debt is our home loan which currently has a very low interest rate.

We float in and out of Stage 2: Financial Stability, which makes me somewhat nervous. We used to have a good emergency fund to buffer any unexpected expenses, however in the past 12 months it’s taken quite a beating.

Our washing machine, fridge and dishwashing machine all stopped working, the dog has had constant ear infections resulting in huge vet bills, the car needed repairing, and a close relative with zero financial sense and at risk of isolation needed her car replaced. Add onto all this, one of our six children had heart surgery 300km from home.

This is life.

Since all the above has happened we’ve struggled to build up our emergency fund again. Yet, I know we have a good capacity to earn money and will get out of this financial set back.

Your Story

Are you aiming for financial independence before or by retirement age?

What level are you on regarding the seven stages of financial independence?

What steps are you taking to make progress in your financial life?

Comment below to share your story.

Mrs Hack

I'm an everyday person on a journey to save money and care for the environment at the same.

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