I've always thought that financial independence meant just one thing: Having money enough to have a comfortable life and not worrying about the bills. But I recently found out that this is a misconception about what financial independence really is. It's definitely not an all-or-nothing condition, but a process.
It is actually quite obvious when you understand that each step to financial freedom grants you greater autonomy that redefines your financial situation. In other words, since you don't go from broke to rich in a single step, understanding better each phase of financial independence makes you more aware of your real condition giving you a better sense of control of your situation. And it makes the concept of financial freedom more achievable.
Stage 0: Financial Dependence
We all have gone through this uncomfortable place of dependending on others. Maybe you are a young adult depending on your parents support. Or you may have hit a difficult situation in life as an adult and need the help of others.
Regardless of your situation, the first step is to transition from dependence on others to being self-supporting and financially solvent.
Stage 1: Financial Solvency
This is the first stage of financial independence. This means that you are able to support yourself without the aid of others and that you are current on all of your bills with your own income.
There are a variety of strategies that you can employ depending on your situation of dependence. You can create an income that reaches your expenses or you can transition from a low to a bigger and better income.
Stage 2: Financial Stability
Once you’re current on your bills, your next goal is to make more money, enough to be able to maintain a savings account.
We all know that unexpected things happen. Not only problems but opportunities might present themselves. You’ll eventually need some extra money. If you don’t have any savings, you’ll fall behind on your bills and wind up in debt again. Or equally frustrating, you will be unable to take advantage of an excellent opportunity because you didn't have the cash.
Once you are able to control your bill and still be able to keep some reserves, you can say you are financially stable.
Stage 3: Debt Freedom
Not all debt is created equal. Some can keep us away from our financial independence. So it's important to recognize them and put them on priority on the bills to get rid first.
In other words, clear your name from any unpaid bill, get rid of any high-interest rate debt. When you are debt free you can enjoy the money you make, without thinking that it is already compromised with some bills-to-pay. This certainly gives you a greater freedom and sense of independence in your life.
Stage 4: Financial Security
Your long term goal since the begining is to be able to separate the expenses associated with your lifestyle from the struggle to work to pay for them. That happens when the profit from your investments is sufficient to pay for them.
As the whole process itself, this happens in stages. You start by having your basic living expenses covered by your investment income. When these basic needs are covered by your investments you’ve achieved a degree of financial security.
Stage 5: Financial Independence
When your current lifestyle expenses can be supported by your investment income, you’ve reached the point of financial independence. At this point you can choose to disconnect from work if you want to or not. It is not a obligation for you anymore.
Stage 6: Financial Freedom
At this point you are able to afford for things that are beyond your life style. Maybe things you always wanted to buy, experiences you always dreamed to have, or philanthropic goals.
When you are financially free these goals can be fund with your investment income. At that point in time, you’re truly financially free in every sense of the word.
Stage 7: Financial Abundance
This can be the most challenging and enjoyable stage of your financial journey.
Being financially abundant means you accumulated wealth beyond the amount needed to fund the expenses of your lifestyle with a comfortable margin of safety. All you need to do is to have responsability to control what you accumulated.
Looking at financial independence as a process, as a series of steps, makes your financial dreams more achievable. Maybe it's hard for you to think about financial independance now. Maybe you can't save half of your income at this moment, but maybe you can save five percent. Or ten percent. And with that profit, you could work to move from Solvency to Stability. Which is an achievable goal that also helps you to build financial confidence. And once you accomplished that, you can work on boosting your profit margin to 15% or 20% so that you can pursue Financial Security.
Aknowleding this process, helps those who have high ambitions to work their way through a path that leads to financial independence and abundance. It help us celebrate our progress at every stage and look to our situation more positively.
Source:
https://radicalpersonalfinance.com/finance-topics/stages-of-financial-independence/
If you like this post, please upvote, comment and resteem if you wish. :)