There are six distinct steps in your path towards financial freedom.
Reaching financial independence in bite-size stages can help our financial goals becomes more achievable and realistic. It also makes the journey less overwhelming.
To reach true financial freedom, you usually need a plan to get there.
So where does it all start?
Stage 1: Dependence
In this stage, everyone is born here. Everyone here is 100% dependent on parents or other adults to survive. Growing up still depends on others for financial support to cover most of your cost of living. In this phase, there is not much freedom since some (or all) of your existence is supported by others making you not have full control of your life.
Stage 2: Solvency
The solvency stage is the first level of independence. This level of independence starts when you can fully meet your financial obligations without needing help from others.
However, there is very limited freedom in this phase because you are paying your way and making life decisions. If you are spending everything you earn, it feels like a treadmill. Progress begins once you are earning more than you spend.
Stage 3: Stability
In this phase, you’ve built up decent cash for emergencies and have no debt whatever. You are earning more than your basic cost of living and have good budgeting in operation.
This stage gives you a bit more freedom. Since you have an emergency fund, you’re able to take small risks and use your cash buffer as a safety net. And since you’re earning more than you spend, you have the freedom to choose what to do with excess income. To progress past this phase, you need to save and invest your excess income. This is the foundation of building wealth.
Stage 4: Agency
Here at this stage, you’ve built up a substantial savings pile and investment portfolio. Not only is your excess income saved and invested, but your assets are growing and contributing to your net worth, too. The Agency stage provides lots of freedom and flexibility. As your investment income increase, the need for personal income shrinks and this gives you more options to work and live as you please, designing your own life.
However, work is still crucial in this phase. You can’t fully quit working forever until you’re in the next phase when your investments generate enough income to cover your expenses.
Stage 5: Security
Elevating to this stage means you’ve reached financial freedom! You no longer have to work to cover your basic living necessities.
However, there’s no room for extra discretionary spending or personal luxuries. When individuals reach this stage (especially early in life), they typically want to travel, pursue new hobbies, share their wealth, give to charity, and treat themselves! but to be able to do all this, you will want to add some additional wiggle room to your spending projections.
Stage 6: Independence
This stage is what most of us are all striving to attain. You reach true financial independence when your investment income covers your living necessities, as well as most personal luxuries. You have enough, and the freedom here lasts forever.
Many individuals who get to this stage continue to work and save, which eventually pushes them into the next phase.
Stage 7: Abundance
At this point, your investment portfolio is making more money than you need in life. The gap between what you have and what you need will continue to grow and grow naturally over time.
This stage gives you ultimate freedom. You can make all decisions in life based on happiness, not Naira. When you’re in abundance, you’re in a great position to share, give back, help out friends and family, or set up long-lasting generational wealth.
Financial Freedom Is Not a Race.