I was scrolling through Instagram one day and came across a post talking about the levels of financial security. It started out by giving a sentence description of each one, but the more I read the more curious I got because I only ever thought about it as you either are financially independent or you're not. As I thought about it more, I realized there is a whole spectrum before you get to financial independence and so I wanted to explore that more in this post. As we've talked about in past blog posts, achieving financial freedom is a goal of mine as well as some of my followers and is something we are actively trying to achieve. We talked about the different forms of financial independence once you get there, but what are the different levels of financial security on the way there? To understand the process of getting from point A to B I have outlined them in this post.
For the first part of our lives, we are all dependent on someone, usually our parents or family members. Depending on your situation, you might become independent from them after high school, college, or even a couple of years after college. At whatever point you do, we have to recognize that it is the starting point because most of us can't provide for our own needs financially when we're young. You're also at the dependent level if you spend more than you earn, your debt is more than your income, or you rely on help from others to help you pay for expenses you can't manage yourself.
At this level, your income exceeds your expenses and you are no longer taking on debt. You are able to rely on yourself to handle your financial obligations and you don't depend on help from others for your expenses. This is an important step because now that you are able to meet your basic needs and provide for yourself, you can start transitioning from surviving to thriving.
At this level, you have a good understanding of your personal finances. You've been able to set a good amount of money aside for your savings and have a solid emergency fund. Having some debt like student loans, or your mortgage is still okay, but you've eliminated most of your consumer debt and are making sure you're not spending money you don't have.
4. Debt Freedom
This stage is critical because it is when you have paid off all debt including your mortgage, student loans, credit card debt, you don't owe money to anyone! You also have a large emergency fund that you know can last you without having to worry much. You are in a position to start creating the lifestyle you want and are almost thriving!
5. Financial Security
In this stage, your basic expenses are covered like food, bills, housing, insurance from your savings and good investments. If you wanted to, you could quit your job and be ok. It's not an amount where you are able to live lavishly but you don't need a job to meet your basic monthly needs.
6. Financial Independence
At this level, you not only have your basic needs met but you are able to do the extra things you want to do that bring you happiness! That could include travel, eating out more, some extra shopping trips. Your savings and investments more than cover your expenses and you can quit your job if you choose and have a great quality of living without relying on a paycheck.
7. Financial Abundance
At this level, you have your current standard of living met without worry and then some more on top of that. You can essentially do whatever you want without worry of ever running out of money. Whether that means you travel more, build the dream house you always wanted, or even increase your giving, money is no longer a worry for you. You also are able to think about generational wealth and passing money down that will take care of your family for years and years after you are gone.
While these are the 7 primary levels, this is a process and it doesn't happen overnight. There are many small decisions in between each step that help move you along and the choices you make will either help you get there quicker or take longer. Recognizing where you are and then making efforts to improve your situation is all that matters whether you are at 0 or level 4. What matters is that you are consciously pursuing something greater than yourself and you are trying to create the life you want for you and the people around you.