Stages of financial freedom

I read this article by J D Roth discussing stages of financial freedom. Roth used to believe that financial freedom meant just one thing: Having enough money that you never had to work again. Over the years Roth learned that financial independence exists on a continuum. It’s not “all or nothing”, but an ever-increasing range of options. It’s a process. Each stage of financial freedom allows you greater autonomy and self-expression, and these are qualities that lead to happiness.

Stage 0 – Dependence: In this stage, your lifestyle depends on others for financial support. We all start here. We’re born this way. How long it takes to break free varies from person to person. You’re in this stage if you rely on financial support from your parents. You’re in this stage if you spend more than you earn. You’re in this stage if your debt payments exceed your income.

Stage 1 – Solvency: Solvency is the ability to meet your financial commitments. You reach this stage when you no longer rely on anyone else for financial support — when your income exceeds your expenses, when you are no longer accumulating debt.

Stage 2 – Stability: You achieve stability once you’ve repaid your consumer debt, established some emergency savings, and continue to earn a personal profit. You may still possess some “good debt” — student loans, a loan for the house you live in — but you’ve eliminated other obligations and built a buffer of savings to protect you from unfortunate events.

Stage 3 – Agency: The final “surviving” stage is free agency, the ability to work and live how and where you want. In this stage, you’ve eliminated all debt and you have enough banked that you could quit your job at a moment’s notice without hesitation.

In the final three stages, you move from surviving to thriving. Money is no longer a safety net, but a tool to help you build the life you envision for yourself and your family.

Stage 4 – Security: You achieve financial security when your investment income can cover your basic needs. That is, based on how much you have saved and invested, you could live a meager existence for the rest of your life. Even if you never worked another day in your life, you have enough to afford simple housing, basic food, essential clothing, and insurance.

Stage 5 – Independence: Financial independence is the ultimate goal for most folks. At this stage, your investment income is sufficient to fund your current standard of living for the rest of your life. You can afford the basics, but you can afford some comforts too. You have Enough.

Stage 6 – Abundance: In the final stage of financial freedom, you have “enough — and then some”. Your passive income from all sources will not only fund your lifestyle indefinitely, but grant you the freedom to do whatever you want. You can share your wealth with others. You can indulge in luxury, explore the world. You can build a business empire.

Each of us will have to decide where we stand and how to move to the next level.