Posted on: July 15, 2020 Posted by: A.L. Jonas Comments: 0
what stage are you in in your financial life right now
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Imagine a life where you are free to do whatever you want to do without having to worry about money. Wouldn’t that be wonderful? Yes, that life is possible and it is imperative that you know how to get there. Some people like businessmen, athletes, artists and lottery winners fast tracked their way to wealth. But for most of the people, the road to wealth can only be done one step at a time. There are stages to financial independence. First and foremost, you must figure out what stage are you in in your financial life right now. Knowing where you are will give you an idea on where to go next.

Active vs. Passive Income

Before you can understand the stages, you need to have a clear understanding of two basic financial terms about income.

Active Income – is the money that you earned while working. It means the income comes from your active participation or as a direct result of you performing a service. Active income can be in the form of salary, commission, tip, wage and even income from business.

Passive Income – requires little or no effort at all from your part. It is basically money that you earn from doing almost nothing.Examples of active income include income from rent, investments, dividends, trademarks, copyrights, affiliate marketing and other portfolio incomes.

Stages in Your Financial Life:

Stage 0: Financial Dependence

Financial dependence means someone else is responsible for you in your financial life. That person can be your parents, spouse, grandparents, uncles and aunts or whoever is paying for your monthly living expenses. It is perfectly normal to be financially dependent on someone else when young. If you are still in this stage, yet you are old enough to earn on your own, your main goal should now be to move on to the next stage.

Stage 1: Financial Solvency

Financial Solvency is the first stage towards financial freedom. In this stage, you no longer depend on someone else to pay your financial obligations. You now have the ability to pay for your monthly living expenses. It also means that if you have debt, you are now able to pay for your loans on time. Generally, the first step is to either get a job or start a business.

Stage 2: Financial Stability

Once you are already able to consistently meet your financial obligations on time, the next thing to do is to start saving money. Ideally, you should be able to save at least 6 months worth of monthly expenses in your emergency fund. As the name suggests, emergency funds are a stash of money set aside for life’s emergencies. It can be used for emergencies such as a job loss, health emergency or appliance and car repair. At this stage, you should also begin investing a portion of your income. A budgeting system will help you handle your money properly.

Stage 3: Financial Security

At this stage, the income from your investments should already be enough to cover your basic monthly expenses. You are no longer reliant on your active income alone because you are now earning some passive income. Even if you lose your job or business at this point, you can now afford to live a simple life without having to worry about your basic needs.

Stage 4: Financial Independence

This is the ultimate goal for most people. This is the stage of financial freedom. It is the stage where you have enough savings and investments to finance your desired lifestyle. At this stage, your passive income can now completely take over. Your basic needs as well as some comfort in life can now be sustained by the income that you are receiving from your investments. Even if you are vacationing in an island somewhere, you don’t need to worry because money is still pouring in without you having to lift a finger.

Stage 5: Financial Abundance

Some people will not be contented with merely achieving financial freedom. The next stage is for these people. In this stage, there is abundant wealth. You already have all the money that you ever need to the point that you don’t know where to spend them anymore. People on this stage usually looks into building their legacy. A legacy is basically who you are, how you lived your life and how you want the people to remember you. It is at this point that you consider how you will leave your wealth behind so it can served as a very strong foundation for the next generation.

Now assess your financial life. What stage are you in in your financial life right now? Where will you grow from here? What is your end goal?

Good luck on your financial journey!

Feature Image by Photo by Lukas from Pexels

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