You cant go from broke to rich in a single step. Theres no magic fairy who will suddenly transform your financial life for you. You have to do it yourself.
But you can work your way through a path that leads to financial independence and complete abundance. That path has stages and you should celebrate your progress at every stage!
We all begin from a place of dependence on others. You may be a young adult transitioning from under your parents care to being self-supporting. Or you may have hit a rough patch in life as an adult and needed the help and aid of others.
Regardless where youre starting from, the first step is to transition from being dependent on others to being self-supporting and financially solvent.
The first stage of financial independence is to become financially solvent. This means that you are able to support yourself on your own income without the aid of others and that you are current on all of your bills.
There are many strategies that you can employ depending on your starting point. You may need to create an income for the very first time in your life. You may need to transition from an unreliable or low income to a bigger and better income. Or you may need some ideas to renegotiate your debts with your creditors.
It doesnt matter why youre behind. It only matters that you get your income to a point where its equal to or greater than your expenses.
Once youre current on your bills, you need to build a buffer account. Call it what you willemergency fund, rainy day fund, cash reserves, buffer accountthe purpose is the same.
Unexpected problems happen. Unexpected opportunities present themselves. Youll need money. If you dont have any money saved, youll fall behind on your bills and wind up in debt. Or you wont be able to take advantage of a perfect opportunity because you didnt have the cash.
First you figure out how much you need in the buffer account. Then you save it. Then you declare yourself financially stable.
If you have debt, youll probably want to get rid of it. Not all debt is created equal. But youll need to sit down and look at your debts and make a plan to dump the debt thats not getting you closer to financial independence.
That definitely means getting rid of any high-interest rate debt. It certainly means clearing your name from any old, unpaid debts. It probably means dumping any consumer debt tied to depreciating assets. And it likely means having a plan to clear the debt on any productive business or investment assets.
Being debt free means you can enjoy greater freedom and independence in your life. And thats the whole point, isnt it?
Your long-term goal is to de-couple the expenses associated with your lifestyle from your need to work to pay for them. That happens when the income from your investments is sufficient to pay for them.
This happens in stagessmall at first and larger later. The first stage is to have your basic living expenses covered by your investment income.
That means your housing expenses, utilities, food, transportation, and insurance. When these basic needs of life are covered by your investment income youve attained a high degree of financial security.
When your current lifestyle expenses can be met with your investment income, youve reached the point of financial independence! Congratulations!
You can choose to disconnect yourself from work if you want to. But of course you might choose not to.
The key at this stage is simply to know that its up to you!
Its possible that you have some lifestyle goals which are beyond the lifestyle youre currently living.
This might be things you desire to buy, experiences you desire to have, or philanthropic goals you wish to meet.
If so, the important thing is to clarify these goals and fund them with your investment income. At that point in time, youre truly financially free in every sense of the word.
When you reach this stage of your financial journey, youve reached the most challenging stage of all. But it can be a very enjoyable challenge!
Youve accumulated wealth beyond the amount needed to fund your own lifestyle expenses with a comfortable margin of safety.
Now you have to decide how to responsibly manage the surplus. How will you allocate it productively while you control it? And who will control it when youre done with it? How will you assure that the money is used for good and not for evil?
Its a real challenge, but its one faced by all those who have faithfully and steadily built wealth throughout their lifetimes. Its the most important stage of all.
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levels of financial independence - Radical Personal Finance
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