Most Americans feel underprepared for the realities of financial freedom.
Of course, this lifestyle of postponing the consequences of poor financial decisions is beginning to have an effect.
According to a 2018 study conducted by Northwestern Mutual, nearly 8 in 10 (78%) Americans are "extremely" or "somewhat" concerned about affording a comfortable retirement while two-thirds believe there is some likelihood of outliving retirement savings.
These fears of financial servitude are substantiated by further data highlighting dramatic savings shortfalls and ebbing confidence in social safety nets. To many, achieving financial freedom is a utopia that they would never realize in their lifetime.
To reach true financial freedom, you usually need a plan to get there. Thinking of financial independence in bite-size stages makes the goal more achievable and realistic. It also makes the journey less overwhelming and measurable.
This article highlights the 8 levels of financial freedom that you can use to track your progress. Let's have a look at them below
The Dependence stage is where we all begin, as children, depending on our support systems and with no financial freedom of our own. In this stage, you are financially dependent on the help of others and can not survive unassisted for great periods.
The second stage is when reality begins to set in and you begin to ponder how to make a headway financially.
For some, this stage comes much earlier through education, hardship, or difficult life situations. For others, it comes much later because they have the safety net of parents, remittances from a trust, or plain old irresponsibility.
At this stage, you take stock of your financial situation — how much money you have, how much you owe, and what your goals are.
This is one step up from being dependent and when you begin to undergo the rite of passage towards financial freedom.
At this stage, you are beginning to stand on your own two feet, financially speaking. This means earning enough to cover your expenses without any outside help, such as contributions from your parents.
This level is attained once you can pay your bills, start decreasing your debt and save some money.
People at Level 4 have money left over after living expenses that they can put toward goals such as building an emergency fund and investing for retirement. Getting to this level implies that you have some means of financial leeway.
A common assumption most people have about getting to this stage is that you need to earn a bigger paycheck.
This is false.
Just because one makes a lot of money doesn’t mean they would be able to optimize their earnings. 64% of working Americans making over $100,000 live paycheck-to-paycheck, due to rising inflation. So it boils down to how well you can manage your money and curtail unnecessary expenses.
Those who have attained this level can live a comfortable lifestyle.
You are not worried if you lose your job or if you have to move to a different city - but you still have to budget and plan.
At this stage, you probably have paid down most (if not all) of your debt and built up an emergency fund worth at least 6 months' living expenses.
This is where you begin to build your wealth or chase other financial goals because you have a stable financial situation and can meet your necessities without hassles. As such, people at this stage accumulate wealth through investing, buying up real estate, or saving for their kids' college.
People at Level 6 have at least two years’ worth of living expenses saved.
With those kinds of savings. You can think about your money in terms of the time it can buy you. You could take a year off from your job if you wanted to. Have regular overseas holidays, invest in a holiday home, and can live a comfortable life with extra luxuries.
However, this is where people are ensnared by the trappings of their financial situation and tend to mismanage their finances. This is done by overindulging and trying to keep up with the Joneses.
Even though your financial situation affords you some flexibility in terms of work and time, you must keep your eyes on the prize. At this stage, you must live well below your means.
At this stage rather than work for money, your money begins to work for you.
People who have attained this stage can solely live off the income generated from their investments, cash flow from business ventures, or a hybrid of the two. Now you are beginning to see the compounding effects of your savings and investments.
People at this stage are no longer interested in the rat race, but in achieving higher idealist goals such as starting a charity, traveling the world, developing their hobbies, etc.
This is probably the most exclusive level of financial freedom.
At this stage, you have accumulated so much money that you would not be able to spend it all in your lifetime. You have more than enough to meet your basic necessities and luxuries. Even if you went on a spending spree buying planes, yachts and automobiles; you would still have a hard time spending all of it.
This exclusive group will likely be filled with people who either won the lottery, inherited a fortune, or are founders of companies – think Bill Gates, Elon Musk, or Warren Buffett.
Having more money than you expected to spend is great. Building enough wealth so that you could not possibly spend all of it is another. Those at this level usually intend to give more to a charity or an altruistic cause.
As the phrase goes, planning for financial independence is a marathon, not a sprint. Breaking down your financial independence objectives into smaller segments will help you stay on target while also making the process more manageable and, ideally, less stressful. The most essential thing is to begin, no matter how modest.
While in the trenches of attaining financial independence, it is important that you keep your eyes on the bigger goals. It is easy to get distracted or weary, and relapse into what every everyone is doing. But if you want to achieve exceptional results in your finances, you have to be steadfast in working towards your goals.
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