5 Stages of Financial Growth
I’ve decided to map out what the various stages of financial growth might look like. Most of us fall into one of the stages as shown below, at least a version of one of the stages.
Stage 1: Square One
The first stage can be depicted by either one of the following two charts. Each chart shows someone who spends everything they earn. The chart on the top shows someone who spends more than what they earn by borrowing the extra funds needed for his or her lifestyle.
To explain the charts further, the person works at his job. The job provides funds for the person’s lifestyle which in turn provides satisfaction or pleasure to the person.
Stage 2: Basic Saver
The next chart shows someone who does not spend every penny that he earns, but rather saves the money left over. Most people fall into this category including even big time savers and 401(k) participants.
Stage 3: Developing Assets & Income Streams
The third chart introduces additional assets and income streams. These might be cash flowing real estate, stocks and other investments, online business, side businesses, etc. The arrow from the person to the additional assets represents effort or work because the person is in the process of building these assets. Notice this is in addition to a “normal” job. This is currently the stage where I find myself.
Stage 4: Your Own Boss
Stage 4 represents the removal of a normal job or traditional income from the picture. This means that you are relying solely on your own ventures, your assets and income streams, to both fund your lifestyle and your long term savings. You’ve decided to devote your full energy into your own assets which is a beautiful thing.
Some people choose to jump from stage 2 to stage 4, basically quitting their job to launch their own venture in one step. I prefer to keep my job while developing other assets. This is a much lower risk, but some ventures require a larger leap. Either way, stage 4 is exciting.
Stage 5: Freedom
Stage 5 represents the removal of work or effort in order to maintain an income. As your assets develop over the previous steps and into this stage, hopefully they will become increasingly passive. Even if they are not 100% passive and require minimal maintenance (perhaps a few hours of work a week), I still consider you are stage 5 candidate.
This stage, should we be so fortunate, represents wonderful freedom, flexibility and independence.
A Few Notes
You will notice that I none of the above stages or charts indicate using long term savings to fund the lifestyle. Since I’m only in my 20s, I’m pusuing an earlier “retirement” than traditional retirement. If I plan to retire early, the goal is to not be dependent on savings but rather to build them even while retired. Long term savings is therefore used more as emergency savings or true, long term retirement funds.
The focus throughout the stages is to develop assets and income streams to eventually replace a traditional job and then to completely fund a lifestyle with minimal effort required. As I mentioned above, I am currently in stage 3, working to develop assets (such as 20smoney.com) while working on my career/job. In order to develop my assets, I’m reinvesting the revenues from this blog back into the blog in an effort to grow the blog/business. Hopefully, in a few years, I might be able to focus full time on this blog and other assets and enter stage 4.
Where do you find yourself with regards to the above 5 stages? What are you doing to progress to the next stage?