Generation Z and Millennials are emerging as significant catalysts for reshaping our understanding of money. The surge of fintech and novel financial technologies has heightened awareness regarding the significance of saving and investing. This, in turn, has created a greater imperative for taking charge of our financial destinies, contributing to elevated levels of financial freedom.
Despite possessing substantial financial knowledge, it appears that the newer generations are finding it increasingly challenging to sustain savings and financial stability. Is the situation deteriorating? Are inflation and job insecurity inundating us? Could it be that our expenditure is escalating, driven by a desire to showcase a “postable” lifestyle on social media?
Understanding our financial standing can be intricate. Often, we categorize ourselves as either “good” or “bad” without truly comprehending our financial level and lacking insight into how we can enhance our circumstances.
Stage 1: Full financial dependence
Individuals in this category navigate their lives on a day-to-day basis, with their primary income stemming solely from their employment. Should they encounter job loss or an unexpected financial setback, they find themselves ill-equipped to handle the situation due to a lack of savings. Frequently, members of this group resort to seeking salary advances or relying on credit cards, often resulting in accumulating debt.
This demographic also encompasses individuals with a substantial income; however, they lack comprehensive financial planning, or if they do plan, it is limited to the current month and the next. Moreover, many of them grapple with debts such as mortgages or car loans.
Living within the confines of this financial dependency level significantly elevates stress and anxiety levels among its members. Consequently, it is imperative to transition out of this situation as it not only impacts one’s financial well-being but also takes a toll on overall health.
For those currently in this predicament, we recommend taking control of expenses and exploring additional sources of income or side hustles. This proactive approach enables the creation of a savings buffer, fostering peace of mind. If indebtedness is the primary challenge, consider renegotiating the terms to achieve a more comfortable financial footing.
Stage 2: Financial solvency
This represents the baseline that everyone should strive for, and, as per the advice of some financial experts, marks the threshold where discussions about “financial wealth” become relevant. Individuals at this stage already possess a certain level of financial security, having saved an amount equivalent to 3 to 6 months’ worth of salary. While they still rely on employment to meet their financial needs, the existence of this savings cushion provides a safety net in case of unexpected events. People at this level typically have essential services, including insurance (medical, life, home), contributing to their overall peace of mind.
Reaching this milestone opens the door to considering investing their money as a means to progress to the next financial level. To achieve this, it remains crucial to maintain control over expenses and initiate the acquisition of initial assets.
Stage 3: Financial stability
Individuals at this stage recognize that the crux lies in investments rather than solely in savings.
If you find yourself at this level, you are on the path to attaining a certain degree of financial freedom. Possessing assets that generate passive income, such as rental earnings and dividends, allows for a degree of financial independence beyond your regular employment. Nevertheless, this supplementary income may not be substantial enough to facilitate a complete departure from your job and support a lifestyle without active work.
It is crucial, at this juncture, to avoid succumbing to the comfort zone. While having financial security can induce a sense of ease, it’s imperative not to forego efforts to ascend to the next level—the coveted financial freedom.
To ascend the financial hierarchy, establishing clear financial objectives becomes paramount. Envisioning your life over the next two decades is a crucial step:
- What would it be like if you maintain your current trajectory?
- How would things unfold if you persist in working diligently and investing to achieve the subsequent level of financial stability?
Set realistic and achievable goals, and take the initiative! Keep in mind the importance of diversifying your investments to mitigate reliance on a single financial avenue.
Stage 4: ‘Screw you’ money
This level stands as the objective for most financial experts. At this stage, absolute freedom reigns as passive income proves sufficient for maintaining a high standard of living. Upon attaining financial freedom, the compulsion to work diminishes, as the generated passive income covers the cost of living. Consequently, if an individual continues working post-achieving financial freedom, it is typically driven by pleasure or a sense of vocation.
For those at this level, the luxury of spending time on activities they genuinely enjoy becomes a reality without the constant worry of financial constraints. However, it’s essential to note that if your monthly expenditure totals $1000, financial freedom is reached when your investments generate an equivalent amount each month. Therefore, adjusting your monthly expenses can offer a more straightforward path to financial freedom; otherwise, a greater wealth accumulation is necessary to attain this state.
Stage 5: Financial freedom
This tier represents the pinnacle among the five, providing the freedom to pursue your true desires in life without encountering any financial constraints, as your passive income significantly surpasses the amount required for comfortable living.
At this elevated stage, you possess the financial capacity to engage in more speculative investments. The capital you put at risk is not essential for sustaining your lifestyle; hence, you can explore ventures like investing in startups or venturing into new sectors.
Achieving this level brings about a noticeable reduction in stress, given the surplus of funds beyond what is necessary for your standard of living. With ample free time, you have the flexibility to indulge in activities that align with your dream life. Sounds good, right?
Given the five levels of financial freedom, which level currently aligns with your financial situation, and which one are you aiming to achieve?