Where are you at in the 7 Stages of Financial Life Cycle?

I feel lost as I reflect on the degree of financial freedom I want to achieve towards the next 5 years.

Should my passive income cover all my needs, wants and/or luxury in order to declare financial freedom or independence?

Hence, I decided to review, recap and share on the varying levels of Financial Independence Retirement Early (FIRE) based on my own understanding and definitions.

Generally, there are 7 stages in our financial life cycle.

1. Financial Dependence

When we are born, schooling and yet to work, in our childhood and adolescence days, we rely on parents for allowances. We are financially dependent on our family when we have no income in younger days.

2. Financial Solvency

Once we start work and start to have income, we are able to pay our bills and spend on things we need and want. But we may rely on the next pay cheque for next month's expenditure and paying credit card bills, living a hand to mouth life in this phase.

3. Financial Stability

We work for a few years, start to have accumulate savings, build up emergency funds for rainy days and purchase some insurance to cover our hospitalization or critical illness. We acquire skillsets, gain experience in work, climb up the corporate ladder, earning more income and contemplate switching jobs or careers.

4. Financial Security

We have cleared all or most liabilities, such as housing mortgage and car loans, attaining low to zero debt financial position. Started to invest and have some passive income, which is sufficient to cover most but not all basic living expenses. Like previous financial stability phase, we continue to acquire skillsets, gain experience in work, climb up the corporate ladder, earning more income and contemplate switching jobs or careers. FIRE is a wild dream on the cards - too near yet too far to achieve.

5. Financial Freedom

We have achieved the milestone of having passive income covering all basic needs' expenses. Being debt free, financially stable and secure, we continue to work because we want to and not because we have to. Here is the phase where we have choices and freedom to do what we want with our time. To quit job, to spend more time with family, to pursue own passions etc.

6. Financial Independence

We continue to work and/or invest to grow net worth and our passive income can cover all basic needs and expenses, plus all wants such as holiday trips and some luxury items such as branded clothes, electronic gadgets and accessories. Here is the phase where we continue to have choices and freedom to do what we want with our time, and being able to splurge on wants.

7. Financial Abundance

Owning more money than what we need. Here is the phase where our money cannot be spent finish in our lifetime and our fortunes can leave a legacy for future generations. This is the hardest phase to achieve, especially for salaried workers. This phase is usually achieved by entrepreneurs or lucky chaps who got a windfall from lottery or strike jackpot in some games of their lives.

I believe most working adults are trapped in Phase 2 to 4, with some savvy ones, who gamed on the power of compounding and investment, in Phase 5 and 6.

Personally, I am in Stage 4 and striving towards achieving Stage 5 in the next 5 years. 

Phase 7 is a dream, Phase 6 is a vision and Phase 5 is a goal which is difficult to attain, yet realistic and not impossible.

Where are you at in the 7 stages of financial life cycle?

Thank you for reading. Stay safe and be strong as always. 

With love & peace, 

Qiongster