From the book, we know that there are 7 stages to everything. There are 7 stages of grief, consisting of the flow of human emotion when they feel a sense of grief, and there are also 7 stages of life, as described by Shakespeare.
But, do you know that there are 7 stages of the financial life cycle?
As a living people, we started from somewhere, whether it’s from a rich family or poorer. Most people have to deal with the early stages of the financial life cycle, while others may achieve it since birth. Yes, it’s definitely possible.
As there’s always an end goal to everything, what’s the end goal of the financial cycle? It is bankruptcy or something way better than that? Of course, you’ll find out about it later on. Below are the 7 stages of the financial life cycle.
What are The Stages of The Financial Life?
Now, what is the importance of understanding about financial life cycle? Rather than seeing it as a condition, we’d like to consider it as a road plan. When you’re in a particular financial stage, you may need to prepare a good plan to go to the later stage.
Knowing about the financial cycle can also make it easier to understand financial freedom. It’s a kind of thing that seems to be too hard to reach for most people. But when we look at it through smaller stages, financial freedom becomes something achievable.
But, of course, before reaching financial independence, you’d have to start from somewhere. Let us see the very first financial life cycle, the total dependence.
1. Total Dependence
The first one in the stages of the financial life cycle is total dependence. People were born to be dependent, and it’s normal for everyone. This is the condition when they don’t have any income, and their daily needs are covered by someone else (hence the name dependence).
During this point, the individuals would try their best to increase their value by studying or having earlier working experience. And when they do their best effort, someone still covers their basic needs.
So for those who are receiving pocket money regularly from their parents, this is the stage where they are now. They could exit once they finally have their first continuous income.
When someone finally has a decent job to cover all his/her needs, that’s when they arrive at the solvency stage. The payment they receive monthly is enough to pay for all the bills and needs.
However, although it seems to be great, this is the stage when they first learn about wants versus needs. We’ll give two examples:
- As a living individual, you’ll need to eat something. A piece of bread is just enough for breakfast. But when you want to go to Starbucks because they have a nice place for your Instagram, that’s a want.
- You may walk or cycle to your office every day and have one of your needs covered that way. However, the moment you get a car because it’s faster and looks stylish, that’s what we call a want.
Differentiating between wants and needs is definitely essential in the solvency stage. Their habit with money would decide whether they will go to the next stage, or back to the first one.
The moment you have enough emergency funds to handle the uncertainty, you become financially stable. As you may know, the financial condition is unpredictable. A wrong turn could lead you to bankruptcy. Therefore, an emergency fund is essential to anticipate the bad things that might happen.
The ideal amount of emergency funds should be enough to cover six-month expenses. The higher the amount of emergency funds you have, the better. When your expenses, whether the predictable or unpredictable ones are covered, that’s when you’re financially stable.
The next one in the stages of the financial life cycle is debt-free. Most people have debts they need to pay regularly. They have to pay some amount of money to gradually clear their debts.
What’s concerning about this condition is the fact that debt is one of the leading factors of bankruptcy. So when you finally settle all the debts, you become debt-free. As there’s no need to pay for the debt anymore, you may use it as a savings, emergency fund, or investment. In order to reach the next stage, we highly recommend using the money for investment.
If you find it hard to deal with the financial plan regarding debts, you could always ask a financial planner who will lead you to a better financial condition. That way, you may avoid the possible mistakes while staying on your track. There are some tips you may follow as well:
5. Financially Secure
This is actually a step closer to financial independence. By being financially secure, all your expenses are covered by your passive income. If you want to learn, there are some tips to get a great passive income. You may need to have several investments that may gain some good profits.
You may use all the active income you earn for something else, like savings, investment, or preparing an even better emergency fund. The point is, as the expenses are covered, you still get the amount of money for everything you want.
6. Financial Freedom
When your investment profit is enough to cover all your monthly expenses and all the stuff you want is finally within your grasp, that’s when you reach financial freedom. This is the end goal for so many people.
This is the time when people would enjoy their retirement, spending their remaining time to the fullest. They can do anything like traveling, fishing, climbing, or any other hobby or activity they have in mind.
7. Financial Abundance
This is when all becomes too much for yourself, not in a bad way, of course. Your needs are covered by the passive income, and you basically have more money you may use for anything else. For most people, this is the moment they will pass the baton to their legacy.
They would prepare the finances for their families, and share the money they still have to make the world a better place through donations, gifts, or establishing a foundation. This is where the fulfillment of getting money is slowly replaced by pure happiness.
And those are the 7 stages of the financial life cycle. It’s really okay if you’re still stuck in the earlier stages, many people have experienced it too. Rather than being stressed about it, it’s better to think about financial freedom as a motivation.
If you make smart money decisions and know where you should place it, financial freedom will slowly become your reality.
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