We take for granted that there are stages of our lives we each go through, such as childhood, youth, middle-aged and elderly. So it is with our financial life, which also has, or should have, at least four major stages. Not everyone completes all four, but each of us should be aware of what those stages are, what is required to reach them, and the financial goals we should be pursuing at each stage.
Stage One – Survival
Most of us have been in this simplest financial stage at some point in our lives. In fact, some people never leave it. For many this is often the beginning stage of financial life, when we are first starting out and trying to make it in the world of money. The focus of this first phase is to put together the financial means to be able to survive in the world without enduring major hardships. These are the key components of attaining Stage One financial security:
- You should be carrying no credit debt from month to month.
- You should have enough money in the bank to be able to pay all your household expenses for one month if you suddenly lost your job.
- You should have a term life insurance policy equal to ten times your yearly income.
- You should have an affordable household budget that you maintain on a monthly basis with consistency.
If you are having trouble attaining all of the goals of Stage One, it is probably because you need to spend less, earn more or both. With proper discipline, you should be able to reform your finances in order reach these goals and to move up to Stage Two.
Stage Two – Stability
At the end of Stage One you are doing okay, but your financial position would still be endangered by things like a sudden job loss or another unexpected cause of fiscal stress. Your goal in Stage Two is to enhance your financial position enough to give yourself some sense of security and financial stability that can be maintained in the face of the normal kinds of adversity that typically occur in most people’s lives. You still won’t be rich, or even really financially secure, but you will at least have some reasonable short-term financial security and have laid the foundation for building further success. To complete Stage Two, you should:
- Increase your savings until you could pay all your household expenses for three months without any income if need be.
- Your student loans have been paid off.
- You have created a will or trust for your loved one’s financial security.
- You have started a retirement account and are making contributions every payday.
The goals in Stage Two are more long term and may take more time to achieve than the goals in Stage One. Yet, attaining them will create the financial bedrock upon which the attainment of Stage Three of your financial journey will be built.
Stage Three – Upward Mobility
The first two stages required primarily discipline and hard work. Both of these traits are also required in Stage Three, but now you want to direct your fiscal energy specifically on removing the remaining barriers to your financial freedom. This means directing your focus on these three goals, which when achieved will leave you free of most of your remaining financial burdens:
- Raising your retirement account contributions to whatever level is needed to ensure that you have whatever you need in order to continue to live your current lifestyle, assuming that you stop working in your early 60′s.
- In addition to what you are putting into your retirement fund, you are saving between 20 and 25 percent of all the money you earn to use for investments in stocks, bonds and other income generating activities.
- You own your car free and clear with no car payments.
Don’t focus too much at this stage on what the actual sums of money you are dealing with are. Your retirement goals can be quite limited, provided it covers a lifestyle you are comfortable with. Your savings rate can be restrained if your expenses are firmly under control and your car can be quite modest as long as it is paid off. The goal is to keep moving forward and upward, whether it be fast or slow.
Stage Four – Financial Freedom
The final financial stage to which we all aspire is one where financial issues are no longer a major concern. Ideally, at this stage you should not only be making money, but actually giving some of it away to the people and causes you find worthy of your charity. But before you can attain that level of financial freedom, you need to accomplish the following goals:
- Get that mortgage off your back by paying off your home.
- Your retirement plan is fully funded and available whenever you decide you need it.
- Your money from investments is enough to survive on without holding a job. You now work as much or as little as you want to.
- Begin to do serious research into what people, causes or organizations could potentially prove worthy of your generosity, then begin budgeting whatever portion of your income you are comfortable with towards a charitable giving plan.
We are all unique individuals, so one person’s vision of financial success is likely to be different from another person’s in some important details. But whatever your fiscal dreams may be, you must complete all four of the financial stages of life to fully attain them. How quickly and by what exact means you move through those stages will vary depending upon your specific circumstances. Yet, with discipline, determination and a focus on the specific goals required of each financial phase, you too can one day arrive in the wonderful realm of complete financial freedom.
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