The steps to financial independence

You can't go from poor to rich in one step. There is no magic potion that will transform your life overnight as if by magic. You have to do it yourself. You have the opportunity to walk a path, albeit a long and winding one, that will lead you to financial independence, or even a life of abundance. 

This adventure has several stages and you have reason to celebrate each time you complete one.

Stage 0: Financial dependence

We all start from a position of dependence on others. You may be a young adult in the care of your parents. Or maybe you are facing a difficult time in your adult emptiness and need help from others.

No matter where you started from, the priority is to quickly move from dependency to financial solvency.

Step 1: Financial solvency

The first step to financial independence is becoming financially solvent. This means that you are able to support yourself, with your own income, without help from others. You are up to date on all your bills.

There are many strategies you can use depending on your starting point. This may require finding a lucrative activity for the first time in your life. You may also need to move from a modest income to a larger income. Or you may need to renegotiate your debts with your creditors.

At this point, your priority is to earn an income that is at least equal to your expenses. When that's done, you've earned a good beer.

Step 2: Financial Stability

Once you are up to date with your bills, you need to build a buffer account. Call it what you want emergency fund, reserve fund, cash reserves, savings account... the goal is the same.

Unexpected problems happen all the time. Of the opportunities arise. You will always need money at some point. If you don't have savings, you will fall behind on your bills and may even have to generate (bad) debt. Or you won't be able to take advantage of a special opportunity because you don't have the money. An emergency fund also allows you to self-insure against life's little hassles (minor medical expenses, theft, miscellaneous damages, etc.). This is always cheaper than an insurance solution.

First, start by estimating how much you need in your buffer account. Then, save. When you do, you are financially stable. And you can open a nice bottle of wine.

Step 3: NO debt

If you have debt, you'll probably want to get rid of it, at least some of it. Not all debt is created equal. You need to take some time to identify and analyze it. Make a plan to quickly pay off any debt that is holding you back from financial independence, that is, any debt that is not based on an asset that generates income (like real estate, for example).

This means getting rid of high-interest debts or long-standing arrears. It also means getting rid of consumer credit, leases or any other debt that relies on depreciation of the asset it is based on as quickly as possible. And it also means having a longer-term plan to get rid of all your other debts.

Being debt free means you can enjoy greater freedom and independence in your life. And that’s exactly what you’re looking for. When you’ve reached that point, you can pop open a nice bottle of champagne.

Step 4: Financial Security

Your long-term goal is to separate your lifestyle expenses from your income from your job. This happens when your investment income is enough to pay your expenses.

This happens little by little, as your savings grow and generate more and more income.

At the financially secure stage, you are able to cover your living expenses with your investment income. This means that you are able to cover your food, clothing, transportation, housing, utility and insurance bills through your investments.

When these basic needs of life are covered by your investment income, you have achieved a high degree of financial security. And at that point, you have earned a good meal.

Step 5: Financial independence

When all of the expenses related to your current lifestyle can be met with your investment income, you have reached the point of financial independence! Congratulations to you!

You can choose to disconnect from the professional world if you want. But you can also, of course, choose not to do it. And it is precisely this choice that changes everything and allows you to put a lot of things into perspective.

The choice is now yours. And you can celebrate it not only by taking a vacation to mark the occasion, but more importantly by living every day that comes your way.

Step 6: Financial Freedom

Maybe you have goals that extend beyond the life you currently live. These could be things you want to buy, experiences you want to have, or philanthropic goals.

If so, you need to clarify these goals and budget for them so that you can finance them with your investment income. 

At this point, you are truly financially free in every sense of the word. To mark the occasion, treat yourself, indulge in something crazy, a big trip for example. Above all, enjoy day after day this new freedom where you can do almost anything you want, whenever you want.

Step 7: Financial Abundance

When you reach this final stage of the financial quest, you have reached the most difficult stage of all. You have accumulated wealth beyond the amount needed to fund your lifestyle expenses with a comfortable margin of safety.

Now you need to decide how to responsibly manage the surplus. This is a challenge, and it can have some pitfalls. But if you’ve followed the quest for financial independence this far, building your wealth faithfully and consistently throughout your life, this shouldn’t be a problem for you.

If you have reached this stage, you will have the opportunity to celebrate your new status every day.

And you, what stage are you at?

Source: http://radicalpersonalfinance.com/finance-topics/stages-of-financial-independence/