When people talk about financial freedom, they often mean different things. For some, it’s not having to worry about paying the bills, while for others, it’s being able to go to the moon and back.
In this post, we take a look at the different levels of financial freedom and what you can do with each of them.
Dependence
The lowest rung is the dependence stage. We were all here as children (because we depended on our parents for money), but for some, it is a reality of adult life too. We rely on other people to support us, and they have power over us.
Solvency
The next stage is “solvency”. This is where you’re just about surviving, and your income and expenses match. You don’t have much money left over for the other things that you want in life, but you can meet your obligations. For instance, a shop clerk earning $1,000 a month with $800 expenses is solvent but doesn’t have much wiggle room.
Security
The next step up is security. At this stage, you have some money in savings and an emergency fund, but you’re also actively building wealth, perhaps through investing. You’re also likely actively thinking about your financial future, if not freedom at some point down the road.
Independence
Once you reach independence, you’re in a much better position financially. Generally, people arrive here after making solid, long-term investments, using their hard-earned money. Investment income is high enough to cover your current expenses, but you still work and look for saving opportunities on sites like Compare Credit.
Independence lets you live a basic lifestyle without having to go to a job every day. It takes the pressure off and makes it easy to ride the storm when unemployment comes or recessions hit.
Freedom
Freedom is the stage that most people think about when contemplating their future wealth. They have enough money for all the basics and some luxuries solely from passive income.
Income can arrive from many non-labor sources, including stock dividends, bond repayments, interest payments, rent, and direct privately-held business income.
The majority of people who get to the financial freedom stage opt for a combination of these income sources. Once they have multiple streams of income entering their accounts, the amount of money they accumulate grows rapidly, offsetting all their regular spending.
Absolute Financial Freedom
Even when you hit the financial freedom stage, you still need to be careful in how you spend money. It’s much easier to blow through $2 million than most people realize.
However, when you reach the absolute financial freedom stage – the rarest of them all – you’re free to do pretty much whatever you want.
Most people in this category have eight-figure net worths. They spent a lot of time simply managing their wealth and ensuring that they keep it. They have finances that allow them to do pretty much whatever they want, including donating to charity, going on trips around the world, and entertaining guests. Work is only something they do if they want to do it.
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