Hello and welcome to another issue of my newsletter. Today, we go through the level of financial freedom. Wealth, like most things, has levels to it.
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Financial freedom usually means having enough savings, financial investments, and cash on hand to afford the kind of life we desire for ourselves and our families.
From the definition above, it is important to understand what every individual desire is different. For some, financial freedom is having the basics- a 3 square meal, a roof over their head, and a little more to spend. To some, it means the basic plus traveling the world at a notice call. Some it’s the ability to pay for their children’s college on and on it goes.
Financial freedom means different things for different people
There are different levels of financial freedom that everyone at some point was, is, or would be irrespective of what they want to achieve financially. These levels are:
Financial Dependence
Financial Solvency
Financial Stability
Financial Security
Financial Freedom
Financial Abundance
Financial Dependence
This is the stage most people are in when they are still in college or fresh out of college. Here your regular income isn’t enough for your living expenses. You have only so much to live on. Your regular income isn’t even able to pay off significant debt. You are merely doing the basics minus debt payment. You depend on others, your parents, relatives, and friends, maybe charity.
Financial dependence: Regular income< Living Expenses
Financial Solvency
At this stage, you’d probably gotten a job, maybe even gotten your first few promotions. You’d most likely be earning above the minimum wage. Here, your regular income is equal to your living expenses and debt repayment. At this point, you could afford a mortgage, an automobile loan too. You begin to build your credit rating.
Financial Solvency : Regular income = Living Expenses + Debt Repayment
Financial Stability
You already have probably become a mid-level manager or probably started your own business or a side hustle at this stage of financial freedom. You have enough and a lit bit more- cash buffer. Your regular income is more than your living expenses, and you have paid all (major) debts like car loans and mortgages.
Financial Stability : Regular income = Living Expenses + Extra Cash
Financial Security
This stage is quite liberating. Here you get returns from your investments - dividends, rental income, royalties, etc. to cover your living expenses. At this stage, you can decide never to work a day in your life again without having to worry about surviving. This is where you begin to thrive. However, it would help if you still were working to move to a higher stage of financial freedom.
Financial Security: Investment income = Living Expenses
Financial Independence
At this stage, you have it already. Your investment income has scaled not just living expenses, and you can afford some luxuries from it. In the previous stage, you couldn’t afford luxuries. Here, you can have some Gucci and a vacation to the Caribbeans.
Financial Independence: Investment income = Living Expenses + Some Luxuries
Financial Abundance
At this stage, you have everything on lock. Your investment income has scaled not just living expenses; you can afford anything you want, luxuries and otherwise. Here, you can have all the Gucci and vacations you want. At this stage, it’s more than just you. You’d want to engage in donations and philanthropy: building hospitals and libraries for humanity.
Financial Independence: Investment income = Living Expenses + Whatever you want
That wraps it up for this week. See you next Sunday.