Money is a tool. You must always remember that rule if you want to achieve financial independence. And to achieve financial independence, you must climb the levels of wealth.
There are five levels of wealth and it could take years for you to achieve your goals.
The 5 Levels of Wealth
The 5 levels of wealth include:
- Financial Stability
- Financial Strategy
- Financial Security
- Financial Freedom
- Financial Abundance
Yes, you should ascend each level of wealth in order. You must do that to appreciate how far you have come and how far you still need to go.
Levels of Wealth 1 – Financial Stability
The first level of wealth is to learn how to maintain financial stability.
Before we get into that, let’s first explain the opposite of financial stability. After all, financial instability is the most correct way that most Americans view the state of their personal finances.
Over 40% of Americans are so financially adrift that they couldn’t produce $400 to cover a $400 financial emergency that manifested itself. This is according to a recent Federal Reserve study.
Another 27% of Americans said that they would need to sell personal items or borrow money to cover a spontaneous $400 emergency.
This is no way to live life, especially if you are responsible for a family. If most people can’t come up with $400 to cover an emergency, then they are probably barely paying their bills.
The first level of wealth acquisition, financial stability, demands that you start learning to become debt-free.
Start saving more money than you spend. The amount does not matter as much as the action. It is better to save $15 today than to owe it tomorrow.
Don’t just focus on your monthly bills. Think about strategies to gradually reduce and then eliminate your debts.
If your debt-to-income ratio is over 40%, then you could spend a lifetime paying debts instead of saving money.
After you pay down your debts, develop an emergency fund. Start it with $1 if need be and reliably add to it.
Some experts believe that you should always have $2,500 to $15,000 in an emergency depending on your income.
Develop a personal budget and stick to it. Make a record of your weekly and monthly purchases and cull nonessential purchases from shopping lists. Learn to differentiate between, “want,” and, “need.”
Level 2 – Financial Strategy
While it is all fine and good to start saving money, it’s good to have a realistic strategy relative to your own personal circumstances.
In the levels of wealth, the second level is financial strategy. As in, you need a financial strategy to learn how to optimize saving money to the fullest advantage.
You need to save money, but saving money is not enough. You need to start making your money work for you via investments.
Only about 16% of Americans save about 15% of their income. About 20% only save about 5% of what they make.
Almost 70% of Americans have less than $1,000 saved in a savings account.
If you can master the art of need v. want in your budget, you should aim to start saving between 20% to 25% of your income.
Even if you have a good nest egg saved, you need a good financial strategy to grow your money as you age.
Think about contributing part of your income into a good Roth IRA or a 401(k)-retirement plan. With a Roth IRA, your contributions could be matched by an employer and your qualified withdrawals are tax-free.
This is also the time to start value investing in companies and stocks after thoughtful research. Look for investments that aren’t recognized by others and which are likely to offer reliable returns.
It takes time to learn how to invest wisely – don’t rush into it.
This is also the time to start thinking about launching a business.
You should also be tracking your financial status weekly, monthly, annually, and as situations demand.
Level 3 – Financial Security
Of the 5 levels of wealth, most people can’t wait to get to this stage – financial security.
However, a prime requirement of financial security is to always be financially vigilant of your finances. Financial security isn’t a goal – it’s a lifelong journey.
If you have a business, think about creating several income streams. That is a great way to become wealthy and stay wealthy.
Don’t get lost in financial materialism. Owning 2 Maybach vehicles doesn’t make you rich – being financially independent makes you rich.
Getting lost in materialism could cause you to fall into debt. When you are financially secure, there is no reason to go backward.
Remember – money is a tool. When you have enough money in life, you have more options to do what you want or need.
That is financial security.
Level 4 – Financial Freedom
When talking about levels of wealth, financial freedom sounds like what it is – having the financial freedom to do what you want.
As long as you watch your finances, get a Maybach or personal jet if you want. Just always consider need over want.
There are even wealth calculators that can help you calculate if you are wealthy relative to your aspirations. It is based on the book The Millionaire Next Door.
It’s a great book that explains that most people go about attaining wealth in misguided ways.
The average millionaire is not a celebrity – they are usually a dentist or restauranteur, hence the title.
It’s important to pay attention to your finances to enjoy financial freedom so you don’t lose it.
Level 5 – Financial Abundance
In the levels of wealth, this is the level where you have so much money that you can just do whatever you want.
This is the level commensurate to Scrooge McDuck jumping into a pool full of gold coins just for the hell of it.
However, even if you achieve financial abundance you should still be thinking about financial security.
Always remember that money is a tool that gives you life options. Even if you are awash in financial abundance, you should always strategize how to keep it and make more.
Financial Independence, and the Levels of Wealth, is a Life Journey
If there is one idea I want to stress, it’s that financial independence is a lifelong journey.
Money is a tool to ensure you have options in life.
Being wealthy is not about lighting Cuban cigars with a $100 bill – it’s about being financially independent and staying that way.
Always remember that maxim as you climb the levels of wealth.
Read More
Millionaire Next Door Formula for Wealth Acquisition
How Many Hours Do Millionaires Work?
How Can I Become a Millionaire With No Money?
What Jobs Do Most Millionaires Have?
How Much Does $1 Million Weigh?
Review: The Millionaire Next Door
Here Are The Best Laptops For Trading Stocks
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.