When it comes to personal finance, building wealth and achieving financial freedom are common goals for most of us. We all know how challenging it can be to know where to start and what steps to take to achieve financial success.
But first, one crucial problem is how to know where we are and how to track our progress. How would you know that you have done it?
Setting a number in mind or comparing your net worth with your friends is one way, but it is often not the right way.
Let’s discuss a new way to get more clarity on where you are and where you want to be.
Estimated read time: 4 minutes and 05 seconds
Buckle up, here we go!
In personal finance, comparing our finances with our friends, family members, and competitors is meaningless.
Because there is too much income inequality. Nothing positive comes out of comparison. Plus, we are talking about personal finance. Everyone’s financials are different. We all like and want different things in life.
Then why compare with others on meaningless metrics like net worth, cars, etc. Instead, we should focus on ourselves. Understand more about ourselves and what we want in life.
That’s where the concept of the “7 levels of wealth” comes in – a framework that can help guide you on your financial journey and provide a roadmap for achieving financial freedom.
The 7 levels of wealth framework will help you understand where you are at present and where you want to be in the future.
Level 1 – Financial dependence
At this level, you completely depend on others for financial support and don’t have any income or assets. It’s okay to be at this level while pursuing your education.
The key to moving beyond this level is to focus on gaining skills and education that will enable you to earn an income and become financially independent.
Level 2 – Financial Solvency
At this level, you can meet your basic needs and cover your expenses without relying on your parents or debt. This may involve budgeting and living within your means. But you do not have enough money left over to save.
To move to the next level, you should improve your skills to increase your income and live within your means.
Level 3 – Financial Stability
At this level, your stress levels about money start to come down. Because you have built up a small emergency fund and have a basic understanding of personal finance principles such as budgeting and saving.
Even though you still live paycheck to paycheck, you have some savings to cover an emergency. You have purchased a good life and health insurance for financial protection.
Level 4 – Financial Security
At this level, you have a solid emergency fund, are debt-free (or manageable debt), and have started to save more money.
From this point, you can start investing your money towards your goals based on your risk tolerance. The more money you can save and invest, the faster you can reach your goals.
By doing so, you can start building wealth and securing your financial future.
At level 4, you’re happy with the safety and security money affords you. You are not worried much about getting fired from your job because of the financial stability you have built.
Level 5 – Financial Independence
At this level, after some years of consistent investing, you have built up enough passive income streams to cover your living expenses without having to work a traditional job.
This means you no longer need to work another day in this life if you choose to; you can now rely on your investments to fund your current lifestyle.
To achieve financial independence, you need to focus on building a portfolio of assets that can generate consistent, reliable income streams. This may involve starting a side hustle, investing in stocks, or purchasing rental properties.
Level 6 – Financial Flexibility
At this level, you have accumulated significant wealth. You can afford to take calculated risks, pursue your passions and interests, and enjoy a high level of financial freedom.
You no longer need to maintain your previous lifestyle. You can easily afford your preferred lifestyle. Whether it’s travelling around the world, buying luxury goods, or having unique experiences, you now have the wealth to pursue your dreams and aspirations.
This is a level many people dream about, but many never attain. Because to achieve financial flexibility, you need to focus on building wealth and diversifying your investments across different asset classes consistently.
Level 7 – Financial Abundance
At this level, you have achieved a level of financial success that allows you to make a significant impact on the world, whether through philanthropy or other forms of wealth distribution.
To achieve financial abundance, you need to focus on building a legacy that goes beyond just accumulating wealth. This may involve starting a business, having a successful investing career, or winning the lottery.
Now, what should you do?
Analyse which level you are on. Check what’s the next level and how to achieve that level.
Don’t skip a level or aim for financial flexibility or abundance directly. One level at a time. No shortcuts.
It’s worth noting that these levels are not set in stone. We didn’t add any financial number to any level because things vary depending on your circumstances and goals.
The key is to focus on building wealth in a way that aligns with your values and priorities and to constantly strive for growth and improvement.
Last, you have control only over your action. Be consistent and work smart/hard. Don’t get distracted by others’ progress or lifestyle. Focus on yours and live a beautiful life.
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