Financial freedom is a dream for many. But getting to true wealth and abundance is often a long journey with ups and downs along the way. In this detailed post, we’ll explore the seven stages of wealth building so you can find out exactly where you currently stand and what practical steps you need to take next.
Let’s start this wealth-journey together!
Stage 1: Negative Wealth
If you currently rely on government assistance, loans, credit cards or help from others just to cover basic living expenses, unfortunately you are still at stage one.
This difficult situation leaves you constantly stressed and anxious about money rather than feeling financially free. You want to get out of this nerve-wracking cycle, but it feels impossible to even save a single dollar needed to start building wealth after covering just the necessities.
The good news is there are some initial things you can start doing to progress upwards from stage one’s “in the red” status:
Create a Detailed Budget
The first vital step is to create a detailed budget tracking every dollar coming in and going out. This allows you to identity areas where you can realistically cut spending with minimal lifestyle impact. These small cuts add up allowing you to begin saving.
Some areas to look at are eating out, entertainment, monthly subscriptions, and other non-essential spending. Avoid lying to yourself that things like takeout and new gadgets are “necessities” – be brutally honest. The goal in this stage is to free up even just $50-100 per month.
Implement Frugal Living Habits
Truly adopt a “frugal living” lifestyle mentality. Cut out all unnecessary expenses possible while you build savings. This might mean temporarily sacrificing conveniences, entertainment, shopping trips etc. But this sacrifice paves the path to real long-term wealth rather than quick fun spends.
Start a Side Hustle
Another urgent priority is finding ways to increase your income. Whether through a traditional second job or side hustle gigs, you must bring in additional money to then save. Building up even small savings gives you critical initial funds to begin simple investing.
Self-Educate on Personal Finance Topics
Finally, start self-educating for free through books, blogs and YouTube channels on critical money topics like budgeting, getting out of debt, passive income streams, investing basics and long term wealth creation. Gather knowledge so you can put better money habits and strategies into action.
Stay diligent with these with these 4 steps—shift spending, increase earnings, save, self-educate. Consistently doing these sets you up to slowly progress to stage 2.
Stage 2: Self-Sufficiency
Congratulations on reaching stage 2 and achieving self-sufficiency! At this point, you’ve moved away from relying on assistance and loans for survival needs and have likely eliminated most non-mortgage debt through diligent budget cuts and extra payments.
However, money is still extremely tight and you have little savings or investments. You largely live paycheck-to paycheck without financial breathing room. About 60% of Americans remain stuck at this stressful stage merely surviving vs. strategically saving and preparing for the future.
How to Continue Onwards:
Lower Living Expenses
Living expenses are still the make or break factor determining savings ability at this stage. Find additional ways to tighten budgets whether through downsizing homes, lowering car payments or utility bills, or relocating to less expensive areas.
Every $100-200 you free up monthly dramatically accelerates wealth building power. This stage’s goal is building a starter emergency fund. So relentless trim expenses and stay laser focused on necessities.
Invest Consistently
While initial investments will be small – maybe $50-200 per month, the critical habit is developing regular ongoing investing. Whether retirement accounts, mutual funds, use automatic transfers. Making investments a normal non-negotiable bill paying priority is key.
Wealth creation starts modestly. But investing habits and compound growth rapidly build over years and decades. So now is the time to cement smart money habits even if investing amounts seem insignificant.
Avoid Debt & Practice Delayed Gratification
Avoid pulling from nascent savings or taking on new debt to purchase wants like vacations or upgraded cars. Luxury spending shockingly easily busts budgets leading right back to paycheck-to-paycheck. Practice patiently delaying gratification of luxury wants.
Stay focused on the freedom financial discipline brings long-term vs. instant fun frivolous buys stalling wealth building for years. Keep grinding!
Stage 3: Breathing Room
Huge congratulations achieving breathing room at Stage 3! You now likely have several months’ expenses saved in emergency funds, feel increased financial stability and have invested small amounts for a few years.
The key at this stage is avoiding some common costly traps ensnaring those finally achieving financial stability after years sacrificing. Watch out for:
Monthly Car or Furniture Loan Payments
The higher cash flow freedom finally allows bigger luxury purchases like brand new cars or whole-home furniture on enticing “low monthly payments”. But these 2-7 year loans can rapidly suck up much of the extra monthly savings you worked so hard to free up! Avoid these wealth traps!
Lifestyle Inflation Creep
As income increases, it’s tempting to loosen strict budgets and increase lifestyle inflation “as a reward”. But limiting lifestyle inflation increases even with more income is critical to channeling funds into further wealth building rather than more house, fancier vehicles etc. Enjoy small budget upgrades but avoid big inflation jumps stalling wealth growth.
Neglecting Ongoing Investments
Lastly, with finances finally stabilized don’t get lazy failing to increase ongoing investments! Channel a minimum of 15-20% towards retirement, mutual funds etc allowing compound growth to accelerate. Missing this window for a few years severely hampers wealth building capacity for decades.
Stage 4: Financial Stability
Achieving Stage 4 demonstrates real financial stability and wealth building habits firmly in place! Emergency funds likely cover 6+ months’ expenses allowing absorbing unexpected income losses. Monthly debts payments are low/moderate thanks to diligent debt elimination focus the past few years.
And you routinely invest 20-25% towards retirement and other brokerage funds. This financial stability provides flexibility to pivot careers, launch businesses and absorb larger financial risks – key accelerators toward stage 5 true wealth building!
Some tips to progress from Stage 4:
Pay Off Remaining Debt
Prioritize eliminating any remaining higher interest debts dragging on cash flow freedom. Especially target credit card, personal loan and car loan balances above 4-5% rates. Free up monthly income capability straight into investments.
Purchase Income Producing Real Estate
Consider purchasing a reasonably priced investment property or pursue “house hacking” options to enter real estate investing. Identify smarter strategies leveraging other’s money through mortgages rather than draining hard-earned savings. Expand money making assets!
Start Side Businesses
With finances now stabilized, pivot focus to earning more through business ownership rather than just strict budget cuts. Start a modest side business while still working full-time to test viability. Building additional income sources accelerates wealth options long term.
Avoid Wealth-Sabotaging Pitfalls
Prevent stalling financial growth by avoiding home or vehicle upgrades exceeding budget just because you finally can “afford” it. And absolutely avoid new credit card or loan debt just for luxury status symbols that add zero wealth value long term! Stay strategic!
Stage 5: Active Wealth Building
Welcome to stage 5 truly active wealth building! At this phase, your assets likely produce largely passive income. And primary jobs pour strong earned income into wealth accounts through maxed retirement contributions, brokerages and likely real estate investments.
You enjoy freedom supporting transformative career pivots, new businesses or ambitious new wealth channels because current assets and incomes comfortably run households. Congrats achieving this dream level!
Now is the time to truly leverage wealth accelerators:
Save & Invest At Least 50%
With assets humming and incomes still strong, ratchet savings rates above 50% while working. This capital enables chasing bigger passive projects like commercial real estate or angel investing in promising startups. Think bigger!
Purchase More Income Producing Assets
Keep accelerating passive revenue chasing avenues like higher return (and higher risk) private real estate investing. Or pursue more niche alternative asset classes through self-education. Bring on multiple income streams!
Avoid “Big Hat No Cattle” Syndrome Avoid splurging on lavish houses, luxury vehicles or status symbols not ultimately contributing to wealth gains just to showcase money. Stay grounded strategically investing vs. elevating spending.
Stage 6: Financial Independence
The dream is now realized – stage 6 financial independence achieved! At this monumental phase, your passive income streams generate enough for baseline living expenses freeing complete freedom from mandatory earning income roles.
You spend time as desired on passions, volunteering, or perhaps running modest side businesses 100% on your schedule. You have abundant savings and assets protecting livelihoods nearly indefinitely barring extreme worst-case economic scenarios.
This stage grants ultimate lifestyle design, location independence and flexibility in how to spend each day without concern over income requirements. Congratulations on this incredible achievement through years of persistent wealth building!
Stage 7: Abundant Wealth
The final crowning “abundant wealth” stage that only a tiny fraction will ever obtain is having over $10 million dollars producing ample income to lavishly fund literally any lifestyle imaginable.
At this phase money becomes nearly meaningless from a life needs standpoint. You can own multiple homes globally, purchase luxury vehicles on a whim, fly private without glance at bills. In short, you have financial power and freedom exceeding any potential lifestyle desires.
Achieving Stage 7 typically requires both substantial luck and relentless drive over decades. The paths are limited to:
- Building and selling an ultra-high growth, highly profitable business at the right time
- Reaching the executive elite at a Fortune 500 firm with mega compensation packages
- Pursuing uber-high risk technology or other alternative assets investments that hit a rare home run
Regardless how you may get there, Stage 7 grants life freedom at unparalleled levels.
Wrapping Up Your Wealth Building Journey
And there you have detailed walkthrough of the seven key stages of wealth building! Hopefully you now have clarity about exactly where your financial situation currently stands. More importantly, you have a tailored action plan detailing practical next steps to continue systematically building personal wealth.
I encourage you to re-read this stage relevant to you and drill down on 2-3 specific actions to take in upcoming months. Small wins consistently compound for years paving the pathway to ultimate financial freedom! You’ve got this! Now get out there are accelerate reaching the next level!
