There are stages of money in life. You don’t go straight from pre-school to becoming a multi-million dollar net worth financially independent person living on a yacht. On your journey from Point A to financial independence, there are many stops along the way.
Myths and Reality
One of the biggest money myths is that it’s normal to go from having nothing, including no financial education, to making it big. Life doesn’t work that way. There are stages of money and most people follow a certain order.
It’s important to recognize this because it’s easy to feel bad for yourself that you’re “not on pace” or that others are passing you by. Sometimes that leads to feeling like a failure, when the reality is you’re actually right on track with where you should be. Especially when you are improving against where you were months and years ago.
Stages of Money
These are the stages of money, and when they typically occur for people. They normally follow a linear order, but there are exceptions to every rule.
Stage 1: Someone Else Supports You
Stage one of money is pretty simple. Someone else supports you because you don’t have the ability to support yourself. Usually this stage lasts until post high school, but for some, they go to work earlier to help support the family or themselves.
And some stay in this stage for a lot longer, or in other words, “living in their parents basement.” Which of course you don’t want to be you.
Stage 2: Survival
The next stage of money is survival. That’s usually the “broke college student” or early twenty-something in their first real job. At this point, you’re just trying to scrape together enough money for food, rent, and some entertainment.
This was a really fun stage in my own life, but not very profitable. I was in a place where I didn’t need a lot, and was fine just getting by month to month. I honestly stayed in this stage longer than I needed to because of a lack of financial education.
Stage 3: Little Cushion and Almost Out of Paycheck to Paycheck
At this stage you’re starting to get a little cushion. You’re not out of the paycheck to paycheck cycle, but you are starting to make progress towards it. The person in this stage is also out of consumer debt so they are in a really good position to start building savings and long-term wealth.
For example, someone making $5,000 per month doesn’t have more than a few thousand dollars saved up, but they are getting some breathing room. Maybe they have $3,000 or $4,000 saved up and are on track to have double that in the next six months. They are consistently saving about $500 per month and will continue to do this until they have a fully funded emergency fund and are out of the paycheck to paycheck cycle.
Plus it’s important to remember that this person is consumer debt free so they are on a really good trajectory, it just might take a little time to get out of this stage.
Stage 4: Getting Ahead
The person in this next stage is really starting to get ahead. They are consumer debt free, have been saving hundreds of dollars every month and have fully funded their emergency fund. Depending on their line of work or business, their emergency fund is going to be somewhere between three to six months plus.
This person is completely out of the paycheck to paycheck cycle and can cover different types of emergencies, including major car or household repairs and even job loss. Someone in this stage has the financial runway to cover a lot of life’s unexpected happenings.
This stage is more than just the money. It’s also about the feeling of knowing you are out of the paycheck to paycheck cycle and have some autonomy over their money, job, and life choices. Having these types of funds set aside means they don’t have to panic about a major household repair or something else going wrong.
They also don’t have to stay in a job situation that they don’t like. A person in this stage has several months of runway so they are no longer reliant on a paycheck every couple weeks.
Stage 5: Investment and Wealth Building
This is the stage of money where things start to get fun. It’s the investment and wealth building stage. The person in this stage is well out of the paycheck to paycheck cycle, have an emergency fund and are in prime position to really build long-term wealth.
In my opinion, this is also the longest stage as wealth building takes a substantial amount of time for most people. Also, many people who are financially independent will intentionally continue the wealth building stage because they are enjoying doing what they do.
This is the stage where many people are in the prime of their careers and they have the money to invest regularly. After a few years, the money begins to compound and the compounding starts to really take off when investments have had multiple years to grow. Using the Rule of 72, if the average investment return is 10 percent, it would take a little over seven years for that money to double.
The sky’s the limit in this stage and you are the only one who determines how much you want to invest and how much you think you need for financial independence.
Stage 6: Preservation
In this stage of money, it’s about preservation. Or in other words, not losing what you have. There are many ways to preserve capital, such as:
- Moving higher risk investments to lower risk
- Selling a company/business and moving the proceeds to a lower risk investment
- Re-allocating more volatile assets into assets that are historically more stable
- Minimizing or eliminating debt and leverage
- More diversification of assets
In the preservation stage, you’ve already won the money game. You have enough money to be financially independent and there is no need to take a big risk like you once might have. People in this stage will continue to invest, it just looks different than in years past.
Bonus: Legacy and Giving
I don’t know if this would be considered a stage, but it’s important. And that’s legacy and giving. What do you want done with your money when you are no longer here? Do you want it all to go to your children, charity, another family member?
And how do you want to share your money now? What charities do you want your money to go to? Do you want to give directly to individuals/families rather than whole organizations? Or thinking really big, do you want to be a donor with your name on a building? You get to choose and there are no limitations
There is no set time for when you should determine your legacy, but normally it’s during your investment or preservation stage because that’s when you have the most capital. Someone just trying to get out of the paycheck to paycheck cycle isn’t too concerned with their legacy.
Giving on the other hand, never stops. Even if you have very little money, you can give your time and efforts. As you acquire more money, you can start adding money to that equation. Some choose to do both, or just pick one or the other. It really boils down to your personal choice.
Conclusion
These are the stages of money. How long you are in each stage is going to vary by your life situation and choices. There is no defined length of time that needs to be spent in each stage, it varies by individual circumstance.
Some may choose to propel their investment and wealth building stage in their early twenties so they can be financially independent earlier. Others may choose the slow and steady route and spend 25+ years in the wealth building stage.
While others with minimal to no financial education will spend most of their adult life struggling just to get out of debt, which is why I’m so passionate about teaching financial education from my mistakes and experiences.
What stage of money are you in? Are there other stages that should be added to this list?
