Last night, I was pondering the subject of cash flow (essentially how money flow through our hands) and about financial well being. I played around with various visualizations that consist of income, expenses, debt, and assets. What I came up with was the 5 stages of financial health below.
I believe that all of us go through these stages at one point in time, although some may never fall into “the debt spiral” or achieve “financial freedom”. Below are the description of each stage and some suggestions on how to improve your finances if you fall into that particular category.
You are earning less than you spend, forcing you to rely on payday loans and credit cards to make ends meet. To make it worse, these debts are causing to pay fees and interest expenses that add to your already overwhelming expenses.
This is a dangerous stage to be in, and there are basically two things you can do:
Personally, I hope that you’ll pursue option #1 and work yourself toward Stage 2.
You are spending everything you earn, and you are not saving a dime. Occasionally, you’ll go hungry for a few days before your next paycheck. On the bright side, you are able to keep your debt in check…for the most part.
Certainly, this is not a great place to be in, but the good thing is that you have options. There are several things you can do at this stage:
If you could do these three things, you’ll soon be moving to Stage 3.
This is your basic middle of the road stage. Your income is greater than your expenses, you have some debt such as mortgage, car loan(s), and student loan(s) that you pay monthly, and you have a little left to save and invest. Your savings and investment may even add a little bit to your income by ways of interest payment, dividend, distribution, or even rental income.
This is not a bad place to be in. At the very least, you have a positive cash flow and are accumulating wealth. However, there are certainly things that you could do to improve your finances further:
Now on to Stage 4.
This is a build on Stage 3. You are continuing to keep your debt and expenses under control, while growing your alternative income and building up your assets by savings and investing.
You are doing well financially — however you should continue to tweak and improve various aspects of your finances wherever you can. Complacency is the enemy here…never stop looking. Key things that you could do at this point:
At this point, financial freedom is within reach. All you have to do to reach Stage 5 is stop trading your time for money — that is shift your income from active to passive sources.
You no longer have to work for money, or at least in a sense that you no longer have to work regularly for it. You don’t have to work for someone else…you work for you. At this point income from your investments and alternative sources could pay for all of your expenses and debt (if you still have any left by that time).
You worked hard to get to this point…enjoy it! However, please do consider these things:
I hope you enjoy these diagrams and the accompanying descriptions. Which financial stage best describe your finances? Do you agree or disagree with the suggestions?