As a business we assist many clients who share a common goal – to achieve financial security and financial freedom. But to get there one must understand what it is that they’re aiming for and one must have a scorecard to track success. Working towards a goal without measuring your progress is like going on a holiday without a road map, in the end you get lost!
To help you I have designed a road map which may assist. There are 5 key financial stages which every person will be at right now. Choose the one you think you’re currently at and set a target of where you want to be. As you’ve heard me say before, if you aim at nothing you’ll hit it every time!
Remember this “what got you here, won’t get you there”. Anything is possible if you believe it is, and if you are prepared to do things differently to what you have done up to now.
Here are the 5 financial stages. Pick the one you believe you’re at right now and also select where you want to be… Good luck!
People in this category are usually living above their means as their living expenses and discretionary spend exceeds their level of income. Financial hardship can also result from of a change in personal circumstances (job loss), additions to the family, an unexpected set back, or simply living the high life without the required income to support the lifestyle.
An effective way to get to the next stage (which is Financial Stability) is to carefully analyse your current cash flows (you don’t know what you don’t know), then set a budget and stick to it!
The majority of people we come across are in this category. Their household income covers their bills, living expenses, and modest lifestyle choices such as travel and entertainment. They are also creating wealth and saving for retirement (e.g. buying property assets or other investments) as they realise that government support in retirement is not ideal. This group of people feel stable knowing that their working income will continue to fund their lifestyle, put a roof over their head, and put food on the table.
Their main fear is the unknown. The what ifs? e.g. Job loss, health set back, unexpected life changing event, and so on.
This group of people know that to be more secure (now and in retirement) they need to achieve Financial Security.
To be secure financially you need a consistent level of household income that pays your bills, living expenses, and lifestyle choices. This group also has a solid balance sheet which comprises of the family home (likely to be mortgage free or thereabouts) and own investment assets (like property) which are appreciating in value. The passive income derived from your investment assets (such as rental income) is sufficiently paying the debt associated with it and you have a strategy of how you will eliminate all the debt by the time you retire.
You feel secure knowing that your investment assets are solid and will fund your retirement in the future .
This group understands that to reach true financial freedom you need to continue to leverage your available equity and accumulate more appreciating assets (like property) that will compound more wealth over time.
This is a goal most strive to achieve but unfortunately only 5% of the population ever get to. These guys chose what they do with their time. They work if they want to work (perhaps part-time as a way of keeping their brain ticking), they go on holidays when they chose to, they live without fear of where the next pay cheque is coming from. They have accumulated a portfolio of assets (like property) over a period of time and the passive income (like rent) from their investments is sufficient to fund their desired lifestyle, pay the household bills, put food on the table for their family, travel when they want and where they want, without having to exchange their time for money.
If you’re one of the guys to have made it to this category, chances are you have learnt many valuable lessons which may be the catalyst to drive you to achieve the next stage beyond financial freedom.
These guys usually own significant businesses, and/or they are sophisticated investors, or property moguls who started investing a very long time ago. Business owners mastered the art of leverage, using a formula that works and they multiplied it. Investors discovered the power of compounding long ago and bought quality assets and held onto them. The income this group derives from their businesses or investments is not only sufficient to fund their lifestyle, but they also buy toys they desire. They are usually very giving and help family and the less fortunate. They are proud to know that their legacy will live on long after they depart from this life.
This is the pinnacle of financial success and is usually a result of hard work, sheer determination, taking calculated risks, and just having a red hot go at life.
In closing I’ll leave you with one message. Financial freedom or financial success is different for everyone!
In my view, being financially free means to be comfortable within your own means. One million dollars in net assets may be plenty for one person, but for someone else it may be just the start. Whatever stage you’re aiming for, be content with what it means for you and your family. If you achieve a certain level and you feel you have more to learn and grow as a person, then have a red hot go as you can achieve whatever you want in life, as long as you believe it.
Money is a score but don’t let it distort your journey and lifes’ pleasures!
Disclaimer: The above information and definitions are the opinion of the writer only and are written without judgement. You should consult your financial adviser before determining if this strategy suits you.