The 3 stages of financial independence

Stage 1: Birth

Goal – Self-sufficiency

  1. Baby – Your family pays for all of your expenses.
  2. Teenager – Your family pays for your living expenses, but you are able to pay for your own entertainment.
  3. Young adult – You are able to pay for 100% of your ongoing expenses without help.

Stage 2: Enlightenment

Goal – Creating and executing a plan

  1. Awakening – You’ve made it to $0 net worth (or more)!
  2. Discipline – You never borrow money for consumption goods (credit card balance) and never finance depreciating assets (vehicles)
  3. True self-reliance – You not only pay for your ongoing expenses, but you have a plan to generate income when you are unable to work that doesn’t involve selling or borrowing against assets.

Stage 3: Transformation

Goal – Transitioning from active income to passive income

  1. Potential energy – You’ve invested enough money that even if you stop making contributions, your retirement fund will grow enough by itself to hit your retirement target before you are incapable of working. You aren’t financially independent yet, but it is only a matter of time.
  2. Kinetic energy – Your retirement funds generate income equal or greater than your expenses. You’re almost there.
  3. Perpetual motion – Your annual expenses are less than 4% of your fund’s value. Your fund can pay for your living expenses indefinitely.

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