A look at the journey we all take towards financial independence. It is simple and definitely doable, but not easy-

Updated: Sep 7, 2019


We all go through different stages in life. We grow physically, psychologically, and also financially. Let us spur each other to take action towards achieving financially abundant lives.

It is however very possible to stagnate in a stage or even fall behind. Knowing in which stage you are helps you to head towards the next stage.

7 Stages of Financial Independence

Stage 0: Financial Dependence

We all start from a state where we are born financially dependent on our parents or caregivers. As we finish our studies and start bringing in income, we will then exit this stage. As responsible people moving into adulthood, we look forward to earning and living as an adult (including its perks). Sometimes though, life throws us a curve-ball in the form of a major illness, retrenchment, or financial difficulty, and suddenly we may find ourselves dependent again for a period of time on the support of others. If you are still getting pocket money from your parents or eating instant noodles almost every day, you are very likely in this stage.

Stage 1: Financial Solvency

Financial solvency is when you have enough income to pay all your ‘needs’ which are basically all your living expenses including all your monthly bills. For example, your meals are a need. But if it’s eating at chic hipster restaurants and fine dining every day, it’s not a need but a want. Another example is getting a car or public transport to get to work and about is a need versus an imported luxury car want. Indeed it is worrying in Malaysia that more and more people are living in credit card debt or being declared bankrupt even in the early 30s when easy credit leads to crazy spending on wants.

Stage 2: Financial Stability

You achieve financial stability when you save up an emergency savings, rainy day fund, or buffer account for unexpected expenses. On average, this money that you have put aside should amount to 6 months worth of life expenses. You may have more or less depending on whether you have dependents, the stability of your income, and how risk averse are you.

A simple way to ensure you start saving is to setup a monthly auto transfer once your money comes in to a not easily accessible account. The old expenses budget allocation (whether physical envelops or an app) still works really well too. Some folks even get creative saving say every RM5 they come in contact with into a savings fund and watch the money grow throughout the year.

Stage 3: Debt Freedom

You achieve debt freedom when you are fully clear of all debts. Granted that sometimes there is a dire emergency which requires money that you are unprepared for. Other than uncontrollable situations, there are generally only 3 good reasons to perhaps go into debt:-

  1. To invest in yourself for education and skills improvement purposes.
  2. To purchase a property for your own stay.
  3. To borrow money for investment leveraging purposes, provided you have done your homework and are aware of the risks involved.

Debt limits your choices and holds you back. No wonder there is an increasing number of folks in today’s debt-filled world who strive to be living fully debt free. It is a great feeling indeed to be debt free and having full freedom that you will never want to get back into debt.

Whether you are in debt or heading towards financial independence, consider engaging a Financial Planner who can help you simplify and speed up your journey while avoiding mistakes.

Stage 4: Financial Security

This is the stage when 100% of your “needs” (living expenses) can be covered from your investment income. Once you hit this stage, you will quickly be heading towards the next stage of financial independence. It takes quite a while for most Malaysians to achieve financial security, especially when the price of almost everything seems to keep going up yet our income seems stagnant in comparison.

If you are serious about financial security, you can no longer just save and hope for the best like how the older generation did in the yesteryears. Instead, make the decision to take active action to increase investment income while keeping expenses stable or reduced.

Stage 5: Financial Freedom

Financial freedom is when you’re at a financially stable stage. You feel truly blessed that you don’t lack anything you need.

Although this is listed as stage 5, you should strive to live your life at whichever point you are to be financially free by not being shackled by anything or anyone, and having the freedom to pursue your passions and spend time with the people that matter to you.

To continue on, you may choose to head towards financial independence and maybe even financial abundance. But for some Financial Freedom is all you want, and that’s fine!

Stage 6: Financial Independence

Financial independence is when all your ‘needs’ and ‘wants’ and covered by your investment/passive income. You’re at a stage that enables you to pursue any other goals, purpose or passions that you desire.

Without delving too much into the FI/RE (Financially Independent Retired Early) controversy, we look at the level of meeting all your needs AND wants to be what you define as your lifestyle as an individual. A minimum threshold though is that your investment/passive income is at least twice (200%) of your expenses.

You are fully free you to choose to not work if you so desire, to fire your boss, or to have your business run without you being involved daily. You can volunteer or work on a cause or purpose that you are passionate on without worrying about your pay. Congratulations to you if you are part of the small percentage of Malaysians and citizens of the world who are financially independent!

Stage 7: Financial Abundance

The most difficult-to-achieve yet deeply rewarding stage is to have financial abundance. You have reached a point where you have more money than you will ever need. Your focus is now on how can you make a difference in the world and leave a legacy.

The greatest joy indeed is in giving and seeing the difference that you are making in lives. Learning is a lifelong process though as you continue to have your money work hard for you and learn on how to use your resources to impact the world around you.


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