The Five Stages of Financial Independence
The Five Stages of Financial Independence
I have talked in the past about coping with financial freedom. Once we reach the mountain top, we undergo a number of emotional changes. It is, however, a mistake to believe that the transformation only begins once we have attained our goal. In my humble opinion, there are five stages of financial independence. These stages begin with conception and meager bank accounts, and end with financial freedom and hopefully an enlightened philosophy.
The mechanics of financial independence only play a small role.
The difficulty tends to lie in the head space.
Stage 1: Discontent
This is the moment of origin. It is the point where we finally have had enough. Usually the scale is tipped by a bad day at work or the realization that the mountain of debt is about to come toppling down on us. We all have different stories, but there are some major commonalities.
Something in our lives makes us realize that we are at the bottom of the pit. There is only one way to travel.
Up.
So we scratch and claw to get a better footing. And we begin the journey.
Before we can begin the journey of the hero, we must recognize that there is a long road ahead of us.
This is discontent. This is the first of the five stages of financial independence.
Stage 2: Enlightenment
The internet is a wonderful thing. Usually stage 2 begins with some deep dive or another. Maybe it was a post from Mr. Money Mustache. Or an old copy of Your Money or Your Life. Whatever the impetus is, it pushes us to seek knowledge.
The rabbit hole is vast, but it is not deep. After a few hours of searching, the basic concepts of financial independence take root. They germinate and grow instantaneously. The despair of discontent is replaced by the hope of building. This is stage 2 of the five stages of financial independence.
It is the first taste of knowledge acquisition.
It is the light of hope in the pit of darkness.
Stage 3: Building
This may be the best stage of all. During the building stage, we are striving toward a greater goal. There is beauty in striving. We are at risk for falling prey to the money mind meld and losing track of our ultimate goals, but that’s okay.
Because it feels so good.
Savings rates are tightened. The stock market is mastered. Tax deferred accounts are bolstered. A financial plan is put in place and the end, although years off, becomes concrete.
Stage 3 of the five stages of financial independence teaches us that the destination is achievable. The path is simple although not always easy.
Stage 4: Disillusionment
And then somehow it all stops feeling so good. This may happen after financial independence finally comes into sight, or even after attaining financial freedom.
Now what?
Depression sets in when we realize that this big audacious goal is nothing more the a street sign. A goal post but not a true goal. It signifies the end of our financial journey, but the beginning of something more deep and profound.
Now that we are not bound by the indentured servitude of the W2 wage, what is our purpose?
Although it seems like a basic question, the mirage of money has spent years blocking our vision from our deeper sense of purpose, identity, and connection with the world.
The swaddle of money has been ripped off. We are a naked babe glistening in the morning sun. Now we have to decide with what meaning and identity we are going to clothe ourselves with.
Stage 5: Financial Peace
Stage 5. The final stage of the five stages of financial independence. This is the actual goal. To define who we are unchained from economic concerns. What is our life about? And what forms of work bring meaning to us?
Because we will all do some kind of work from the moment we are born to the moment we die. We just may or may not get paid for it.
This is the stage where our relationship with money finally becomes healthy. It is not a goal nor an accomplishment. It is a means to an end. A means to fulfilling our unique purpose whatever it is.
It becomes peaceful. Worries about enough fly gently in the wind away from us. Money apathy sets in.
And we are finally free.
You are correct that most journeys do start with an event that causes us to drop to the bottom of a financial pit and spur us into action. Mine was the realization of my financial predicament after a very lengthy and bitter divorce.
I was genuinely concerned I would never be able to retire at the traditional age let alone early unless I did something different.
We are very fortunate that the internet has now allowed spread of information so quickly and freely to everyone. That is the biggest advantage we have over prior generations (especially baby boomers) who had to negotiate the transition from a pension based work situation to a 401k one (and a reason why this generation is getting screwed in being prepared for retirement).
Getting to stage 5 is the goal, most people think there is no step 4 when they do it but I think the majority will definitely enter it.
Your right in that the internet makes it much easier to gain knowledge quickly.
This post is very appreciated !
Thanks!
So true DocG. I think I’m currently at stage 3. I think a pitfall is that the effort and planning of building wealth fills a lot of our bandwidth and not enough energy is allocated to determining the next step after that. And for what purpose. Once a person is FI, do they just stop striving? Do they just Netflix and chlll? FI is just a mile marker. Money is meant to be spent, not a goal.
The key is to be mindful now before you get there.
I’m past stage 3, but not at stage 4 or 5 yet. Hopefully, I’ll just skip over the disillusionment.
You know, it’s probably easier to just stay in stage 3 my whole life. Keep building.
You have a point there. i would like to think I could reach stage 5.
Manny Ross taught me neuro pathology in 1981. Manny was the Ross part of Kubler-Ross. Kubler-Ross was Swiss and proudly raised in the Calvinist tradition: WORK, WORK, WORK and when you’re done with that WORK some more. Kubler-Ross said in an interview:
In Switzerland I was educated in line with the basic premise: work work work. You are only a valuable human being if you work. This is utterly wrong. Half working, half dancing – that is the right mixture. I myself have danced and played too little.
Meet stage 1 and stage 5 in a single statement. It is at once a diagnosis and a prescription. Discontent means lack of content. A life lived in discontent will not be cured with money or financial formula. It will only be cured with content. Even if you get to 5 you won’t know how to act because of emptiness, the enslaving emptiness of work work work and then work some more. You will know peace because of a life lived in balance not because you accumulated a fat bank account. You will know peace because you danced enough. Your children will know peace because you know peace. You will not be clueless about the future, nor fear the future. You won’t be disillusioned because you never bought the illusion and you will be grateful to have missed the illusion as you see the carnage produced by that perverse distortion. Your enlightenment will be from a life well lived complete with success and failure in other words balance and nobody will be able to take it from you. Sometimes I read these blogs (not yours) and feel a sense of sadness at how wasted the underlying lives must be. How disconnected from reality while swaddled (good word by the way) in illusion controlled by none other than Google Analytics, or the latest self published tome of boiler plate which they hawk at every chance. From Ball of Confusion: rap on brother rap on…and the band played on…
I mostly skipped stage 1. I don’t remember what prompted the fateful google search that landed me on MMM but I know that I was perfectly happy and enjoying the job. Step 2 was fun. I couldn’t believe what I was reading. Mind explosions all over the place.
I’m firmly in Step 3. Step 3 is a little tougher then you let on. There is a lot of figuring out our goals, discussions about how to prioritize saving vs paying down debt vs buying a house, a smidge of envy for those ahead and a terrible amount of impatience.
I’ve been working on remembering that the journey is what is important and not the destination.
I think the last sentence says it all. Can you enjoy the journey.
Never live your life based on things you have zero control of.
Money is all relative. Seriously. All those on these blogs will never be the poorest and we all be far from the wealthiest. It really doesn’t matter.
Financial peace is a choice. Make your plans but do not limit you happiness to the attainment of some random goal. Be financially solid. You do not need to be a superstar.
You can attain financial peace at any point. Recognize all the rest is simply a process.
Focus on the more important elements of your life that money has limited utility- your relationships and your health.
I think financial peace is a choice. But many of us don’t know how to make it.
I believe I’m just beginning Stage 3 and still have my toes in Stage 2. This is a great summary of the process.
Thanks. Good luck!
When I first read this it actually bummed me out. I have been comfortably entrenched in Stage 3 for years but I’m not looking forward to the disillusionment of Stage 4. Those paychecks still feel like the first one a decade later. Deep down I know you’re right. At least peace waits for us on the other side.
Knowledge of stage 4 beforehand will make it better.
Can knowledge of stage four lessen the impact? Kinda like ripping off a band-aid fast! Ouch, then Ahhh!
Definitely. Plan for stage 4 and it won’t be so bad.