Your financial life is a journey. Each stage of wealth building comes with its own set of celebrations and challenges. Here’s a chance to measure your progress. Which level of wealth describes your financial situation and what will it take to move to the next level? Let’s unpack the 5 stages of wealth. We’ll help you understand the signs of success and potential traps you’ll find at each level.
If you want to go deeper into each stage, we talk through all of them in the corresponding Money Guy Show episode, The 5 Levels of Wealth: Which Stage of Wealth Are You At?
1. Financial Stability
This is the stage where you can pay your bills! 40% of Americans struggle to pay for basic needs, so being able to comfortably cover expenses is a great first step.
Traps to Avoid: At this stage, don’t fall into the trap of tunnel vision and only focusing on monthly payments. Now is the time to start building your emergency fund and making sure your deductibles are covered.
Indicators of Success: Developing the habit of saving money and eradicating any credit card debt are huge signs of success.
Even if you start small, these habits are exactly what will take you to the next level and give you peace of mind. Don’t be afraid to cut back, consolidate your expenses, and be savvy about how you spend your money. It will be well worth it!
2. Financial Strategy
At this stage, your army of dollar bills has a plan beyond simple cash reserves. Now is the time to make sure your money is working for you through investment tools like Roth IRAs and 401(K)s.
Traps to Avoid: Only 16% of Americans are saving more than 15% of their income each year. We believe people who are not saving at least 15% are missing a huge opportunity. Retirement saving falls on you, and The Financial Strategy stage is the time to think seriously about where your money is housed and taking advantage of compounding interest.
Indicators of Success: You know you’re on the right track at this stage when you’re saving 20-25% toward your future goals, you’re automating your financial life as much as possible, and you’re tracking your net worth each year.
3. Financial Security
At this stage, you don’t sweat the small stuff. You have confidence that your financial strategy and life are in a good place.
Traps to Avoid: Watch out for lifestyle creep. Splurging on your daily Starbucks or a nice family vacation is fantastic, but pay attention and make sure you are living within your means. Not only can overindulging cause you to slip into financial problems, it also takes the novelty out of those special purchases.
Indicators of Success: At this stage, you can spend money on small, unnecessary expenses without worrying about it. You can drink your Starbucks most mornings without question. This might be the time in life when you buy a luxury vehicle (cash or paying it off within twelve months), put that swimming pool in the backyard, or start creating memories through travel. Looking at your finances and realizing you have margin for some of your bucket list items is the beauty of this stage!
4. Financial Freedom
This is the level of wealth most people aspire to reach. At this stage, you can do what you want, when you want, how you want.
Traps to Avoid: Make sure your math is right. Don’t just assume your retirement savings are enough to support the kind of lifestyle you envision for yourself. Be honest about finding the “why” behind your work and know what you’re retiring to instead of just what you’re retiring from.
Indicators of Success: You know your army of dollar bills has worked hard enough to cover your cash flow needs. You can live the American dream of being your own boss and live with more flexibility. Try using The Millionaire Next Door formula (age x income / 10) to see how your net worth measures up (if you are under 40 check-out our formula modification in the video below). To qualify for this level of wealth, you should have a net worth double the number produced by the formula.
Reaching this milestone earns you The Millionaire Next Door title of Prodigious Accumulator of Wealth (PAW). This distinction is the point that you are considered Balance Sheet Affluent (as opposed to Income Statement Affluent, meaning high earners with low assets.) It means you have accomplished the goal of building an Army of Dollar Bills that can work as hard for you as you have over your working career. Take a deep breath and enjoy the accomplishment!
5. Financial Abundance
Money doesn’t restrict you anymore. You have additional freedom to vision plan and decide what kind of purpose and legacy you want to leave.
Traps to Avoid: At this stage, you don’t have to worry about travel expenses anymore, but don’t wait until this level to build experiences and memories. You’ll miss the journey along the way!
Indicators of Success: You’re concerned about the quality of the experience over the cost. And more importantly, you can look past yourself and focus on how to make the world a better place. How will you use your Financial Abundance for good?
Conclusion
No matter your stage of wealth, you can create strategies that will set you up for financial success and help you achieve the next level. We hope this breakdown inspires you and helps you find the right path to follow along your financial journey.
Unpack more details on each level of wealth in the corresponding Money Guy Show episode.
If you feel inspired and want to know more, watch The Money Guy Show on YouTube or listen wherever you get your podcasts.
As a financial expert with a demonstrated depth of knowledge in wealth building and financial planning, it's evident that understanding the various stages of wealth is crucial for individuals striving for financial success. The article you provided outlines five key stages of wealth, each accompanied by its own set of challenges and indicators of success. Let's break down each concept mentioned in the article:
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Financial Stability:
- Definition: This is the initial stage where individuals can comfortably pay their bills.
- Traps to Avoid: Tunnel vision and only focusing on monthly payments.
- Indicators of Success: Developing the habit of saving money, eradicating credit card debt, and building an emergency fund.
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Financial Strategy:
- Definition: At this stage, individuals move beyond basic cash reserves and start making their money work for them through investment tools like Roth IRAs and 401(K)s.
- Traps to Avoid: Not saving at least 15% of income and neglecting the opportunity for compounding interest.
- Indicators of Success: Saving 20-25% toward future goals, automating financial processes, and tracking net worth annually.
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Financial Security:
- Definition: This stage reflects confidence in one's financial strategy and life.
- Traps to Avoid: Lifestyle creep and overspending beyond means.
- Indicators of Success: Ability to spend on small, unnecessary expenses without worry, enjoying luxury purchases, and having margin for bucket list items.
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Financial Freedom:
- Definition: The level most aspire to reach, allowing individuals to do what they want, when they want, and how they want.
- Traps to Avoid: Incorrect retirement savings assumptions and not understanding the purpose behind retirement.
- Indicators of Success: Achieving a net worth double the Millionaire Next Door formula result, becoming a Prodigious Accumulator of Wealth (PAW), and enjoying flexibility and independence.
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Financial Abundance:
- Definition: The highest level where money doesn't restrict and individuals have the freedom to vision plan and decide on a purpose and legacy.
- Traps to Avoid: Waiting too long to build experiences and memories.
- Indicators of Success: Prioritizing quality experiences over cost, focusing on making a positive impact on the world, and using financial abundance for good.
In conclusion, the article emphasizes the importance of creating strategies at each stage to achieve financial success and move to the next level. It encourages viewers or readers to explore more details on each level through The Money Guy Show, available on YouTube or as a podcast. The insights provided can inspire individuals to find the right path for their financial journey.
