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Stages of Financial Progress

It may be helpful for someone starting life with minimal financial resources to consider four stages of financial progress.

In the beginning we are in the "financially vulnerable" stage. It is primarily marked by difficulty meeting basic needs and an inability to meet unexpected expenses. People in this stage may lack significant parental support and be part of the unskilled labor pool. Unfortunately, a significant portion of people spend their entire lives financially vulnerable. The key to advancing from the financially vulnerable phase to the financially stable phase is skilled employment.

Stage 2 is the "financially stable" phase. It is characterized by reasonable wages, accumulation of an emergency fund of 6 months of living expenses, avoidance of debt to the extent possible, and a surplus of income to invest to drive progress to Stage 3 and Stage 4.

Stage 3 is the "financially secure" phase. This is the point you become debt free and can live at least 3 years on savings and investments. The less debt you accumulate in stage 2 the quicker you advance to stage 3. In Stage 3, money is only a minor consideration in your professional decisions. 

The fourth stage is "financial independence". This is when you are debt free and can live the remainder of your life if you choose without income from work. In Stage 4, money may have little to no impact on your life decisions. 

Thinking about finances in the context of these four stages can help guide your planning and financial decisions.

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Monday, 12 November 2018

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