The Financial Success Spectrum

As with most things in life, financial success is a spectrum on which everyone has a current position. There will always be someone who is lower on the spectrum and someone who is higher (well except for Warren Buffet I suppose!!). The good news is that our position on this spectrum is not static and that we have the potential within us to shift our position higher.

The best way to move higher up this spectrum is to understand where you currently sit and work out what steps you need to take to shift yourself up. This piece will help you understand where you currently are and give you a taste of the types of changes you need to make in your life to elevate yourself.

The financial success spectrum has five broad stages which are:

1. Financial chaos
2. Financial equilibrium
3. Financial wellness
4. Financial freedom
5. Financial abundance

You will see as you read on that moving up from one stage to the next is far more about our mindset, how we manage our money and our level of financial literacy than how much we earn.

Financial Chaos

What is it?

People in the “Chaos” stage of the financial success spectrum are those who are quite casual with money. They have little control over how much money they own, how much they spend and feel very little sense of agency over their financial position. They’re usually not very financially literate, spend money that they don’t have often getting into bad debt and may live pay check to pay check.

Bad debt is money borrowed to purchase general day to day stuff. This is different to good debt which is where one borrows money to invest in appreciating assets in a risk-managed way.

Fortunately, this is where most people start out, and many who have started here have developed themselves into financially successful people. So, if you’re here there’s no need to feel hopeless or like you’ll never be able to grow. We know that even the most financially successful people likely once started here. If they managed to progress, then you can too.

What isn't it?

People in the financial chaos stage do not necessarily earn any less from their job than people in the other stages and in fact can often earn more. It’s more about how they manage (or rather don’t manage) their money than their income that puts them in this stage of the spectrum.

How do I get to the next stage?

The first step is to believe you’re capable of progress and improvement and the second is the determination and grit to make the changes needed no matter how hard or how long it takes. Start to repay bad debts, and refrain from making purchases on credit cards or via payment plans. Unless you have the money in the bank, don’t buy it! You want to really start living within your means.

Financial Equilibrium

What is it?

People in this stage have more control over their finances and have learned to match their spending with their income. They still likely live pay check to pay check but are less likely to purchase shiny new toys on a whim with money they don’t have as they understand this can get them into trouble. Whilst they have developed this level of control over their finances, financial equilibrium people do not have sufficient financial buffers for a rainy day. These people often become financially stressed if a large unexpected bill arrives. If they lost their income-producing job they would likely feel in strife.

What isn't it?

Being in the financial equilibrium stage, again, has very little to do with how much income one earns. It’s about how they manage income and expenses, and whether they have the right financial buffers in place for a rainy day. Those without the right financial buffers belong in this stage.

How do I get to the next stage?

Again, the first step is to form the right mindset that you’re capable of the self-improvement needed to make in your life to get to the next stage. You need to build enough financial buffers to see you through unexpected times. This can look very different for different people at different life stages. For example, just a few months of savings might be enough for highly employable younger people without dependents who can switch jobs easily. But perhaps 6-12 months’ worth might be more suitable for someone with a more established and specialised career who may take longer to find new work. If you have dependents, you’ll need enough financial buffers to be able to look after them also. Insurances to protect your income are also appropriate if you have dependents. To get to the financial wellness stage, you need to have these things in place.

Financial Wellness

What is it?

Financially well people have good financial control and sufficient buffers in place to see them through rainy days, months and perhaps even a year or two. They also have a higher level of financial literacy than those lower on the financial success spectrum. However, they are still very dependent on an income producing job for survival in the longer term.

What isn't it?

Many lower on the financial success spectrum believe that people in this stage have achieved this success through luck or fortunate circumstances. However, this level of financial stability and success is earned through the right mindset and beliefs, diligence, self-control, and life habits which enable them to make the financial choices that place them into this stage. Without this backbone those who do find themselves in fortunate circumstances (e.g. inheritance or winning the lottery) will soon end up back in the Equilibrium or Chaos stage. In fact, they never left.

How do I get to the next stage?

You guessed it – it starts with the belief that you have what it takes to achieve financial freedom. There are many paths from the wellness to freedom stage. But essentially you need to find a way of earning enough passive income to cover your and your dependents’ living expenses perpetually. Whilst there are some instances where people have achieved financial freedom more quickly, for most people it can take a decade or three of focus to get here. The earlier you start the earlier you achieve it.

Financial Freedom

What is it?

Financially free people earn enough passive income to cover their living expenses, so that working for income is no longer necessary. They no longer depend on paid work as a means to survive financially.

What isn't it?

Those who are lower on the financial success spectrum often think of financially free people as folk who spend their days in cafes, shopping in malls, or watching TV whilst the money rolls in. In fact, most financially-free people fall into one of two categories. They are either retirees who have earned their time of rest, or they are hard-working people who have achieved their wealth through many years of targeted hard work. Most still continue to work hard but choose (rather than need) to do so in a field of their interest as their calling to contribute meaningfully to the world remains strong.

How do I get to the next stage?

Getting to the next stage involves laying down even more foundations so that your passive income grows beyond the minimum you need to live on. This often involves investing in appreciating assets, but there are countless other means such as perpetual incoming royalties, owning a self-sufficient business and so on.

Financial Abundance

What is it?

When your passive income exceeds your living expenses perpetually you have achieved Financial Abundance.

What isn't it?

Financial Abundance has nothing to do with having a high-income earning job. It’s all about how much money rolls in when you’re sleeping.

Next steps

Where are you on the Financial Success spectrum and where do you want to be?

Start taking steps everyday towards the direction you want to head, and one day you’ll wake up and find yourself there.