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The 7 levels of financial independence - where are you?

From the time we're little kids, we're taught about the importance of financial independence. Remember when you got your first bit of pocket money as a kid? Remember when you paid your first proper bill as a teenager? Remember the first time you paid rent? These are all pretty standard milestones of financial independence. Unfortunately, not everyone moves towards financial freedom at the same pace.

Some people rely on parents, siblings or a partner for income for most of their life. On the other hand, some people buy their own homes in their early 20s, or retire in their 40s.

If you feel like you're not really in control of your own spending and saving, it's important to look at why that is, and what you can do about it. The first step is working out where you're at in terms of financial independence. Then you can plan to work your way up the ladder. Below are 7 levels of financial freedom starting from 1, completely dependent, to 7, independently wealthy. Where do you fit in?

  • 1. Completely dependent
    If someone else is paying all your bills and expenses, and supplying all of your spending money, this means you're completely dependent. This was a common situation in the past, as many women would stop working and rely on their husband's income once they started a family. It's shifted now, as most women continue to work after they're married . However, younger people may be likely to rely on their parents for longer, thanks to higher unemployment amongst young people and longer average periods spent in education.
  • 2. Some money of your own
    If someone else pays all (or most of) your bills, but you earn your own spending money, this is the stage you're at. For example, if you live at home with your parents and don't pay rent (or only pay a little bit), and are free to make decisions about what you earn from work.
  • 3. Equal partners
    Are you equal partners with whoever you live with - parents, housemates or partner? Could you afford to live by yourself if you had to? If you answered 'yes' to the first question but 'no' to the second question, you're at stage 3.
  • 4. Independent on paper
    Do you live alone, comfortably covering all your expenses? Could you theoretically pay all your bills and have a bit left over if you had to move out by yourself? Then you're at stage 4. If you're not sure whether you're 'independent on paper', try making a quick budget where you deduct rough living expenses from your current income.
  • 5. Protected from emergencies
    Being able to pay your bills month to month is one thing - coping if something goes wrong is another thing altogether. Are you protected in case of an emergency? Stage 5 means knowing you'd be able to maintain your income and lifestyle if you couldn't work for a bit, or couldn't do as much work. Usually this means three main things: multiple insurances, being free of 'revolving door' debt (like credit cards you never quite pay down), and having an emergency fund. Most financial authors recommend that you build up a fund equal to at least 3 months' worth of regular expenses.
  • 6. Independent in future
    So you're independent month to month, and you're protected from emergencies - what's the next step? Stage 6 involves planning for the future. This means thinking about your retirement, and other long term goals. How much will you need to have in your super when you retire in order to have a comfortable lifestyle? Do you have that amount yet, or are you on the right track? Do you own your own home, or alternatively, will you have enough money to cope with any rent increases? These are all questions you should be able to answer positively at this stage.
  • 7. Independently wealthy
    Once you can cover your expenses, protect yourself from emergencies and plan for a secure future, the last step is growing your wealth. From here on out, it's about improving your lifestyle and perhaps being able to provide a better start for your children and grandchildren. For example, you might own a home and have a retirement plan at stage 6, but at stage 7, you might be financially independent enough to go on regular overseas trips while you're still working and when you're retired. Or, you might have enough money left over to give generously to your favourite charities.

Ready to start working up to the next stage of financial independence? Remember, you have access to Vision Super's financial advisors who can help you regardless what level you're currently in and get you climbing the independence ladder. Call us on 1300 300 820 to arrange a meeting.

 

General Advice Warning
This article includes general information and does not contain any personal advice. It is provided for general information only, to help you understand Vision Super’s products, services, policies and procedures. The information was correct at the time of publication, but may have changed since. It does not take into account your personal objectives, financial situation or needs. You should consider whether it is appropriate for you and your personal circumstances before acting on it and, if necessary, you should seek professional financial advice. Before making a decision to invest in any Vision Super product, you should read the appropriate Vision Super Product Disclosure Statement (PDS). Past performance is not an indication of future performance.
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