The Five Stages Of Financial Security

Conventional wisdom suggests that while money can’t buy happiness per se,  it stands in the way of a lot of peoples’ ability to be happy.

Is there a way to understand how money plays a role in making us happy or unhappy?  Is there a minimum amount we need to be happy?  Or is that formula more nebulous and complex?

This is the GoldenRule system of money and happiness…

So many of us are fixated on providing for our material needs.  And many do believe that the key to being successful, happy, stress-free, etc., is making a lot of money.  Western culture basically gauges a person’s value on their monetary net worth.

But is this fair?

Do you really need x amount of money to be happy?

If money plays a role, how much is “enough?”

I’m going to examine this by breaking down the concept of “financial success” into five basis stages.  What’s interesting is, these stages aren’t about a specific amount of money.  They are about the role money, or lack-thereof plays in your personal financial success and independence.     Where do you fit on the scale?

Level One:  True Poverty

People who cannot provide the most basic needs (food & shelter) for themselves or their family without outside assistance are at financial level one.

Level Two:  Barely Providing

The next level are those who can afford to provide their basic needs: food, shelter, clothing, and some very basic necessities like transportation.  Their income allows them to be slightly stable and take care of themselves.   But they do not have any “disposable income” to spend on anything superfluous.   And their basic needs and utilities are modest.  People at level two have vehicles, but they’re nothing special, just transportation.

Level Three:  Living With Comfortable Choices

The third level of financial independence is when you’re making enough to provide for your basic needs, with “disposable income” to some degree whereby you can put money into “non-essential” items like a new car, or pursue various hobbies and interests.

Levels 1-3 are what are called the “debt phases.”  These people often have a negative net worth, being more in debt than the value of their assets.  (Although ironically, many people at the lowest poverty level may not have enough credit to get in debt and could have a positive net worth).   Levels 1-3 are typically the scenarios where the lack of money exerts the most stress, and puts the most limitations on peoples’ happiness.

Level Four: Positive Net Worth

The forth level of financial independence is where people begin to actually become technically “financially independent.”  When their assets are greater than their liabilities, and their debt load is relatively marginal.  Level Four, however, doesn’t mean people are truly “debt free.”   People at this level can have a positive net worth, but still have debts, mortgages, student loans, etc., but lack the liquidity to nullify all their debt without selling off assets such as real estate.

Ironically, even at level 4, people are still vulnerable to unforeseen events, disasters, medical issues, accidents, etc., that can render them in even worse financial shape.

Level Five: True Financial Independence

When you have a positive net worth, and the only reason you’re carrying debt is for tax purposes, and you have the cash/liquidity to eliminate any debt on demand, you are truly financially independent.  This also means you have enough of a nest egg or savings to pad you from unforeseen situations.

You’ll notice that nowhere is there an actual monetary amount listed on these five stages.  Because actual financial success and independence has less to do with a certain amount of money, as it does debtThe degree to which a person is in debt is the real source of stress and money problems.  Because of this, it’s possible for people at virtually any income level to be at any level from 1 to 5.   And because of this, the adage, “Money can’t buy happiness” is actually true.   You can be a multi-billionaire and still be miserable and financially strapped.  Or you can be a simple age earner, who has a modest lifestyle, that lives a much more joyful and stress-free life.  It all depends on debt and the circumstances you put yourself in.