Which level of wealth are you at?
If you are able to answer this question, you will probably know how stable your current finance is, and how far you can reach the level of financial freedom. This article is going together with you to find out the answer, so stay focused!
There are 4 levels of wealth. After learning this, you should determine which level you want to achieve for your life, and take action.
#1: Financial stability
This is the lowest level of wealth. This can be determined when you have enough cash in your bank account in order to meet your needs at least 6 months. Plus, you have a health insurance. Reaching this level means you are able to supply your needs within 6 months without any income. This has become significantly important during the pandemic, and not everyone realizes that. To check if you have reached this level, follow the instruction of the image.
#2: Financial security
After reaching level 1, you should aim to be financially secured. This means you have enough passive income (cash flow assets that you own and do not participate actively to earn it) to cover your most basic expenses in a year. You should list down and calculate the total monthly basic expenses, and then multiply them by 12 months:
This is similar to the idea of section “Expenses” in your Income Statement. The result is the passive income that you must have to supply your needs within 12 months without a job. If your current passive income is at least equal to your 12-month basic expenses, congratulations, you are financially safe! Examples of passive income are bank interest, investment, home-made food selling, book writing, etc.
#3: Financial freedom
Enjoying this level is almost everyone’s dream. What does it mean? Financial freedom requires you to have enough passive income to support your current lifestyle, so basically you can enjoy life more than your basic needs without working. In order to know if you have achieved this level, calculate your total current expenses annually, meaning every expenses occurred in your daily life in a year. That number is your target passive income to become financially free.
#4: Financial abundance
Finally, we come to the final level of wealth. I guess you can imagine what is needed to be at this level…Correctly! You need to have enough passive income to sustain your desired lifestyle. If you want to have a villa with a beach view, a fancy swimming pool and some fancy branded cars. If you wish to provide your children with the best education, this is where you can do that. However, it would take such a long time, but nothing is impossible! Don’t take example of some celebrities because they become rich fast. Reaching this level and other levels also means you should know how to keep your assets, so that is more valuable to remember. To become financially abundant, your passive income should be at least equal to your expenses of a desired lifestyle.
The first principle of all the levels is “INVESTMENT”. It is always worth investing in gaining knowledge and enhancing skills. From that foundation, you are equipped to create or expand your passive income via stock/mutual funds investment, or your own products which fill the gap in the market needs. Warren Buffett did say “Risk comes from not knowing what you’re doing”, so as long as you understand what you are going to do, it is not a risk. You just have to start instead of waiting for an opportunity. The second principle is “SPEND < EARN”. Read my post about managing your finance effectively for more information.
So at which level you are in now? Share in comment or via social media.
Please don’t hesitate to share this very useful information for those needing insights on personal finance!
bcrc · 22 September 2021 at 10:29 am
The article is very useful for determining ways of reaching desired financial goals.
Is your goal to have a better understanding of your personal finance situation and the finance management? You can calculate your monthly needed income by keeping records in Excel on expenses and desired savings. If you do it it regularly, you will be able to manage your personal finance in a better way and to grow your financial stability.
C-137 · 24 September 2021 at 2:17 pm
Very useful article on understanding where you currently stand on a financial level, and know on which area you can set new goals for yourself. I enjoy the writing style too!