“You must gain control over your money or the lack of it will forever control you.”
Dave Ramsey
We are born vulnerable and moneyless. Our guardians are usually not broke but grown-ups don’t often confer ownership of money on newborns, for good reason. Ownership of money, whether gifted to us or earned through our efforts, comes later in life. I call this initial stage of our money journey D for “Dependence”.
After Dependence comes E for “Earning”. Most people have to work to earn money. In this stage, people earn, spend some, save the rest, and invest their savings. Why a person gets paid and why some jobs pay better are fundamental questions that I will answer in two future posts.
For those who earn, save and invest wisely, Earning is followed by F for “Financial Freedom”. In this final stage, there are no earnings, therefore no savings from earnings. Returns from investing are spent, and they are enough to cover costs until the end of life. I call this stage Financial Freedom instead of retirement because we sometimes associate retirement with an age, whereas there is no fixed age when a person achieves financial freedom.
Dependence -> Earning -> Freedom summarizes the “Journey of Wealth”. One point worth clarifying is that these stages, which are demarcated based on whether a person is earning, living on investment income etc., are not airtight compartments. Children may earn some side income, and many financially independent people continue to work for pay. The stages are a mental construct, a “thinking tool”, which helps us to understand what is important for growing wealth in each stage.
The three stages are shown in the figure below. Take a look at the actions in each stage.
The Dependence stage is about learning. What we learn determines how much we earn. You have surely noticed that some people who work long hours are paid very little. At the same time, other people seem to earn amounts so large that people wonder if it is justified. The low earners and high earners are commonly distinguished by what they learned in stage D.
Earnings often come from employment. Savings come from earnings. One cannot save more than what they earn, so the level of earning matters. How much we save not only depends on what we earn, but also on how frugal we are. It is hard to overstate the importance of frugality in building wealth. Finally, the rate of growth of our investments determines how fast we can attain financial freedom. There is an abundance of content about investing on the Internet, some helpful, some misleading, and some even illegal or predatory.
The main goal during Financial Freedom is to make it last.
The three stages are a part of a framework that allows me to simply and clearly show what we should prioritize at various points in life. Most people in the world are not rich. Too many people die before they reach Financial Freedom. I believe that by doing enough things right on the journey of wealth, many of them could have gained control over wealth. There is a basic mathematical advantage that the middle class has over the upper class that should reduce the wealth gap in a natural way. I will elaborate on this in a future post.
Thanks for reading and stay tuned for more on the topic of wealth.