Levels of financial dependence

At the very surface level of constructing a financial plan, the journey can feel linear. We begin with what we have and plan to move towards an end goal of ‘having enough’ and being financially independent. But this is not where financial planning ends; it’s just the toe-dipping beginning as we gain courage and confidence to engage more with our financial planning.

It feels linear because financial independence has always been closely associated with retirement, and retirement has been seen as our final epoch. There are not simply two stages of financial dependence; there are several, and we don’t necessarily go through them all, neither do we all end up fully financially independent.

Life is a little like snakes and ladders – we can be moving forward (upward) on our chosen path until illness, divorce, or retrenchment changes our financial dependence status. Or we may have a windfall or unexpected success that boosts us up several spaces in our plan.

The importance is not in sticking to the linear journey but in creating check-in points to mitigate stress and measure success according to our personal milestones. 

This gives us the freedom to make choices that might move us up or down a level in our financial dependence – like extending our bond to buy a larger house, or turning down a better job offer to spend more time with our family.

Understanding different levels of financial dependence helps us with the framework of our financial plan.

Dependence is where many of us start. At this level, our lifestyle depends on others for financial support. Support from parents, needing to spend more than we earn, or if our debt payments (credit cards, personal loans, student debt) exceed our income, are all common at this level.

Solvency is the ability to meet our financial commitments. We reach this level when our income exceeds our expenses and when we are no longer accumulating debt. We are fully able to support ourselves with our income.

Stability is a stage of financial dependence where we have no credit card or personal loans, have established an emergency fund, and are growing our asset base.

If we can keep growing our wealth, we will start to have free agency, meaning that we can work and live how and where we want. Typically, we will have eliminated all debt (including property loans), and have enough savings and invested assets to have the confidence to quit our job at a moment’s notice.

After this point, we now have a certain level of financial independence. We have financial security when our investment income can cover basic needs for the rest of our life. It’s not about luxury or comfort; it’s about financial security to have all the basics covered.

Full financial independence is a stage in life where we can fund our chosen standard of living for the rest of our lives. You can afford the basics and some comforts too. This is what many term as “having enough”.

Abundance is a rare stage where we have enough — and then some. We can share our wealth with others or indulge in luxury.

Remember, these are levels of financial dependence and not levels of happiness or peace of mind! They are purely a helpful way to frame where we are on our financial journey but do not make our journey wrong or right, or complete or incomplete.

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