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The 11 Stages of Wealth: Which Stage of Wealth are You at?

Updated Sep 2017: A lot of friends and family like this stage of wealth to let them know whether they are improving their wealth progressively. However, the problem for them is that after they achieved Debt Freedom, there is a chasm between Debt Freedom and the next higher rung, Financial Security. In this update, I provide 3 more stages that you can aim for in your progression to financial freedom.

Updated Aug 2018: I have not updated any stages, but I have shared my thoughts on some stages that might fit for you, but not for everyone. Theses are Freedom from Employer, Flexible Financial Independence, Half Financial Independence.

Updated Oct 2020: I gave a talk a day ago and decided to update the article on thoughts on some of the stages.

This morning, my colleague and myself conducted an internal webinar open to the children of clients.

We wanted to do something like this because their parents most likely want them to start off their adult journey in life with a solid foundation.

In our preparation, we did a survey among the millennials aged 19 to 34 on a few things.

One of the questions we asked was their motivation to pick up this kind of financial stuff.

There were a couple of things surprising.

The first one was how much they wish to be “independent” from the grips of financial advisers. I was surprise by the level of distrust they had for financial advisers.

The second was the number who wish to attain financial freedom. Times have changed. If this was 10 years ago, I can quite confirm that not many of us would know this concept call financial freedom so well.

But I think this financial concept have been bandied around in the media enough such that more people are interested.

Financial Freedom is a Very Appealing Financial Goal But…

This financial goal may also be very far out for someone who has just started climbing the corporate ladder.

When your income is lower, it might be a bit difficult to envision where your income would climb to.

There is a reason why many are not motivated to save for retirement. The goal is so far away, the sum of money required is so extensive that you wonder why would you save for something so far away when you can give yourself a better life by spending the money today.

Perhaps, it is better to have smaller, achievable, challenging goals.

While challenging, it will be much more motivating if the goal is somewhat relatable and reachable.

It would be even better if upon reaching these milestones, it signifies certain utility in your life.

Money can be Very Useful Even without Attaining Financial Freedom

Money can be very helpful to your life even if the amount of money you have is not able to create a recurring passive income.

For example, if you have accumulated 5 years of annual expense, that gives you a lot of optionalities.

While the money does not last you forever, if you are trap in an industry that you do not like, that is enough money for you to risk a career transition into another industry.

Presenting The 11 Stages of Wealth

I first created this 11 stages of wealth 3 years ago.

I wasn’t the original creator of this set of milestones. Joshua Sheats from Radical Personal Finance formalize these stages and there is no reason to take and change it when they describe the progression very well. Over time, a few other financial bloggers have their take on this including JD Roth, FI180, and Morgan Housel.

The 11 stages let you identify the level of wealth you have attain.

Each stage either

  1. Gives you some level of psychological freedom
  2. Your level of wealth provides certain level of immediate use

You should aim to level up to a further stage.

The higher you go, the more useful your wealth would be.

10 Stages of Wealth | Financial Security | Financial Independence | Financial Freedom

Let us go through these stages one by one.

Stage 0: Financial Dependent

A person who is financial dependent simply have a lot of baggage.

Firstly, he or she has to depend on others for survival, for extravagant things, or to take care of daily expenses.

A Financially Dependent person has a negative net worth meaning the assets that he has is less than the liabilities.

Let me explain briefly what is net worth. The following is how you calculate net worth:

Net Worth (Equity) = Assets – Liabilities

Net Worth is usually what we use to determine if a person or entity is in good financial shape.

The Assets are the stuff that:

  1. Produces current cash flow or potential to produce future cash flow. You as human capital, investments, savings, insurance savings, investment bonds, and properties are some examples
  2. Have a value that you can sell off in exchange for money. The value will depend on how much people are willing to pay for it now. This can be whatever value that is left of the car, the home, your stamp collection, your collectibles, your gold, and silver coins

The Liabilities are

  1. Mortgage Debts that are outstanding you took on your home
  2. Mortgage Debts that is outstanding that you took on your investment properties
  3. Debts that you borrowed as part of a leveraged insurance savings plan
  4. Credit Card Debts that you have outstanding
  5. Unsecured Debts that you borrow from a money lending agency (legal or not legal)
  6. Debts that you borrow from family members, friends, and relatives
  7. Debts on the purchase of your car

A Financially Dependent person has to borrow consistently from banks, institutions, friends, and family for the lifestyle that he or she lives.

You might see him always driving the newest cars, switching from an HDB flat to a condo, and bringing his family to European holidays for 3 years in a row.

If you assess his net worth it might be a different story.

Secondly, a financially dependent person is unable to keep his cash outflows below his cash inflows. In other words, a financial dependent person have a negative net cash flow.

Net cash flow is calculated as:

Net Cash Flow = Cash Inflow – Cash Outflow

Cash Inflow is:

  1. Disposable Income
  2. Dividend Income from Dividend Stocks
  3. Business Income from Side Businesses
  4. Interest Income from bank savings, deposits
  5. Cash Payout from insurance savings endowments
  6. Systematic annual selling of investment assets

Cash Outflow is:

  1. Basic Survival Expenses. These are the expenses that without them, you and your family can’t survive well
  2. Rich Living Expenses. These are the expenses that you do not need to survive but they make your life feel RICH
  3. Repayments for Liabilities

A Financially Dependent person is likely to have a net cash flow that is negative.

How can a person spend out more than he or she earns?

You can do that by borrowing from others.

You can get your family to pay for your house or give you an allowance. The latter is a good situation to be in.

They are dependent on friends and family members.

When you are dependent on others, the person has some hold over you.

In this case, they are your friends, boss, company, and the banks. If they are not happy about something, they can push that situation to you to create stress in your life.

Can a person be having a positive net worth yet net cash flow negative?

Yes. The person may have assets that are of value, but his family members are servicing his assets.

He may also have lost his job, move on to a lower-paying position, but still keeping his cars and big house, but having a very problematic time servicing his home.

Can a person be having a negative net worth yet net cash flow positive?

Yes. The person owes some debt, but he is keeping within payment which is a good thing. The person may be making a conscious effort to pay down the debt or to build up the assets.

He could be taking on debt for studies so that he can earn more in the future.

These are good debts.

But is the person dependent on banks or family members at this point? Likely yes.

Financially Dependent can be good or can be bad, we are not demonizing people at this stage. It depends very much on what the person builds up in his assets.

Related: Read my Comprehensive Guide to Your Personal Net Worth Statement and Your Personal Cash Flow Statement

Stage 1: Financial Solvency

If a financially dependent person proceeds to improve in how he or she manages the wealth, they become Financially Solvent.

When they achieve Financial Solvency:

  1. Their net worth can still be negative, but they stop taking on more money from unsecured lending, friends and relatives, or parents
  2. They are not behind on their liabilities payments. This means their net cash flow is positive.

A person that is financially dependent and progress to this stage shows either higher motivation, a change of their money beliefs and values, a more conducive environment that assisted them to realize they need to be more responsible.

The main benefit a financial solvent person gets is the freedom from the anxiety that comes from being behind on his or her bill payments. This is a psychological benefit.

If you owe people money, yet do not have the cash flow to pay, you may have to exercise extra discretion to avoid certain people that you owe money to. It might be okay for a while but as time passes, this will become taxing on your family and you.

As their net cash flow is positive, they can start putting money away to building wealth, paying down more debts, or saving for some goals.

Stage 2: Financial Stability

A person proceeds to achieve Financial Stability when they manage to build up some emergency funds.

A person’s emergency fund is more important than paying off all his or her debts.

Without the emergency fund, a financially solvent person would be paying off his debts with all his net cash flows and one hospital emergency, and he would have to turn to his credit card or other family members for help.

An emergency fund of $3000 helps a lot, even if it is not the full amount we usually recommend.

To find out how an emergency fund works and how to build it up, you can read this comprehensive guide that I wrote.

A person that achieves Financial Stability tends to have achieved Financial Solvency as well.

Stage 3: Debt Freedom

Debt Freedom is achieved when a person is able to pay off all his or her debts.

That seems drastic because, for most people, their mortgage is 25 to 30 years, which means that it will take a long time to be free from debt.

However, we tend to consider Debt Freedom to be achieved when the person paid off all their high-interest debt EXCEPT mortgage debt.

Mortgage debt due to the duration and that the banks can foreclose and sell off your place, tend to have the lowest interest, and essentially a dwelling is important to some for stable family building.

A person that achieves Debt Freedom tends to have achieved the previous 2 stages as well.

Stage 4: Accumulated 1 Year Worth of Annual Expenses

You have cleared most of your outstanding debt that is high interest, leaving you with the low-interest mortgage debt.

It is time to start accumulating wealth.

You can follow my Wealthy Formula.This is the formula for how most people build wealth. The gurus you encountered will say the same thing.

The first milestone in wealth accumulation is to accumulate 1 year of annual expenses.

It is made popular in the urban culture of having $X so that you can fire your boss, tell your company off.

Basically, you have more control over your situation versus when you are a slave to debt and your job.

Suppose last year, you spend about $25,000/yr in expenses.

The first wealth accumulation is to build up this $25,000.

Once you attained this, you have a little optionality. Suppose you think there is much more to your capacity if you leave this job and focus on a separate work domain.

You can make this fork because you are alright for one year.

Stage 5: Accumulated 5 Years Worth of Annual Expenses

This is similar to Stage 4, but you have build up 5 years worth of annual expenses.

Suppose your annual expenses still hovers around $25,000/yr. If you achieve $125,000, you might be able to take that sabbatical for 2 years, then come back to work.

Alternatively, it can be viewed as you got a 5-year extension to make some life or work projects work.

Stage 6: Accumulated 10 Years Worth of Annual Expenses

Stage 6 builds upon stages 4 and 5.

At stage 6, you would have accumulated a larger sum than the previous stages. You will try to build up 10 years of your annual expenses.

Suppose your annual expenses hovers around $25,000/yr. If you build up to $250,000, you have ample room to maneuver.

The difference between this stage 6 and the next stage (stage 7) is that stage 7 requires your wealth machine to provide cash flow while leaving the capital intact, stage 6 looks as though you will spend down your principal capital.

10 years of annual expenses are much synonymous with a couple building up money so that one spouse can be a stay at home mom for 10 years.

Stage 7: Financial Security

As you accumulate wealth, your wealth can be put into financial assets that you can manage competently.

We call this your Wealth Machines.

When the person develops these Wealth Machines, their wealth fund would grow and be able to distribute wealth cash flow either by selling off assets systematically or in the form of interest income, dividend income, business income.

Financial Security is reached when your Wealth Machine(s) is able to provide a wealth cash flow that is greater than your annual essential expenses.

Your essential expenses are not all your current expenses. Your essential expenses are the bare minimum goods and services that you need in order for your family to function at the bare minimum level.

There are no luxuries or items for rich living here.

For example, your annual expenses are $25,000/yr. However, out of this $25,000, your essential expenses are $14,000/yr.

If your wealth machine can provide a rate of return of 7%, out of this, you can take a wealth cash flow of 5%.

You will need to accumulate $14,000/0.05 = $280,000.

With $280,000 you reach some sort of financial security. You keep your capital relatively intact, while you can conservatively cover your annual survival expenses.

Financial Security is a stage that is very attractive because it gives a person optionality.

It enables the person to make a riskier career move without worrying too much about the repercussions, take a break from work, or pivot to semi-employment.

The person is one who does not have to give a crap about how the boss thinks when his basic survival is not determined by the moods of his or her boss.

Financial Security, in the Financial Independence space, is very similar to a type of financial independence known as LEAN FIRE.

LEAN FIRE stands for Lean Financial Independence Retire Early.

Instead of aiming for the wealth assets to be able to provide a wealth cash flow that covers all your annual expenses (stage 8 later), LEAN FIRE aims to achieve this by covering their basic necessary expenses, with less money.

Related: How much wealth do you need to achieve financial security, financial independence, and retirement?

Here are some expectations about your wealth machine:

  1. The long-term annual rate of return of your wealth machine should be reasonable. The rate of return should be conservative enough based on what the average wealth builder can achieve, and we should not push the rate of return just to fit the target and duration we want
  2. The wealth cash flow, distributed from your wealth machine,  should be less than the annual growth of your wealth machine (which grows at the annual rate of return). This is because the wealth machine needs to distribute cash flow and have enough assets to keep up with inflation. If all is paid out and spent, the wealth machine will get smaller and smaller

Stage 8: Financial Independence

Stage 8 is a progression from Stage 7.

Financial Independence happens when your Wealth Machine(s) is able to provide a wealth cash flow that is greater than your annual current expenses.

It should also be noted that your wealth cash flow distributed needs to be conservative enough when compared against the long-term average rate of return of your wealth machine.

Building on the previous example, suppose your annual expenses are currently $25,000/yr and that you believe you can maintain your annual expenses around $30,000/yr plus inflation, you can calculate how much you need.

The formula is the same as my article above on how much you need to achieve financial security, independence, or retirement.

If your wealth machine can provide a rate of return of 7%, out of this, you can take a wealth cash flow of 5%.

You will need to accumulate $30,000/0.05 = $600,000.

We can rate a person having an Audi as rich, but to me, if a person has an investment property and a portfolio that provides a wealth cash flow covering what he and his family need now, that is truly a position to be enviable.

Again, the expectations about your wealth machine are similar to when you estimate for Financial Security:

  1. The long-term annual rate of return of your wealth machine should be reasonable. The rate of return should be conservative enough based on what the average wealth builder can achieve, and we should not push the rate of return just to fit the target and duration we want
  2. The wealth cash flow, distributed from your wealth machine,  should be less than the annual growth of your wealth machine (which grows at the annual rate of return). This is because the wealth machine needs to distribute cash flow and have enough assets to keep up with inflation. If all is paid out and spent, the wealth machine will get smaller and smaller

Stage 9: Financial Freedom

Once you are past stage 7, the rest is the stuff of fairy tales.

Financial Freedom happens when your stable of Wealth Machine(s) is able to provide more than your annual expenses but also one or two extravagant things that have previously not considered.

What is life if you slog so hard and not get to enjoy it?

When a person reaches financial freedom, he can throw in a few things that they have denied their family for the longest time, be it the premium car that they wanted, or one more holiday for the year.

The difference here is that these new spending goals weren’t a consideration before this stage of their lives.

Stage 10: Financial Abundance

The last stage of the list is Financial Abundance.

A person and his family are really rich when, his net worth is very positive, and his wealth machine(s) provide a level of cash flow that expenses accountability can take a back seat.

This is to say that the cash flow is so strong that they can provide for the family and other goals that money doesn’t run out easily while at Financial Freedom, careful considerations still have to take place.

When your friends or yourself have reached this stage, you are probably at the top 1% of the place that you live.

It is likely you will not have an issue sending your niece to an overseas education out of goodwill, throw an extravagant birthday bash for your daughter’s 21-year-old birthday, or help fund that poor family that got into a trouble whose story was all over the newspapers.

Expanding the Stages: Explaining some of the slightly Ambiguous Stuff

Now I have this stage of wealth for some time already, and many readers love it because they can see where they are, and what is the next rung.

There are also many folks that ask me some questions about it and I felt that there is some stuff that I can spend some time to explain.

There are also a few stages that, I was debating hard whether to include them or not.

And as of now, I did not include them.

However, I will explain them here and you see if it fits something that you can identify with. If it does, you include it.

Stage: Freedom from Employer

This stage is interesting. It is a milestone we reached when we feel we are not afraid to fire our company and go to work with another one.

Is wealth an important determinant?

I believe it is.

A young working adult would think money matters less. That is because she could be at Stage 0: Financial Dependent. If she quits, her parents will still provide her with an allowance. She can still maintain a rather good standard of living.

However, when you have a family, leaving a job when you do not have another one planned can create a lot of anxiety. You do not know if you can find a job that pays as well, to cover a lot of the essential needs.

Thus Freedom from Employer could become a valid stage.

So how much you need?

This is very subjective because, for each of us, our boldness to leave our employer would vary.

One way of computing is perhaps a percentage of your future financial independence amount. Perhaps 10%.

Essentially Stage 4 to 6, different levels of F-U Money, is to address your confidence to have freedom from the employer.

This stage can be equated to your ability to take a sabbatical.

Stage: Quarter and Half Financial Independence

Between the stage of 1 year of annual expenses and Financial Independence, you could probably squeeze in 3 more stages.

This is to let you know where you are on the journey and serves as motivation.

However, the reason I did not include them in is that I would rather include more novel stages, whose names tell us how functional they can be. I have already violated this by having 3 stages of accumulated annual expenses.

There is also the problem of sequencing.

For some, Half financial independence might be earlier than Financial Security, and for some, it might be later.

I would rather treat that for most of their essential survival expenses is about half or three-quarters of their total annual expenses they need.

So financial security is good enough.

There is one advantage of tracking Half Financial Independence, and that is, it means one spouse is essentially financially independent!

Stage: Flexible Financial Independence

This is one possible stage that might rest between Financial Security and Financial Independence.

Essentially, we articulate the stage of financial independence as the wealth machine is able to provide a reasonable rate of return over time. Out of this rate of return, we decide to take distribution a conservative amount as wealth cash flow.

In this way, we can have a high degree of confidence our Wealth Machine can Grow, and still distribute Wealth Cash Flow for a long time, instead of running out.

Flexible Financial Independence is when you haven’t reached this sum for your wealth machine, but your wealth allows you to take risks to live off, should you need it.

For example, your aim is to have $600,000 to be fully financially independent, based on withdrawing 5% of your portfolio.

You have not reached this sum yet. You only have $480,000.

But you deem that this is enough for you to be flexibly financially independent.

What this means is that you can withdraw 6.1% of $480,000 and get nearly the $30,000/yr you need.

Is this conservative? Probably not. You might run the risk of running out of money earlier than expected.

However, you can implement a variable spending plan.

For example,

  • When there is a recession => Be conservative, cut my annual expenses by 10%, activate my part-time job to supplement
  • When time is good => increase the allowance that I am able to spend by the inflation amount

We call this a variable withdrawal system. I have written how a variable withdrawal system would make $500,000 adequate for me if my expenses is $24,000/yr. You can read it here.

A variable financial independence withdrawal system

You could have a workflow like this to make things systematic, as in my article.

Why don’t I include flexible FI?

I think its difficult to see where it resides.

For myself, Financial Security is Flexible Financial Independence. For some Half Financial Independence is Flexible Financial Independence.

For some, they can never be flexible!

If this works for you, you can include this.

You should enjoy the Process of Accumulating Money as much as the End Goal

I am not sure where each of you would reach.

For each of you, your earnings potential, your situation may mean that you may reach financial abundance or that you can only accumulate 5 years of annual expenses.

To get to your goal, you need various milestones

Just treat the process of accumulating money as a real life computer game, where the rewards are real.

Instead of playing a virtual game where you can hit the reset button, in this game, you cannot reset easily and you may be penalize for making stupid moves.

However, as you level up to a further stage of wealth, it comes a long with certain “life upgrades” similar to your experience when you play a game.

Summary: What Can You Do Next?

You can start with my FREE Building your Wealth Foundation series of articles, where I explain in detail the simple steps that you can do to put yourself in a strong foundation, and then move up the stages.

On an individual level, how do you measure in these 11 stages, has anyone achieve some sort of financial stability, debt freedom, or financial security yet?

Let me know.

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Monday 9th of November 2020

I am curious what expenses you include to get to $14,000/yr survival level and $25,00/yr annual expenses? When I strip off all the fluff I end up at 50,000/yr. If I really stretch and say I paid off my house and have no car loans I can get to 38,000/yr. Can you share what categories and how much in each to get to 25,000/yr annual expenses?


Friday 13th of November 2020

Hi Scott, thanks for your question. That $14,000 is used as an example but if you are curious I can list out what I considered essential. Basically, I do not separate entertainment and say that it is not essential. I take everything and break them into two piles. for example my entertainment could be $300 but the bare essentials is $60. the rest of the $240 is less essential.

A hypothetical one for me is the following:

Food - $500/m $6000/y Transport - $80/m $960/y Utilities (home, mobile, broadband) - $200/m $2400/y Household - $200/m $2,400/y Insurance - $200/m $2,400/y Entertainment - $200/m, 2,400/y Medical - $50/m, $600/y That works out to be about $17,160/yr. I did add some buffer for a few things like household and food but i think it is sensible. For each of us, we could have more categories and your mileage may vary.


Thursday 14th of December 2017

Kyith, long time investmentmoats supporter here! Thanks for all your great writeups. Can I check with you on Stage 7. You wrote:

"For example, your annual expenses is $25,000/yr. However, out of this $25,000, your survival expenses is $14,000/yr.

If your wealth machine can provide a rate of return of 7%, out of this, you can take a wealth cash flow of 5%.

You will need to accumulate $14,000/0.05 = $280,000."

Confused on the "rate of return of 7%" statement. Where does it fit into the equation?


Sunday 3rd of December 2017

We are at stage 7 or 8, but most likely 7 as things are evolving as we live on. Our parents will grow older and they will need our support in terms of medical fees. Our children will grow up and they will need education fees.

I read your latest post and thinking of a coasting FI, doing more investment related stuff, reading more books and attending AGMs.


Tuesday 5th of December 2017

Hi Jason,

Thanks for updating. You look like you are in a good situation. I think most of us do not have a Fat sum of wealth such that we can safely tell ourselves we are at stage 8. Until then, usually we are at stage 7.

Things can be made more certain by deliberately exploring the future costs. I urge you to do that to empower yourselves.

Best Regards,



Tuesday 12th of January 2016

Sorry for duplicate or triplicate. The WIFI sucks here


Monday 11th of January 2016

Interesting article. Still at stage 4. Hahaha, am thinking of going into semi retirement in 3 yrs time.


Tuesday 12th of January 2016

Hi Windytree,

that is so great to hear! how many years have you been on this challenging path towards being financially secured?

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