I was Stumbling today and came across an interesting post on Millionaire Money Habits. It is the post titled ‘The Money Spectrum‘. This article and its accompanying graphic are useful as they are. However, I think it may be even more useful if it is brought over to a more personal level.

Stages of Wealth

Working from the bottom up, we can look at the mindset of somebody at the various Stages of Wealth and see how things change as somebody amasses wealth. You will notice that there are no dollar amounts associated with the graphic. That is because – with the exception of the highest levels of wealth – anybody at any income level can be at any level. It is possible to make a 7 figure income each year and still be out of control. Likewise, it is difficult but not impossible to make $10,000 or so a year and still have your money working for you.

Admittedly, the more you make from any source, the easier it is to get higher on the scale.

Ignorance/Out of Control

A person at this stage probably has a negative net worth. Any money that comes in goes right out. If they are asked how much wealth they have they cannot answer because they do not know. They probably sense that it is not good, but there is not enough concern to find out. If they have credit, this person will generally be using most or all of it.

In the worst case, everything is so far out of control that they know things are bad. Notices from creditors and landlords get trashed or left unopened. The door and phone will not be answered in a last ditch effort to avoid the problem. The financial situation simply exceeds this person’s ability to deal with it. Even if they get out of this situation with help, it is very likely that they will return to this state.

To move to the next state, ignorance needs to be removed, the problem identified, and the financial bleeding stopped.

Treading Water

Somebody in this state is still in debt, likely with a negative net worth. However, this person knows where they are financially. Being in debt, there is still a fight against the tide of economic forces. However, this person is no longer drowning. They have found a way to stay in place. Things are not getting worse, but they are not getting any better.

This individual is living paycheck to paycheck. As soon as money comes in, it is spent in some combination of needs and debt service. It is likely that some weeks progress is made and in other weeks gains are given up.

Climbing Out

This is the first of the truly positive wealth stages. Not only is the person not getting further into debt, they are actually decreasing their debt load. It is even possible that during this process a positive net worth is attained. Life is not easy, but there is some breathing room. The primary financial goal is to reduce debt.

Credit card debt, car loans, and home equity loans are still a part of the life during this stage of wealth. Using a debt snowball or other process, these debts are being eliminated over time. Depending how deep the hole was to begin with, this process can take a few months to a few years. When the short term, high interest debt has been eliminated it is on to the next Stage of Wealth.

Building The Foundation

This is the place to take a deep breath and celebrate. Somebody that has reached this point is ahead of a large portion of the population. With no short term debt there is a lot more flexibility with income and cash flow. Most people here have a positive net worth. In here the thought processes however will begin to differ.

Some individuals will continue with the debt snowball and work on long term debt like low interest student loans and home loans. Others will want to prioritize retirement saving. Still others will begin saving large emergency funds (6-12 months or more) or begin planning for large scale life changes.

The key point of this stage is that it is a transitional stage. The actions taken here are done to setup what is going to happen next. Usually, the actions involve continuing to pay down debt to some extent and increasing savings and investment rates. Once the foundation is complete, we move on.

Working For Yourself

This is where somebody is personally debt free. It does not always mean that there is no debt. Instead, any debt that is held on to is associated with an asset that generates the cash necessary to pay for that debt. For example, a rental property may have been financed, but the annual rents cover the mortgage and maintenance on it. There are other possibilities that work the same way (business loans, etc.).

What differentiates this stage is that while you still have to work, it is just to meet the daily, ongoing needs. Any money that is earned is yours. All income beyond the necessities can be spent as desired. Epicureans can spend it on food. Extreme savers can continue hoarding. Hobbyists can save up and add tools and other items to their collections.

By this stage, most people are continuing to save and invest with their sights on the next stage.

Money Working For You

This is where everybody wants to be. Between all of the assets that have been accumulated, there is enough free cash flow to live off of. Yes -full retirement is now possible. This is the level that most of us strive for because it is when we are truly free to do what we want. The only work that is needed is just to ensure that savings, investments, and other assets are maintained to keep the income for life going.

For anybody that wants to continue beyond this stage, their focus is going to be on continuing to grow their assets.

Money Working For The Future

Here, is is no longer about the here and now. All of the needs for a lifetime have been addressed and there is more money available beyond that. The concern at this stage is about leaving a legacy of some sort. It may be for the next generation – or several. It may be for a charity or a new foundation with specific goals. Whatever the desire is (and the range is infinite) it is beyond the individual.

Some people amass so much wealth and continue to be focused on more wealth acquisition that they fall into the last category:

Its Not Money…

Bill Gates. Warren Buffett. Steve Jobs. Larry Ellison. Among others. These individuals worked to build fortunes that far exceeded anything they could spend. All of them are continuing to work and build their wealth. It is a part of who they are. They are driven to succeed and control. They have visions and ideas about how the world should work. They are putting their efforts towards making those visions reality.

These individuals are very competitive. We hear about it too – one person gets a 200 foot yacht, the next gets a 250 foot one. A $20 million dollar house becomes a $30 million home. And it continues upwards. All of this is because of a never-ending drive to be the best and to be recognized as being the best.

The money eventually just becomes a way to keep score. There is not always a way to directly compare one person’s achievements against another person’s. So wealth and income become a proxy for measuring how people stack up.

Those are the stages of wealth. How far do you want to go? What are your goals? Where are you at now?

My desired destination is at the ‘Money Working For the Future’. Currently, I am in the ‘Climbing Out’ stage but am shooting to be into the ‘Building the Foundation’ stage by the end of this year.

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