0. You Earn Less than you Spend
This is obviously a good place to avoid and represents the least amount of freedom. No one should be here, but I added it because I know many people (particularly in the US) operate regularly in this stage.
1. Your Job Covers Your Expenses
This is where a lot of people are. You spend everything you make. At this stage, losing your job is a terrifying prospect because you are only a week or two away from being back in stage 0. A few more weeks, (depending on how long you can string out your credit cards) and you’d be looking at bankruptcy. At this stage, changing jobs is very risky because, if it doesn’t work out, you have very little cushion to let you find another job.
2. Your Job Covers Your Expenses and Savings
Once your expenses are lower than what you are making, you can start setting money aside. Many people never make it to this stage because when their income goes up, so do their expenses. Keep in mind that you can get to this stage simply by spending less money. If you are in stage 1, you can often get here by cutting out (or reducing) entertainment expenses, eating out and other non-essential expenses.
3. Your Savings Allow You to Take Risks in Your Job
When you have bit of an emergency fund built up, you can take risks in your career that simply aren’t an option when you are living paycheck to paycheck. Sometimes this means switching to another job. Sometimes it means getting behind something that is risky, but will really make you look good if it is successful. Sometimes it means taking an ethical stand that might involve losing your job.
The point is that, until you have some savings built up that would allow you to go without a job for at least a few months, your decisions are all going to be driven by a fear of losing your job. Once you have this cushion, you can start making decisions that are best for your career and family instead of just your immediate cashflow needs.
4. Your Savings Allow You to Quit Your Job and Start Your Own Business
This is a big jump. It requires a shift from depending on someone else for your finances to being responsible for producing your income on your own. This isn’t something that is very easy to do unless you have some significant financial reserves built up. Obviously, this doesn’t necessarily happen all at once. Many people start their own business while still working for someone else. Still, the decision to stop working for another employer and take all of that responsibility on yourself is a big step.
5. Your Business Covers Your Expenses
At this stage, your business gives you a sustainable income. In many ways, this is like being back at stage one, but now you are responsible for everything instead of being dependent on someone else.
6. Your Business Covers Your Expenses and Savings
Similar to stage 2, this is where you are able to keep your expenses down, while earning enough to save.
7. Your Savings Allow You to Take Risks in Your Business
Once you have some savings built up for your business, you can take risks that simply aren’t practical at the lower stages. These risks might included expanding your services or products, experimenting with marketing, launching new businesses, or bringing on more employees to help scale up.
8. Your Savings Allow You to Sell Your Business
At this point, you have saved enough that you don’t have to keep running your business. Maybe you don’t sell the business, but instead hire someone to handle the day to day decisions for you. This is the stage where you really step out of working (in the traditional sense) on a daily basis.
9. Your Investments Cover Your Expenses
Investments may include stocks and bonds, but also may include businesses that don’t require you to work on them every day.
10. Your Investments Cover Your Expenses and Savings
At this stage, you make more than you spend without requiring day to day involvement in your investments.
(This article often is searched for as 10 Steps of Financial Independence & 10 Levels of Financial Independence)