Shakespeare describes the seven stages of life as the helpless infant, the schoolboy, the lover, the soldier, the wise judge, the old man still in control of his faculties and the extremely aged, returned to a second state of helplessness.

It could also be said that there are seven stages of financial life, but in terms of personal finances, it is possible to stagnate or fall behind.

Knowing which financial stage you are in can help you move on to the next.

Stage 0: Financial dependence

Everyone is born financially dependent. As people finish their studies and start earning an income, they exit this stage.

But life can be unpredictable – a major illness, retrenchment or other financial difficulty, and you may find yourself dependent again, for a period of time, on others.

If you are still receiving pocket money from your parents or eating instant noodles almost every day, you are very likely at this stage.

Stage 1: Financial solvency

Financial solvency is when you have enough income to pay for all your needs – your living expenses including all monthly bills.

For example, meals are a need, but if it’s eating at chic restaurants every day, it’s not a need but a want. Or getting a car as opposed to taking public transport to work is a want versus a need.

Indeed, it is worrying in Malaysia that more and more people are living on credit card debt or being declared bankrupt in their early 30s because easy credit leads to spending on wants.

Stage 2: Financial stability

You achieve financial stability when you have saved up an emergency fund or buffer account for unexpected expenses. On average, this should amount to six months’ worth of living expenses.

The exact amount depends on whether you have dependents, the stability of your income and how risk-averse you are.

To start saving, set up a monthly auto transfer into an account that is not easily accessible.

The old expenses budget allocation (whether physical envelops or an app) works really well too. Some people get creative by putting every RM5 note they receive into savings and watch the money grow.

Stage 3: Debt freedom

You achieve debt freedom when you are fully clear of debt. Granted, there are emergencies and other situations beyond your control that need money, but there are generally only three good reasons to maybe go into debt:

• To invest in yourself for education and skills improvement.
• To purchase a property for your own stay.
• To borrow money for investment purposes, provided you have done your homework and are aware of the risks involved.

Debt limits your choices and holds you back. It is a great feeling to be debt free. Whether you are in debt or heading towards financial independence, consider engaging a licensed financial planner to help you simplify and speed up your journey and avoid mistakes.

Stage 4: Financial security

This is the stage when 100% of your needs (living expenses) are covered by investment income.

Once you hit this stage, you will be quickly heading towards the next stage of financial independence.

It takes a while for most Malaysians to achieve financial security with the prices of almost everything going up and wages remaining stagnant.

You can no longer just save and hope for the best, as the older generation did in the past. Nowadays, active action to increase investment income while keeping expenses stable or reduced is needed.

Stage 5: Financial freedom

Financial freedom is when you are financially stable and have everything you need.

This is listed as Stage 5, but you should strive to live your life at whichever point you are with the freedom to pursue your passions and spend time with the people who matter.

Some people may choose to continue to work towards financial independence, and maybe even financial abundance. But for some, financial freedom is all they want, and that is fine.

Stage 6: Financial independence

Financial independence is when all your needs and wants are covered by investment/passive income. You can pursue any other goals, purposes or passions that you want.

Without delving into the financially independent/retired early concept, we are looking at the level of meeting all your needs and wants to have what you define as your lifestyle as an individual.

A minimum threshold would be for investment/passive income to be least double the amount of your expenses. You are fully free to choose not to work for a living.

Stage 7: Financial abundance

The hardest to achieve, but the most rewarding stage is financial abundance. You have more money than you will ever need, and your focus may be to make a difference in the world and leave a legacy.

The greatest joy is in giving and seeing the difference you can make in people’s lives.

Learning is a lifelong process as you continue to have your money work hard for you and learn how to use your resources to have an impact on the world around you.

This article first appeared in MyPF Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.