Generation Z and Millennials have become the biggest drivers of change in the way we understand money. The rise of fintech and new financial technologies have led to an increased awareness of the importance of saving and investing, and a greater need to take control of our financial lives, ultimately contributing to higher levels of financial freedom.
Despite the high level of knowledge about money, it seems that it is becoming increasingly difficult for the new generations to maintain savings and financial stability. Could it be that the situation has worsened? Are inflation and job insecurity inundating us? Perhaps we are spending more and more money on everything that is “postable” on social media?
Knowing where we stand financially can be complicated. On many occasions, we limit ourselves to thinking that we are “good” or “bad” without really knowing at what level we are and what we can do to improve our situation.
In this article we help you identify where you are financially.
Level 1. Financial Survival
People in this group live from day to day. Their main characteristic is that their only source of income is their job. If they lose their job or have an unforeseen event, they have no money to cope with that situation, as they have no savings. People in this group often resort to asking for advances at work, or use their credit cards, often getting into debt.
This group also includes people with a good income, but who have no financial planning or, if they do, it is very short term (the current month and the next). In addition, they often have debts such as a mortgage or car loan.
Living in this financial freedom level increases the level of anxiety and stress of the people who are in it, therefore, it is important to get out of it because it not only affects the pocket, but also the health.
If you are in this level, to get out of it we advise you to control your expenses and try to find an extra source of income (so you can get a savings cushion that will give you peace of mind). If you are in this level because of your debts, you can try to renegotiate their conditions to live more comfortably.
Build a financial cushion to get you through the most difficult times
Level 2. Financial Stability
This is the minimum level to which everyone should aspire and, according to some financial advisors, the point where you can start talking about “financial wealth“. People at this level already have a certain savings cushion to fall back on in case of unforeseen events because they have managed to save between 3 and 6 months of salary, although they still depend on work to make ends meet. People at this level have contracted services such as insurance (medical, life, home…) that provide peace of mind.
At this point it is possible to start thinking about investments to move up to the next level. For this, it is very important to continue controlling expenses and start acquiring the first assets.
Level 3. Financial Security
People at this level have realized that the key is in investments, not only in savings.
If you are at this level you start to reach a certain financial freedom, you have some assets that generate passive income outside your job (rent, dividends…). However, this income is not enough to be able to leave your job and live without working.
At this level it is very important not to fall into the comfort zone. The fact of having financial security can make you get comfortable and not try to climb to the next level: the desired financial freedom.
To move up the financial ladder, you must first set financial goals. To do this, visualize your life in the next 20 years:
What will it be like if you continue like this, what will it be like if you continue to work hard and invest to reach the next level, what will it be like if you continue to work hard and invest to reach the next level?
Set yourself achievable goals and… Go for it! Remember that you should diversify your investments so as not to depend on a single investment.
Level 4. Financial Freedom
This level is the goal of most financial authors. At this level there is absolute freedom, since passive income is enough to have a good standard of living. Upon reaching financial freedom, it is not necessary to work since the cost of living is covered by the passive income that is generated. Therefore, if someone works having reached financial freedom, it is for pleasure or vocation.
If you are at this level, you can spend your time doing what you really like without worrying about having money to make ends meet. However, make no mistake, if your monthly expenditure is 1000$ per month, you will reach financial freedom when your investments generate 1000$ per month. Therefore, you can achieve financial freedom in an easier way by adjusting your monthly expenses, if not, you will need more wealth to achieve it.
Level 5. Financial Abundance
This level is the highest of the 5, in it you can do what you really want in life without any financial hardship because your passive income far exceeds the money you need to live comfortably.
At this level you can afford to make more risky investments since the money you put at risk is not needed to live: you can invest in startups, in new sectors…
At this level your stress decreases in a very noticeable way since you have more money than you need to live and, having so much free time, you can do whatever you like. Looks good, doesn’t it?
Now that you know the 5 financial freedom levels that exist, which one do you find yourself in, which one do you intend to reach? In Coinscrap Finance we are clear that at least you should reach level 3, so you know, create the goal that best suits your needs and save to get to where you would like!
