Seven Stages of Financial Independence as a New Zealander

Many people feel that financial independence may only be available to those who inherited their fortune, had the next million-dollar idea, or won the lottery. While those scenarios certainly are true, they aren’t the only routes that can be taken. And though we won’t get into great detail today about just how to achieve financial independence, we would instead like to go over the various stages involved along the way.

One key quality that many financial independents possess is the ability to set and meet goals. Knowing the stages of financial independence helps you have a set of goals to strive for, and a frame of reference to better understand whatever situation you may be in.

The ‘Pre’ Stage – Whenever you are born, and as you grow up, you are wholly dependent on your parents or guardian. For obvious reasons, this is the exact opposite of financial independence. This should be the only point in your life where you are the true opposite to financially independent. This stage should not be confused with, say, an injured worker who is at home on ACC. They are not dependent on their ACC payments as much as they were their parents when they were a child.

Scarcity – Those fresh out of school or university and out into the job market often strive to be in this category. You can work and support yourself without any help from others. This doesn’t mean you’re not struggling though as you’re likely to be living paycheck to paycheck in this category with little-to-no savings set aside.  Adults in this category often feel that because they can handle their own bills without help that it means they’re financially independent, despite the lack of savings and the amount of debt that follows this kind of lifestyle.

Stability – Many middle-aged New Zealanders fall into this category, and many are happy and content being in this category. You are able to support yourself (and your family). All bills are current and paid up to date. You’re not living paycheck-to-paycheck, and you’ve even got some savings set aside or an emergency nest egg hidden away. Being financially stable doesn’t mean you don’t have debt though.

Debt Free – This one is almost the same as the point above of being financially stable, except you do not carry any debt. Now, we know there are almost 2,000,000 households in New Zealand and a great deal of those homes have a mortgage. Many financial experts argue over whether or not to include a mortgage in your debt. This often comes from an American way of thinking in how they view debt over there. Let’s make one thing clear: If you have a mortgage on your home, then you owe the bank money. If you owe the bank money, that means you’re in debt to them.

Up until this point in the process, we have assumed that any income you have is from working a job or running your own company. At the debt-free stage, many Kiwis will have set up some sort of passive-income stream. Whether it’s from earning interest on their savings or investments, or possibly renting out another home or dwelling, or even from turning their hobby into a little side business. Having to work a job to be debt free does not make you financially independent. Having a little bit of passive income does not make you financially independent.

We should also mention that not having a mortgage is a freeing experience. So much stress can come from knowing that if you don’t pay the bank, you may not have a place to live. Many people hate the feeling of that position. Oftentimes one’s ultimate goal may simply be to fully pay off their mortgage. To some, making that last mortgage payment can be a better feeling than finally becoming financially independent. It’s a huge milestone and anyone that reaches it should be proud and more so if it’s paid off early.

Security: Once you are free of debt the next stage that follows is Financial Security. At this stage you meet all of the points above: You are supporting yourself, you have a nice chunk of savings, and you are living debt free. The benchmark for this stage is that you have enough of a passive income to support all of your living necessities. Necessities does not include buying a boat, but it does include having your groceries and power bill covered by the passive income.

INDEPENDENCE: This is the stage many of us strive for, Complete Financial Independence. You haven’t got a financial care in the world, and your investments and passive income streams are enough to not only cover the necessities, but enough to fully fund your current lifestyle with as much of a hands-off approach as possible.

Being financially independent is absolutely possible for those who have the knowledge and discipline to work towards it. Being fiscally conservative, hard working, and not afraid to take some risks is a (simplified) recipe for financial independence. You don’t need a stroke of luck on Powerball night to get to this kind of lifestyle.

Beyond Financial Independence: There’s a difference between being financially independent and simply having an abundance of money. Being financially independent allows you to live your current lifestyle without worrying about debt, paying the bills, or having a little fun. Once you go beyond financial independence you are able to completely upgrade your style of life and live out your biggest, wildest dreams. Think Graeme Hart or Richard Chandler and what you would do if you shared a similar net worth.

You don’t need to move beyond financial independence to be happy. The financial anxiety of most New Zealanders comes from debt, or a desire to upgrade their lifestyle without the means to do so. Moving along through the process should include celebrations for passing each stage. These stages are goals to strive for and each one is more rewarding than the last.

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