How I Manage Money: Levels of Financial Wealth

I’m far from the richest man in Babylon, but I do well enough for my friends and coworkers to occasionally ask how I manage my finances. Money is one of those emotional topics that are uncomfortable to talk about, but I think that avoidance leads to a less financially healthy, equitable society than what we could be. And every time I break down my setup for someone, I make a mental note to write it down so that other people can potentially benefit from it. So here’s that breakdown, spread across a series of posts.

I’m going to state upfront that my experience with money is built on an incredible amount of privilege that I know gave me a head start and wind at my back towards financial success:

• Being born in a body, family, country, and at a time where basic life essentials were met.
• Having parents who valued education and paid for a substantial portion of my college degree, leaving me with ~$20k in student debt by graduation.
• Pursuing a career in technology which provided a job with a great starting salary after graduation, allowing me to pay off my loans within a few years and consistently growing over time.
• Having family members who taught me the basics of investing and instilled an interest in personal finance early on.

The thing I hate most about writing this out is that it ignores the ONE thing I did: I’ve been extremely, profoundly lucky. It feels incredibly arbitrary and unfair that I received these gifts and others didn’t. A friend of mine created a board game that brings this point to life and injects levity to start conversations about how privilege impacts our lives. Check it out for a meaningful, sometimes uncomfortable, but cathartic experience on making sense of chance.

So at best, this is a list of things I did to avoid squandering the luck I received. That said, I know enough people who received similar or higher rolls of the privilege dice and are stressed out about their finances, so maybe this can help others sustain, and maybe if they’re lucky, grow their money.

The very first step before you get started is leveling with yourself about what money is to you and why you want to manage it. For me, money is a resource for supporting my lifestyle; investing it back into my family, friends, and the world; and gaining a net-positive boost to my mental health from my financial assuredness. I believe everyone should be able to feel good about money too. There are complex social and economic systems in place that make it all but impossible for billions of people to even have a fighting chance for money to be an asset rather than a liability. And so I think those that can put money to work should do so in order for them to be in a position where they can give their gifts back to empowering the other half. My goal isn’t to watch a number tick up; it’s to grow a resource to invest back into a world that’s given me more than enough.

Finally, a huge disclaimer that I’m in no way a financial advisor. These are just one internet guy’s mindset, processes, and tools that help him manage his financial life. If you take one thing away, remember that your mind if your most important asset. Don’t just outsource your education about money to someone else, especially me. Let this be one of many perspectives you read, consider, and choose how to integrate into your own life.

So, let’s manage some money.

Levels of Financial Wealth

My mental model is to think of wealth in stages, with each one generally building upon the last (though some of the earlier phases may change in order depending on your situation):

1. Financial Awareness: understanding your budget of income, expenses, and orienting yourself around assets and liabilities. You may be living beyond your means, but at least you know where you stand.
2. Financial Stability: reaching balance between income and expenses, otherwise known as “living within your means”.
3. Financial Security: saving enough excess income to build a 6-month emergency fund for weathering unexpected ups and downs in life.
4. Retirement Planning Pt 1 (if applicable): maxing out your employer’s matching contribution to retirement investments (eg. a 5% 401k match). This is essentially free money.
5. The Age of Asset Growth: paying off long-term debt like student loans, credit cards, mafia loan sharks, etc. Credit cards are great for their benefits as long as you’re paying off the balance each month without paying interest. Home mortgage is also fine since the home is building value. But the goal is to reach positive net worth. It’s yours to keep if you’ve made it this far, but for me, this is the age where it’s time to start giving some of my earnings back to the world.
6. Retirement Planning Pt 2 (if applicable): maxing out yearly contribution to retirement investments ($19.5k for a 401k and $6k for an IRA as of 2020).
7. Financial Acceleration: investing in additional assets like stock, real estate, and businesses to accelerate down the road toward financial independence. This is when the power of compounding interest really starts kicking in.
8. Minimal Financial Independence: reaching the point where your passive investment income matches your minimum living expenses. It would be a stretch, but you could retire now if you really scaled back your lifestyle. Rule of thumb is for this to occur when net worth reaches 25x annual living expenses. Traditional wisdom is to aim to reach here at age 65, but you can reach this phase 10, 20, even 30 years earlier.
9. Comfortable Financial Independence: reaching the point where passive income matches your typical living expenses. You could retire now and maintain your quality of life.
10. Abundant Financial Independence: reaching the point where passive income matches your wildest dreams of living. You couldn’t possibly spend it all yourself. Again, it’s your money, so do with it what you please, but you might find the most happiness to be gained from giving it away as you see fit at this point.

I think it’s helpful to have a roadmap like this to see where I’ve been, where I’m going, and understand what conditions must be met to reach the next milestone. Reddit’s Personal Finance community provides a helpful guide and flowchart that roughly aligns with these stages.

I’m breaking this series into multiple posts covering the phases above, so first up is Phase 1: Financial Awareness.