8 Stages of Wealth: From Sinking to Affluent

Building wealth is a journey, which often begins with a shift in mindset, a new outlook. Moving through the stages of wealth usually requires not only doing things differently but also seeing things differently.

Here are the eight stages of wealth, and how to navigate them:

Sinking

Those who are sinking are either reliant on others to make ends meet or accumulating greater amounts of debt over time. They often feel helpless, hopeless, and become stuck in survival mode.

Individuals in this category may be unemployed, underemployed, or underpaid. They often feel they’ve eliminated every expense that could be cut but are still unable to make ends meet. Some feel trapped as, struggling to cover expenses, they continuously add to their credit card balances.

To increase your earnings or earning capacity:

Request a raise
Work more hours
Learn a new skill
Complete a certificate or degree
Moonlight (take on a second job or side gig)

To reduce debt:

Reduce expenses wherever possible
Implement a debt reduction strategy

Since those who are or have felt that they were buried under debt (drowning in debt) develop a scarcity mindset, leaving this phase usually requires a dramatic shift in perspective.

Breaking Even

Those living paycheck to paycheck are able to meet their monthly financial obligations without assistance. They struggle, however, to pay for any unexpected expenses.

Someone in this phase has no wiggle room in their budget. They’re likely either overspending, spending impulsively, or lack awareness of how much money is coming in and where it’s going.

Someone who is breaking even is extremely vulnerable to setbacks. They may feel a lot of fear or stress over what will happen when they, inevitably, need to upgrade or replace their belongings.

People may end up living paycheck to paycheck because they bit off more expenses than they could chew. Maybe they didn’t realize that a more expensive house would also come with more expensive maintenance, underestimated the cost of a pet, or their daily needs inflated faster than their salary. Others find themselves stuck when they lose a job, have to cut their hours, incur medical expenses, or end a relationship.

It’s not unusual for those in this phase to go through periods where they try to deprive themselves of wants, to get ahead, followed by a spending spree when they give in to their desires, deplete their willpower, or accept that the way they’re living is unsustainable.

Individuals in either of the first two stages of wealth are experiencing financial insecurity.

One of the most common reasons people find it difficult to get ahead, while in this situation, is that they don’t know where their money is going. They don’t have a money management system in place.

Focus on tracking your money, watch it, learn more about your cash flow. This will reveal places where you can make changes to break the paycheck-to-paycheck cycle.

Once you know what is coming in and going out, you’ll want to adopt a strategy that allows you to use your money more effectively.

Moving Forward

Someone who widens the gap between their income and expenses, and willing to forgo some of their desires to set money aside for later, will soon find themselves getting ahead financially.

Reaching a better financial position typically feels like a huge weight being lifted. Sure, there are still issues in life, but the daily stress over money is subsiding.

Perhaps you’re using the “extra money” to save for bigger-ticket items or to treat yourself (now and then). Budgeting and saving allows you to begin designing the life you want to live.

To move to the next stage of wealth, some of your surplus funds will need to be saved for the more distant future.

Stable

Once you’ve saved 3 to 6 months of expenses, enough to cover emergencies or unanticipated twists and turns, you’re financially stable!

Having this much set aside would cover you if you needed to look for a new job or pay a large medical expense. If something happens, and you’re unable to work, you’d be able to support yourself during the elimination period before your long-term disability policy kicks in.

When I became stable, I slept better at night, having more savings brought peace of mind.

To continue to move up the stages of wealth, it will likely be necessary to eliminate debt and increase investments.

Secure

People have become financially secure when they are either completely debt free or have enough saved to cover any outstanding debts.

Becoming wealthy does not necessarily mean avoiding debt completely, but it generally means borrowing both rarely and strategically. One reason people with greater net worth continue to take out loans is to maintain liquidity, reserving their cash for opportunities. Someone might prefer to keep cash in investments that will earn a higher return than the cost of borrowing.

Something to keep in mind, when you’re incurring debt is that although all leverage is debt, not all debt is leverage…

Most of the people who reach this stage have a strong sense of their financial priorities. They’ve struck a balance between their current desires and future aspirations. Something to consider, if you haven’t already, is your “enough”.

To move to the next stage, you’ll need to build enough wealth to no longer be completely reliant on earned income.

Flexible

Once you have saved enough, new options become available. Perhaps you’ll decide to go a while without working, drop down to part-time, or take a pay cut to do something you’re more passionate about.

Some people hope to work until they reach financial independence, others want to take sabbaticals from work or ease into retirement. During this phase, someone might think of themself as semi-retired.

Our professional lives take up a huge chunk of our time and, therefore, are likely a large part of our identity. Having enough money to replace some of one’s earned income can provide the opportunity to step back from a current job, potentially into a consulting position.

Alternatively, you could reduce hours to pursue hobbies, artistic endeavors, and spend time with loved ones.

Those who reach the top three stages of wealth are able to focus on their health and engage in activities that bring them joy. Having greater flexibility may also allow for more time relaxing.

To continue to climb the stages, you’ll need to eliminate the need to work to sustain your lifestyle.

Financially Independent

Those who’ve achieved financial independence can maintain their lifestyle indefinitely, without earning additional income. This doesn’t mean that they don’t have jobs or businesses, it simply means that what they’re doing is a matter of choice rather than necessity.

To accomplish this, you must have:

Amassed enough wealth to live off of 3 or 4% (a safe withdrawal rate) of your investment portfolio.
Created reliable passive income streams that exceed the annual spending needed to live your desired lifestyle.

Alternatively, have a combination of the two…

You may think of financial independence as the “end goal”. For most, it marks the beginning of a new life journey.

What happens when work becomes optional? For many, nothing changes. They continue to work so long as it continues to be rewarding. Alternatively, you might decide to explore the world, take on home projects, volunteer, or start a business.

One question to ask yourself, at this point is – do I want to continue to grow wealth?
If so, you’re headed for the final stage…

Affluent

Those who reach the final stage of wealth have more money than they’ll ever need. They’re able to spend lavishly and give to loved ones or charities without diminishing their ability to live off their investment portfolio.

If you’ve made it this far, first, congratulations! If you haven’t already, it’s probably a good time to contemplate sharing your knowledge, to ensure you pass not just wealth, but also financial wisdom, to the next generation.

Enjoy the Journey

Although I’d argue everyone could benefit from reaching financial stability, whether you aim to move through all of the stages of wealth, or not, is a deeply personal decision.

No matter what you see as the desired end goal, remember:

You can build wealth! There are strategies and tactics which will allow you to move to the next phase – if you’re willing to make the necessary changes to prioritize saving and investing.
Increase your wealth only to the extent that it improves your situation. The goal is not to die with more money, it’s to live your best life. Determine your “enough”. Beyond this, adding to your investments will no longer add value.

Subscribe for thoughtful notes on money, meaning, and designing a life that’s uniquely you — delivered straight to your inbox.