Search for Savings & Loans
Mastering the 7 Stages of Financial Independence
Money Psychology

Mastering the 7 Stages of Financial Independence


Many people crave for a time when they will be financially independent, a status that takes one from the worries and uncertainties of what the future may bring.

This independence means that one no longer has to live paycheque to paycheque or as we say all the time in Kenya, until the end of the month when we get to sort our bills etc.

What is financial independence?

Being financially independent means that you can comfortably meet most of your basic needs and some extras - not from your salary - but from what we would call investments. Some would prefer to call it the ‘side hustle’.

If your ‘hustle’ could comfortably support you to the point of not needing a salary at the end of the month, then this basically means that you have made it to this financial bracket where you can be said to have achieved financial independence.

To have become financially independent means that your lifestyle is not dependent on a salary and you could live comfortably even if you quit any formal job you have. Simply, if you can quit your job today because your ‘hustle’ can sustain you without all the stress of being an employee, then, congratulations! You have made it in life!

Stages of Financial Independence

There are a number of financial independence stages divided into two categories of survival and thriving.

  1. Financial Dependence

Under the survival category, there is Survival Stage 1 which is Financial Dependence.

Financial dependence is where everyone starts including those who are now topping billionaire lists globally.

We all have been dependent on someone at a point or at several points in our lives. In the financial dependence stage, we get support from different kinds of people including family and friends.

In this stage, there is a general inability to pay for life expenses whether on an income or not.

  1. Financial Solvency

The second survival stage is financial solvency.

In this stage, we manage to regain control over our finances. This financial solvency is characterised by the ability to pay all your bills and remaining current without others helping out.

Landing full-time employment or getting a better paying position that allows you to support your lifestyle is how some of us become financially solvent. To move from dependency to solvency involves starting small and not diving into extravagance which would imperil your financial standing.

In this stage, one starts building a base of savings that could come in handy in an emergency or a sudden change in circumstances.

  1. Financial Stability

In survival stage 3, one starts gaining financial stability where one is now able to save money regularly.

In this stage, one is able to create an emergency fund or a savings account which is an essential step towards achieving financial independence.\

  1. Debt Free Status

If you manage to go beyond stage three, the next step is survival stage 4 where you become debt free.

Being in this stage means that you have paid off all your debts and that money shifts from being a safety net for you but a tool you use to build your dream life.

This stage ushers you into the first financially thriving stage of your life.

  1. Financial Security

In the first thriving stage comes financial security where you begin your financial journey into becoming financially independent. In this stage, your income no longer dictates your lifestyle because whatever you want, your investments can cater to.

To know you are thriving, you now have the ability to pay for your basic expenses using your investment income. You are now in the Financial Security stage.

  1. Financial Independence

The second thriving stage is financial independence which tends to be the goal for most people. In this stage, your investment income can take care of your basic needs and a little extravagance - if you may.

At this point, you are almost not in need of a paycheque (from an employer) and this is where you could stop working if you chose to. You are basically your own boss. 

  1. Financial Abundance

The last thriving stage is financial abundance. If you thought being your own boss was it, think again. In the financial abundance stage, your wealth is now beyond your lifestyle needs and the biggest burden is deciding how to properly manage the surplus. This stage necessitates the need to have other people take care of your wealth meaning you need to have trusted advisors to help you with growing your wealth much further.

This stage will usher you into the very elusive self-actualisation status. But there is still more, since you can never ever have enough money - generally.

Working Towards Financial Independence

In working towards financial independence, here are some tips to consider. 

1.  Budgeting

It is very hard to work on your finances without a budget. A budget is a tool that helps you spend money within set limits thus cutting out on frills.

Having a budget allows you to track where your money is going and how. Without a budget, it is easy to spend more than you should, which can throw you off balance.

Since a budget helps you see how you spend your money, you can then make a plan which will help you prioritise.

2.  Live below your means

In line with creating a budget, you should consider trying as much as possible to live below your means as you move towards your long-term financial success. Regularly spending all of your money, or spending more money than you make - which means you have to borrow to make the deficit - gradually reduces your ability to make savings. 

Living below your means could mean foregoing instant gratification and putting aside some of your income for future investment or emergencies. 

3.  Getting rid of “bad” debt

In Kenya today, many people have been struggling to repay loans they acquired to get themselves out of a fix. Due to the fact that these Kenyans are registered with the Credit Reference Bureaus (CRBs), it means that they are effectively locked out of getting credit  from many institutions which limits their growth.

To get out of this situation, it is necessary to get rid of the bad debt. This means that they have to clear these loans if they are to be eligible to access credit to help them build their income generating enterprises.

To enable you to save as much as you can, you may want  to pay off the debts with the highest interest rate first or, you may prefer to start with the smallest debts so that you can celebrate your milestones sooner.

Bad debt decisions could make it difficult for you to achieve financial stability. So have a budget to enable you to know how much you can comfortably spend and focus on getting rid of debt.

4.   Save for what you want

If you want something so bad, it is better to save for it instead of taking a loan to get it. To stay away from debt, make sure that you abstain from incurring debt for short term goals. Even if it feels like you are saving for eternity, the reward is much bigger and much more enjoyable if you can have what you want without debt.

5.  Create an additional income stream

Financial independence will rarely be achieved with one stream (source) of income. This means that if you are in employment or you have a business, you can invest in a ‘side hustle’ and expand your earning base.

In reality, earning more money means a quicker way to your financial goals than trying to cut down on spending.

A side hustle can grow into a business that will make you more money than from your employer.

Freelancing and working a second job could get far ahead than just sitting pretty hoping to grow your money from your employment. The beauty is that anyone can pursue a side hustle.

There are numerous investment options that give you a chance at multiplying your savings without either leaving your current employ or spending a lot of energy in the workings of the investment decision. These could become solid additional income streams that do not take much time away from your daily schedule - if you can afford such services, you should talk to a financial advisor prior to making any decisions.

6.  Have an emergency fund

Emergencies are rare but when they come, make sure you have prepared for them. While you can rarely be 100% cushioned by an emergency fund, it nonetheless goes a long way in ensuring that you have a little less to worry about than if you did not have the fund.

An emergency fund protects you from the unexpected which could be a job loss, an illness or a move you had not planned for. An emergency fund helps cover some costs which will help you through a tough time. It also allows you to work on a backup plan.

7.  Have a retirement plan

With age comes the reality that you will be much less productive as compared to your younger self. With this in mind, it is good to have a retirement plan (investment) which will come in handy in sorting out your financial needs when you are elderly.

It is wise to plan for the days when you will not be a salaried employee and you will need medicare, help moving around or even leisure that you were unable to enjoy during your busy working days. 

If you are in a place of work that offers retirement benefits, then you can take advantage of these and if possible, match up what the employer saves for you. This means that your retirement package will be much better than if you did not save anything.

In case your employer does not have such a retirement plan, opening an individual retirement account will help you take care of your future financial needs.

While these seven steps are not exhaustive, you can always employ a plan that you feel could work for you in ensuring that you are on the right path towards financial independence.

In brief, here are some of tips that will get you going towards your financial independence:

1.       Budget, budget, budget!

2.      Spend less and strive to earn more

3.      Have self-control when it comes to spending

4.      Increase your savings and the rate at which you save

5.      Let your money work for you by investing it where it earns you more

6.      Avoid debt and,

7.      Invest in a side hustle

My guess is that you are here since we are all on a journey towards financial independence. As such, the best thing is to take the first step by embracing what will help change your situation. Seeking financial independence is not easy but it is not impossible to get to a level where money is no longer an issue in life.

Look around you and you will realise that money is all around us. The difference between where we are and becoming financially independent is knowing how to get this money into our pockets.

Therefore, we need to get creatively busy and make hay while the sun shines. The opportunity is there.

No items found.

Njenga has over 8 years experience in multimedia and business journalism both as a writer, editor and producer. He has over 5 years of experience in radio broadcasting as a news reader, reporter and presenter. He is also a 2012 Earth Journalism Network-EJN Fellow.

Get the Money254 App and don't miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.

Get it on Google Play
A person holds the Money254 App in their hand.

Welcome to Money254 - your simple way to compare loans in Kenya online.

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Download the new Money254 App and don’t miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.
Get it on Google Play

Learn more about Personal Loans available in Kenya on Money254

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Instantly search loan products from established providers in Kenya and compare on the terms that matter most to you.
Find the best Personal Loans for me

Don't miss another article - download the new Money254 App Today

Get it on Google Play
Download the Money254 app on Google Playstore

Sign up for our newsletter and get weekly money tips to your inbox.

Get updates from the Money254 team on financial news and new Money254 features.