Oct. 28, 2020

The 8 Stages of Building Wealth (and How to Set Money Goals)

The 8 Stages of Building Wealth (and How to Set Money Goals)

Episode 25: The 8 Stages of Building Wealth 

In this episode we cover: 

  1. How to build legacy wealth 
  2. How to stop living paycheck to paycheck  
  3. How to Accelerate Your Wealth 
  4. The stages to become a millionaire 


**  Some links may be an affiliate link and we earn a small commission at no extra cost to you. We only recommend products we truly believe in. 


What's up everybody. And before we get into the episode, I just wanted to let you guys know that we're doing a contest where you can win my two favorite personal finance books. It's the two books that truly changed my life and change the way I saw money. And that's Rich Dad, Poor Dad, and the millionaire next store. And if you want to get into the contest, to win these books, all you have to do is leave a rating and review on Apple iTunes, shoot me a screenshot to Andrew at Dollar After dollar.com. And you'll be instantly entered to win those two books. Thanks so much and enjoy the show. On this episode of the personal finance podcast, we're going to talk about the eight stages of building wealth. What's up everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the personal finance podcast, we're gonna be talking about the eight stages of building wealth. And the reason why we're talking about these eight stages is you need to know that your finances come in waves, and they come in phases. And the reason why you want to understand these stages is so that you can hit your goal and level up each and every time that you hit a new financial milestone. And that's what these truly are, is these are financial milestones. And as you go through the stages, you want to put together plans so you can get to the next phase, because you have to track and measure where you are with your finances so that you know exactly where you want to go. Because knowing where you want to be in five years to 10 years, allows you to put together plans every single year, so that you can put together monthly plans and daily plan. So you could take action every single day, and have a goal that you have set forward to be able to achieve that goal and allow you to build true wealth. And that's what we're trying to do here. We're all trying to build true wealth for our families for longevity, for our legacy. And what happens is, you have to hit each of these financial stages, so that you can build legacy wealth for generations to come within your family. And so today, what we're going to do is we're going to go through these eight stages, and talk about each one and talk about the certain things that you need to accomplish to get to the next level, because getting to each of these levels. And if you accomplish all of these, you're going to be an extremely wealthy person with an abundance of wealth, and you're gonna be helping a lot of people with that abundance of wealth. So this is an unbelievable episode that you guys want to make sure to stay tuned into. And the big thing to understand with each of these phases is that everyone's path is different. Some people may complete these phases faster than others, that doesn't make you less likely to be able to build wealth. All it means is that personal finance is personal. And everyone's path is going to be completely different. So don't try to compare yourself to others. Don't try to compare yourself to your peers. Don't try to keep up with the Joneses. Look at this as a challenge that challenge yourself to figure out what can I do every single day that allows me to get to my monthly goal. And what can I do monthly that allows me to get to my yearly goal, and what can I do every single year, what can I accomplish every single year, that allows me to get to the next phase. And that's how you want to look at this. Because if you complete these phases, you'll be wealthier than 99.9% of people in this world. And so we're going to talk about this. And we're going to go through these phases. And it's going to show you that if you hit these goals, you'll be able to do whatever you want in life. And that's the cool thing. That's the power of this. It allows you freedom with your time, it allows you more freedom to be with your family, and allows you freedom to be able to help others. So let's get into the eight stages of building wealth. So as we go through these phases, you're going to realize you're somewhere along the line of these phases, you're in one of these stages. And what I want you to think about as we talk about these stages is how can I get to the next level? What takeaways do I get from this episode that allows me to get to the very next level on how can I set up goals for myself and my family, to be able to build wealth and get to the next stages. And that's why this episode is so powerful, because it's going to allow you to set parameters for yourself to be able to get to the next phase because sometimes that's all you need is to have the parameters around yourself so that you can set up goals be able to push yourself to the next level. So let's get into stage one. Stage One is what I call total financial dependence. That means you're totally dependent financially on someone else. So a lot of people and everyone is born this way. So you're financially dependent on your parents or your guardian or whoever else is in your life. So think of a baby is dependent on their parents to be able to financially provide them food and shelter. This is where you are when you're dependent on someone else and sometimes Adults are dependent on other people. And in my generation, the millennial generation, there's a lot of adults that are depending still on their parents. And if this is you, if you're still living at home, depending on your parents to pay for your food for your electricity for your mortgage, you're depending on your parents to bail you out. And this is a situation that you really want to have some self pride if you're an adult. And get out of this situation, there's a couple of situations where it's okay to live at home, some of which is if you took out a massive amount of debt, or you're in just a crazy amount of debt, say you went and you took out $200,000 in student loans. Well, if you're in that situation, it's in your best interest to move back in potentially, with your parents to eliminate the rent costs, so that you can pay down that debt as fast as possible. Otherwise, that debt is going to destroy your wealth long term. And everyone has to start somewhere. And sometimes you just have to suck it up and do things like that. But if you're not in a situation like that, where you just have a crazy amount of debt, I'm not saying if you have a $10,000 student loan, I'm not saying go move in with your parents right now. What I'm saying is, if you have a massive amount of debt, that's a consideration to have, but you don't have to do it that way. Because every everyone's path is different. But if you're not in that situation, and you're still just mooching off guardians, then you really want to have some self pride and get yourself to the next stage, because too many people are living in the situation right now. And so you want to be self sufficient and self dependent. But everyone starts at that this total independent phase, and this is ground zero for everyone. But you what you want to do is get to stage two, which is the beginning of your financial journey. So this is when you can support yourself without help or handouts from anyone and you're also current on your bills. So a lot of people are still in stage one, but they think they're in stage two, because every time a bad situation happens, they call mommy and daddy and they need a bailout or every time they spend too much money one month, then they're not current on their bills, and they're behind on their bills, and they swipe the credit card to get into more debt. And this is where the problem happens. Because a lot of people are still dependent financially on something. But what you want to do is get to stage two, because this is allows you to support yourself, where you're not getting help from anyone else. What you're teaching yourself here is sound financial practice to set yourself up for the next phases. Because if you can't control your finances at a bare bones level, how are you ever going to build wealth? If you can't control your money? How are you ever going to build wealth if you can't stay current on your bills? Or if you can't pay down your debt? Or if you're getting yourself deeper into debt? How are you ever going to build wealth, so you have a choice to make in this situation, you can live this life with pure freedom. And that's what money buys money buys freedom, it doesn't buy stuff, or you can be enslaved to debt for the rest of your life. And the choice is up to you. Or you can live paycheck to paycheck for the rest of your life. And that's what this stage is, this is still a person living paycheck to paycheck. They're just current on their bills. And the amazing thing is, a lot of people think that they're good with money if they're current with their bills. And that's where a lot of people think that the stage stops right here at the financial beginning stage, because they think I'm current on my bills, I'm doing a great job, the handyman is here to tell you because your boy has got your back there is way more to your money than just being current on your bills, they're way more to your money than living paycheck to paycheck, because wealth buys you freedom. And so if you're stuck in this stage, or you thought you made it because you're current on your bills, because maybe you have a history of people in your life who have never been current on your bills, then you're doing a fantastic job because everyone's upbringing also influences their finances. But at the same time, let me tell you, there's so much more. And your path may be different than someone else's. But there's so much more to your finances, that will blow your mind. And so what you want to do is get from this stage to of the financial beginnings and get to becoming financially stable, which is stage three. And what this means is you're still supporting yourself, obviously, your bills are current, and you hold some savings that you can begin to invest. So holding some savings is the key to stage three. Because if you have some savings, you can get yourself out of sticky situations. See people in stage two with the financial beginning stage cannot get themselves out of a lot of sticky situations. And a lot of people who are poor stay poor, because they cannot fund emergencies when they pop up. So having savings having an emergency fund is huge, but that's why a lot of people stay poor is because they don't have an emergency fund. This is why Dave Ramsey, one of the first things he does is tells you to save $1,000 because if a situation arises, it's going to kill your progress if you don't have an emergency fund. And if you don't know anything about emergency funds, we talked about it in one of the early episodes. You can go back and listen to that episode because I talked about it in great detail but emergency fund is so important for every person to have to be able to get out of these sticky situations. You have to have cash on hand to save yourself. If you don't have cash, you can't save yourself from an emergency. And you will literally stay broke your entire life if you don't have some cash on hands, because emergencies always happen. It's not if they're going to happen, it's when they're going to happen. And the cash allows you to get out of that big medical expense that you never thought was going to come up, it allows you to get out of a situation, when you're trying to pay down debt and your car breaks down allows you to pay off for the repair of that car and still continue to pay down your debt, it gets you out of these situations that you're trying to fix financially. But if you don't have the cash on hand, you're never going to get ahead, and you're going to always stay broke. In addition, if you have cash on hand, you can take advantage of opportunities that come up. So let's say you're offered a job, but you have to move out of state, but it's a huge race, let's say you're gonna make double the money that you're making. Now, well, a lot of broke, people can't take advantage of stuff like that, because they can't afford the move. But having cash on hand allows you to be able to take advantage of those types of opportunities. Or maybe someone wants to get rid of their house that you know, and you don't have the money for the down payment. But it'd be a great deal. If you could buy that house. Well, having cash on hand allows you to take advantage of that deal. These are situations that once you get one good opportunity, it catapults your wealth to the next level, it catapults you leveling up. And what you're going to realize is, once you have cash on hand, and you have an emergency fund, and you have additional cash where you're starting to invest, just slowly starting to invest that seed, then you're going to be able to level up much faster and things just start to happen. Opportunities just start to come up when you have cash on hand, because then you begin to start to look for opportunities. And these opportunities are everywhere. But this is hard to understand if you're staying in stage two, where you're just staying current on your bills. And just trying to keep up stage three is where you're going to really start to make progress because you have this emergency fund and you have cash on hand to be able to take advantage of opportunities and get yourself out of sticky situations, which leads us to the next stage, which is stage four. And stage four is when you're going to get out of debt. Now when I say out of debt, there's two ways that you can do this, you can get completely out of debt, including your mortgage, or you don't have to include your mortgage, I'm going to leave that up to you. Because a lot of times if you have a really low interest rate, for example, I just locked in a 2.7% interest rate on my mortgage, I'm not paying that thing down anytime soon. Reason being is I can make way more money in the market long term than paying down a 30 year mortgage. So I'm just going to be making my mortgage payments. In other situations, if you had an high interest rate on your mortgage, I'd be paying that down as fast as I possibly could. But it's situational with the person. So your debt free stage will definitely include credit card debt, it will definitely include student loan debt, because those tend to have very high interest rates, it'll definitely include any debt out there, outside of your mortgage. But you can also include your mortgage in this situation, a lot of people would argue with me on this case, but as low as interest rates are right now, in this current environment, I'm not going to include it in there. But becoming debt free, is extremely powerful, as you know, because now that your debt is gone, you can now allocate all the funds that you were paying down towards debt towards building true wealth. And what happens here is you're accelerating and fueling the fire with the extra cash left over that you have and allowing yourself to buy assets. And this is the key This is what's coming up in some of the personal finance podcast episodes is we're gonna be talking about some huge wealth building assets that you can buy. And we're gonna be talking about the difference between assets and liabilities and things like that as well. But you're going to see how powerful it is to buy assets and how much they compound and how it can completely change your life if you focus on buying assets. But this is where you have to start that journey is you have to become debt free in stage four, and you have to get to stage three, you have some cash on hand to be able to take advantage of these opportunities. So getting to these stages is critical. And this is where you need to keep your eye on the prize. If you're in major debt, then you want to get to stage four, you're debt free, you're free from the chains of debt, and that's going to change everything for you. So you're going to do as much as you can to get through stage one, stage two, stage three to get to that debt free stage. And this is where a lot of people will stop as well. A lot of people in the Dave Ramsey camp and things like that they focus so much on their debt. And now it's time to build wealth. Now it's time to really accelerate your progress. So once that debt is gone, you really can Accelerate Your Progress, especially if you want to be financially independent or retire early. This is a huge step because there's no way to save, say 50% of your income if you're in massive debt because you're making all your payments down on your debt. So this is a huge way to begin building wealth is getting through that debt free stage. So now let's get into the next four stages, which are massive wealth building stages. So now we get to stage five, which stage five is a massive stepping stone because what happens in stage five is you're you're starting to invest you're debt free and you're starting to invest that money and accelerating your investments. So all that money is going towards your investments in stage four. But in stage five, you become financially secure. And what happens in stage five is you have enough investment income to cover your bare basic living costs. So your bare basic living costs, so your food, your water, your housing, your transportation, you can cover those items with your investment income. So let's say your bare bones minimum is that you need $40,000 a year, just your bare bones minimum to live. Well, this financially secure stage allows you to hit that point. So no matter what happens to you say you lose your job, you at least have enough income coming in to cover your basic needs. And so truly, you could retire early if you want to. But at this phase, it's not where you exactly want to be because you want to be able to do more things with your money than just can't cover your bare bones living costs. Unless you just truly don't want to work and you want to sit in your house all day, then this could be the end of the road for you. But most people don't want that most people want more. So to cover your bare bones living costs, is a great phase to be in. Because guess what, you have a lot less stress in your life. imagine not having any financial stress in your life. Some of you, your finances keep you up at night, all night long, some of you do have constant anxiety, imagine that just being lifted away. And the choice is up to you to do that your road may be harder than everybody else's, your road may be longer than everybody else's. But the choice is still up to you. because anybody can do this. Anybody can build wealth, there's people out there that are gonna be more privileged than you. But you still have an opportunity to be able to build wealth slowly, and you can build this wealth, slowly get yourself out of debt, save up as much money as you can, so that you can get to this point where you're investing money to become financially secure. So you can cover your bare bones living expenses, and get rid of that anxiety, get rid of that financial anxiety, this is the point where you want to get to, to really start to accelerate that well. Imagine waking up every single day, just knowing that your basic needs are covered that you don't have to work for those basic needs, but they're just covered, but you want to continue to work, so that you can get to the next level, to be able to accelerate your wealth to get to the place that you want to be independent. And that's what stage six is. So getting for stage five, which means you're just financially secure, given enough income to cover your basic bare bones needs. Stage six is financial independence. Now, if you know about the fire movement, you know, they're somewhere in between stage five and stage six, some people would say stage five is your fire because you could retire whenever you want. But stage six is when you have enough investment income to cover your current lifestyle. So this is where the true fire movement lives that right here stage six because you're financially independent, or you can retire early for some people. But when you're financially independent, you have enough income to cover your current lifestyle. So let's say you spend $100,000 a year let's go with big numbers here, and you spend $100,000 a year well, stage six means that your investment income is $100,000, a year or more. So you have enough investment income to cover your current lifestyle. This is where a lot of people see the dream as is getting to this point. And this is where a lot of people work so hard to get to this point. Because now you're retired if you want to be you don't have to be you can build even more wealth and get to the next levels. But you retired if you want to be. Now how do you get to this point? Well, we've talked about this a lot of times on how you can retire early. But getting to this point takes a lot of hustle, it takes a lot of work. And it takes a little bit of head knowledge, but anybody can do it. And it really to get to this point, I'm going to put it as bare bones simple as I possibly can, you have to spend less than you make invest the gap between your spending and your saving invest the difference until your wealth grows enough to allow you to be able to live off the investment income. But spending less than you make and investing the difference is the key to this equation. And that's how you're going to get to this point. Because if you're spending every single dollar that comes in, you're still on stage two, which is just staying up to date with your bills. And if you're not saving any money, you're going to stay at stage two for the rest of your life, you have to understand that these phases come with somewhat of a sacrifice, but you're gonna live different than everybody else in your circle today so that you can live differently than everybody else in your circle in the future. Meaning you don't have to work anymore. If you don't want to. You can go on whatever vacation you want. If you want to. You can read menus from left to right instead of right to left, you don't have stress, you have financial freedom, you can do whatever you want with your time, which leads us straight to stage seven. So a lot of people think it stops at stage six, you've you've covered your expenses, you're done. But stage seven is true financial freedom, which means you have enough investment income to cover every big dream that you want to have. Maybe you want a couple of vacation houses you want one in Colorado and then you want one overseas in Europe. Financial Freedom allows you to do that. It allows you to have everything you really truly dreamed about in life and allows you to give that to your family. Maybe you've always wanted to send your kids to private school. Or maybe you've always wanted to take up aviation as a hobby and fly planes around. All these things you've always wanted to do you are able to cover that in stage seven and financial freedom and it allows you to live the life you want to live have the freedom with your time be able to do what you Want to do, or a lot of times, this is also where you can, where you can start a business, maybe you want to start a business in a certain area, you've always wanted to do it your entire life, this allows you to have enough money to be able to do that. And let's talk about that for a second. Because a lot of people think you have to have a lot of money to start a business. But you can start a side hustle in stage two, and slowly build it up as time goes on. And that's going to accelerate your path to the stages, because if your side hustle starts to make money and make real money, you're gonna jump these stages much faster. Because increasing your income, spending less than you make are the huge parts of this equation. But increasing your income through side hustles, or increasing your income at your day job is going to take you to these levels 10 x faster. And it's the key to this situation. And that's why we always talk about how we can increase our income all the time. And getting to this financial freedom stage. Stage seven is the massive reason why, because it takes you to the point where you get the lifestyle that you've always wanted. And that's not to say getting to this financial freedom stage is all gravy, because everyone has hardships that come up in life, life happens. But getting to this stage allows you to have freedom with your time, which means in turn, that you can focus your time on anything that you want to do. And you may be thinking, that's awesome, I get to do whatever I want to do in stage seven, financial freedom must be the end, right? Well, there's one more stage, and I don't stop at stage seven for a reason. Because if you want to continue accumulating wealth, then there's financial abundance stage eight. And what this means is that you have enough investment income, that you could never possibly spend this money. And you're going to have enough money where you can focus on the stewardship of your wealth, focus on preserving that wealth for your family for the long term. And you can focus on giving that well giving wealth to others in need giving wealth away. And we're going to have a whole episode on giving. But that's one of my big personal motivators to be able to give wealth away to be able to support the things that you want to put your money towards, put your money where your mouth is, because you can talk all day long on social media and things like that. But if you're not putting money towards your cause, then what are you really doing, Imagine being able to support your cause financially to actually propel and make a difference, and move that needle forward. And what we'll talk about in that episode is you can get money at any of these stages. And you should be giving money at any of these stages, in my opinion. But at the same time, this stage allows you to give abundantly to the things that you care about. And that's why this journey is so important. Because it allows you to freedom to be able to do whatever you want to do with your money, and allows you to change your life and change the lives of others by giving. And it's going to change the trajectory of your entire family's line, if you figure out a way to have financial abundance and be able to preserve that money. And with wealth preservation, I have all kinds of ideas, I would love for there to be a fun where you could put all your money into it and allow your family forever to be able to draw down you know, to 3% for the rest of their lives, you know, 200 years down the line, you can have family members living off your money still, because you have found a way to preserve it, and allow them to draw down a certain amount of money every single year. And the best part is compound interest is working for you. So that money is gonna grow, and your family's gonna be able to live on more money and more money as time goes on. There's so many things that you can do in the financial abundance stage, there's so much flexibility, that it allows you to change the course of your family's life. And that's why we target these stages. That's why this is so important. Because having life changing money for you, your family and the things that you care about can make all the difference in the long run. So think about these stages. And think about how you can get to the next level. Because getting to each of these levels will change your life in its own right, every single time. If you're at stage two, and you get to stage three, or if you're at stage three, and you get to stage four, and you're debt free, that's going to absolutely change your life, it's going to take stress away from you, it's going to take anxiety away from you. And that's what money's here to do. It's not here to buy stuff. It's here to buy your freedom. what's worth more to you stuff or freedom stuff or releasing your anxiety stuff, or building wealth for your family for the long run, what is more important to you? And that's what you have to ask yourself and say, Hey, do I want to keep buying more stuff? Do I want to keep running up in debt? Or do I want to change my family's legacy? Thank you guys so much for listening. And if you get true value out of this episode, share it with a friend and leave a rating and review on Apple iTunes because that is what helps support this show. That's what helps get the show out there because we want to spread this message to everyone. It's not taught in high schools. It's not taught in colleges, and we want everyone to understand that they too can build wealth, everyone can build true wealth. Again, thank you guys so much for listening, and I hope you have a wonderful day.