Three Stages of Personal Finance

JD over at Get Rich Slowly often mentions the 3 stages of personal finance. It's a topic that I have not covered here until now. My "road map" of personal finance is a little different. I will compare the two here.

3 Stages of Personal Finance:

1. Learning the Basics
2. Putting Basics to Practice
3. The "What Next" stage

In JD's system he starts with understanding concepts of compound interest, paying off debt, and saving. In the second stage he says we are paying off debt, saving for goals, exercising frugality. Lastly the third stage covers having basic savings (emergency fund) covered, retirement covered, and then pursuing the goals you want as you have the financial ability to do so.

JD says he has reached the third stage and for that I applaud him! He made it through the hard road and now can enjoy life a lot more. His path is one I also am taking right now. I can safely say that this is not easy and a constant struggle. I am frustrated on a daily basis but must move forward. This why my system is slightly different:

My Road Map of Personal Finance:

1. Obtaining Values, Beliefs, Practices
2. Learning how to handle money
   
3. Accumulation
4. Financial Freedom (most call this "retirement")

In my road map I start with childhood. You usually get your money, saving, and spending values from your parents and family. You tend to do what they do (right or wrong). In the second step you are off to college or work in the "real world" and you learn how to handle money. This usually involves credit card debt, expensive mistakes, and no savings (in my case). A lot of us have to hit the proverbial "wall" before we realize and embrace the need for change.

Once we figure out what we need to do we make a plan to pay off our debt, save for an emergency fund, save for retirement and other needs, and finally get a feeling of getting our financial lives in order. I call this the Accumulation step since we are working toward a positive net worth and beyond. (This is where I am right now).

Finally you reach the Financial Freedom step. I suppose this is what I would consider my "What next?" stage since at this point I have all debts paid, have very substantial savings, and don't necessarily have to work unless I want too. I can go extended periods of time without the need of a paycheck. This is the basis of the title of my blog: "The path to $1 million".

My actual goal may change to something other than $1 million. I am using that number as something to aim for. I may figure out that it does not have to be that high in order for me to get to the 4th step. For me (at least) I am more prone to exercise extra frugality with a loft goal of $1 million as opposed to say $100,000. I do what works for me!