The Stages of Personal Finance

Perhaps it is something in the water lately, but after reading Dave’s post and this one over at Krystal’s blog I have noticed that some people are little out of touch with how the stages of personal finance typically works.  Although the stages of personal finance has been theorized by other bloggers I will put my two cents on it and then mention how that relates back to these conflicts.

Stage 1: Clueless

We all have to start somewhere and by far most people start here at clueless.  You don’t have a budget, because you don’t know what you spend.  Your investments were chosen at random or with off hand comments from other people.  You likely either have consumer debt or will have it shortly since most people at this stage overspend.  Basically you are a baby in the woods and the credit card wolves are circling for a good meal.

Stage 2: Awakening

One day something snaps inside of you.  You are sick of this debt and you start to realize you can’t live like this forever.  So you start to do a little reading on the topic of personal finance and perhaps stumble across some debt repayment or frugal blogs.  The ideas you realize aren’t that complicated and easy to follow.  So you start cutting back on your over spending and really focus on paying down that damn debt.   Yet the most amazing thing of all is your start to realize how the less you spend means the more you have to pay back debt.

Stage 3: The Wall

After a few months or years depending on how stubborn you are the ‘new debt paying you’ is starting to get old.  You are tired of cutting coupons and taking a lunch all the time.   You miss going out for supper and damn it it is taking so long to pay back that debt.  What is the point  of continuing?  Maybe you should give up this whole cheapskate existence.  At this point people take one of two paths, they either: a) give up entirely and cycle back down to stage 1 again (and likely repeat the process at some other point) or  the break through and move on to stage 4.

Stage 4: Strategic Spending

At this stage you hit the wall in stage 3 and managed not to give up entirely, instead you woke up to the fact you have been a cheapskate when in fact what you want to be is frugal.  So you start to spend more on some areas of your life that you really missed.  At the same time you realize you don’t miss some of your old spending habits.   So you entered the strategic spending stage where you cut back in some areas to save some money, but also are ok with spending more on other areas because they are important to you.  This stage is why this blog focuses a lot on being happy, since that is a good guide on where to spend your money and where to cut back.

Stage 5: Earning More Money

This is a particularly weird stage as it can technically occur anywhere after stage 1.  The appearance of it depends on numerous external and internal factors such as do you know anyone who owns a business, do you like to take risks and do you have the capacity to earn more in your current job?  Regardless of when it occurs you realize that you can work the other side of the money equation and just earn more.  Getting a promotion, asking for a raise, starting a small business, taking a second job…you get the idea.  I personally list this stage here because the majority of people that I’ve talked to tend do this stage about here.

Stage 6: Earning  More Time

This stage is interesting as it represents the final evolution for most people in personal finance.  You realize you can ‘buy time’ by having your investments make money instead of you.  This often lead people to write blogs about early retirement (yes, I’m guilty). Also if they stay here long enough they might also realize that even if you can earn more money doesn’t mean you have to.  You can also choose to work less and have more time starting right now.  Or the alternative is to earn more per hour, yet work less.  In either case, the focus now shifts to finding and keeping that elusive thing called: balance.  That sweet spot where you have enough money for today and your future as well as balancing your time for today and in the future.  While it is possible to hit that balance it never lasts since your life continues to change.  So balance becomes your white stag which we endless chase yet never hold onto for long.


So a lot of disagreements on personal finance seem to flow out of people who are in different stages.  If you aren’t at stage six the idea of choosing to earn less (either with your job or your investments) can be a little mind boggling.  The same thing occurs for those that have lots of friends at stage 1 while you have moved onto stage 2, ironically that very conflict is what often triggers stage 3 where some people really do just out grow apart over money.  So regardless of what stage your at try not to attack others, but rather struggle to understand their point of view.  It might be alien to you now, but in the future it might make sense.

Which stage are you in?  Do you have conflict with others in a different stage?  If so, what about?

6 thoughts on “The Stages of Personal Finance”

  1. Great post.

    I’m probably around 4/5. I think my biggest conflict is with those who struggle to understand how someone could be happily retired and living on less.

  2. I’m at stage 3, heading for stage 4 with an early eye on stage 5. The Wall is an annoying place to be, and I think I just needed six weeks off from the bi-weekly deposits into my savings account as well as a personal break from working out in the gym.

    The rebirth is beginning. TFSA has been invested, RRSPs are finalized, insurance has been paid and half my property taxes are in and my annual bills (like internet) are paid. I personally like to take this hiatus and pay off everything at the beginning of the year so I can concentrate on less monthly expenses. It gives me the delusion that I save more over the year. I realize there is the time value of money in effect here, but the impact to me is negligible and the lifted weight from my mind is more of a return.

    So as I get into the strategic spending phase, I have been limiting most ‘frivilous, but good once in a while’ purchases to Groupon and Red Flag Deals, where there are usually some great deals. These are generally meals out or vacation deals (once a year). Generally, I shop for my wife at discount prices.

    My passion for books leads me to purchase at random, but I think I need an annual budget here because I cannot be trusted.

    Stage 5 is looming, and for me, I think it will revolve around a job in the summer that lets me be active and takes me away from a cubicle environment.

  3. I reached Stage 6 back in 2001 when I switched from working F/T to P/T, forgoing about 40% of my take-home pay in order to take back my life and be able to do things other than work and sleep. Ridding myself of much of my lousy commute was big, too. I “bought” my freedom with 40% of my take-home pay, something I would repeat in 2007 when I chose to forgo 27% of my take-home pay to get more freedom, and again in 2008 when I stopped working altogether and retired.

Comments are closed.