How to determine your financial condition?
In this note, I will briefly tell you how to determine your level of financial condition. Let me immediately emphasize: the financial condition depends simultaneously on the level of earnings and on the level of spending, on the ratio between these values, as well as on the nature of the assets and liabilities of a person or family.
In total, 4 levels of financial condition can be distinguished.
Level 1 – financial hole. If expenses exceed income, you are in a financial hole. No matter how much you earn: if you spend even more, it’s still a hole. At this level, a person has debts, there are no financial assets (reserves, savings, capital), his income is only active.
Level 2 – financial instability. If expenses are approximately equal to income, you are in a state of financial instability. At this level, a person has no debts, or they are insignificant, but at the same time there are no financial assets. A man spends everything he earns. This means that in any force majeure situation that requires expenses, he will have nothing to pay for them, he will acquire debts and slide into a financial hole. Income in this case is also only active.
Level 3 – financial stability. If your income is greater than your expenses, you are in a state of financial stability. In this case, at the expense of free funds, a person creates financial assets. He is financially protected by the presence of a reserve fund, can create savings for the purchase of expensive goods and capital for investment. Income at this level can already be both active and passive.
Level 4 – financial independence. If your income is predominantly passive, coming from several sources, and greatly exceeding your expenses, congratulations, you are on the level of financial independence. Here, the main income-generating factor is no longer labor and time, as at other levels, but capital. And capital can be increased indefinitely (unlike labor and time), so incomes in this state tend to grow rapidly.