What criteria can be used to assess the financial condition of a person or family, and what it can be.
Someone earns more, someone less. Someone lives on their modest income, someone is mired in debt. Someone has a lot of property, someone does not have it at all. How to determine your financial position, and what does it depend on? Let's figure it out.
If you ask such a question to the average person, most likely his answer is something like this: the more you earn, the higher your financial position, the more property you have, the richer you are. But this is only half true. There is also a second side.
Imagine a person who makes $ 100,000 a month. He has a huge house, several business-class cars, a yacht, and he regularly rests on the islands. What is his financial situation? Now imagine that he spends 150 thousand dollars a month, and all this property is acquired through debts that need to be returned, but there is no opportunity for this. Well? Have you changed your mind?
Remember the important rule:
Based on this, 4 levels of a person's financial situation can be distinguished.
Level 1. Financial hole. At this level, a person spends more than he earns, his income is less than expenses. Accordingly, the person has debts and no financial assets. Income at this level can only be active.
Level 2. Financial instability. At this level, a person spends about the same as he earns, his income is approximately equal to expenses. The person has no debts or is inconsequential, but he also does not have any financial assets. He can make large purchases only at the expense of loans, when a force majeure situation occurs, he quickly becomes overgrown with debts. As the name implies, his condition is unstable, and he can very quickly go down to a level below - into a financial hole. Income here can also only be active.
Level 3. Financial stability. At this level, a person spends less than he earns, his income exceeds expenses, and he retains part of his earnings. Accordingly, he has financial assets - reserves, savings, and no debts. Even if a person loses income for some time, they will decrease, or another force majeure will come - he will be able to survive it at the expense of accumulated assets. Accordingly, the state is stable. At this level, not only active, but also passive incomes appear, which bring investments of free funds.
Level 4. Financial independence. The highest level of a person's financial condition. At this level, incomes significantly exceed expenses, most of the earnings remain and turn into capital that creates new earnings. Thus, incomes grow exponentially (constantly increasing). The presence of personal capital and the predominance of passive income over active income is the main difference between financial independence. A financially independent person does not need to work to make money - capital does it for him. Many aspire to this level, but only a few can reach it.
Now you yourself can determine your financial situation, and, of course, see what you need to strive for.
