Personal Financial Position: From Financial Instability to Independence

Personal Financial Position: From Financial Instability to Independence

Month after month, many of us look at our bank and credit card statements and are surprised that we spent more than we thought we did.

We understand that the financial situation of a person depends on expenses and income. Therefore we can divide personal financial position into 4 groups:

  • Financial pit. Expenses higher than income.

  • Financial instability. Expenditures and income are the same.

  • Financial stability. Revenue higher than expenditure.

  • Financial independence. Revenues are several times higher than expenses.

The financial pit and financial instability indicate that we are living below the poverty line.

Now let’s look at each of these situations in more detail.

 

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Financial pit

It is the lowest level of human financial position, which can be described in quite simple words – human expenditure exceeds its income.

This gap creates debts and shows that we do not have cash reserves and savings.

If a person in a financial pit tries to pay off his debts using borrowed funds, he/she will have his/her own financial pit rooted deeper.

Only a strict, personal financial control, as well as reduction of expenses and finding new sources of income can change this situation.

 

Financial instability

Financial instability is a financial position of a person in which his/her income is as high as expenditure. In a state of financial instability, a person consumes as much money as he/she earns.

On the other hand he/she does not have cash reserves and money savings.

In this case, any unexpected situation encourage people to borrow money (e.g. take a loan).

But as soon as a person borrows money, he/she will immediately reach a lower level – the financial pit ( Get Rid of Bad Spending Habits: 5 Necessary Steps ).

In this state, the word “instability” speaks of itself to a person, as if there is enough revenue to cover expenses, but nothing remains, so this situation is very volatile and insecure.

 

Financial stability

Financial stability is a situation in which personal income is higher than personal expenditures.

The consequences for such a situation – a person has no debt, he/she has cash reserve and cash savings.

Financial stability is above the poverty line, because cash reserves and savings allow solving any unforeseen situation (even loss of revenue sources) without financial problems. In addition, if the revenue is higher than the expenditure, it allows us to increase both the cash reserves and capital.

Therefore, it is almost impossible to get from this state to financial instability.

If a person has crossed the poverty threshold, then it is very unlikely that he/she will get there again ( How to Organize Paying Your Bills ).

 

Financial independence

Financial independence or financial freedom – it is the highest financial standing of a person.

Its name suggests that a person is not dependent on money (to better understand money you can read our article 6 Things about Money You Should Have Learned in School ).

The financially independent income of a person exceeds his expenses several times.

Financial independence differs from financial stability by source of income. Person´s income with financial independence is mostly passive (he/she can only work if he/she wants to).

Such person receives passive income from several sources, so the probability that he/she will return to the previous state is almost impossible.

If a person has made his/her way to financial freedom, then he/she will keep that position for the rest of his/her life.

As we can see, it is not immediately possible to get financial freedom.

The road from financial pit to financial independence is a long, laborious process that requires a lot of effort.

 

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