The Four Levels of Wealth

FINANCIAL FREEDOM - such a big word. Desired by all, understood by few. So do you have your own definition of what financial freedom is, and what it means to you? Clarity is power, and the clearer our definition of financial freedom, the more likely it can be achieved.

While I was reading Adam Khoo's Secrets of Self-Made Millionaires, I came across a well-defined explanation of what financial freedom is, along with the other different 3 levels of wealth.

Level 1: Financial Stability

This is achieved when one has enough liquid assets to cover his/her expenses for at least 6 months, and he/she has sufficient life and hospitalisation insurance to protect against permanent disability, inability to work, or sudden death.


Level 2: Financial Security

This is achieved when one has accumulated a critical amount of positive cashflow assets to generate enough passive income to cover one's basic expenses.

Level 3: Financial Freedom

This is achieved when one has accumulated a critical amount of positive cashflow assets to generate enough passive income to sustain one's current lifestyle. This is also the point in time one can choose to stop working and yet has enough to live at his/her current standard of living.

Level 4: Financial Abundance

This is achieved when one has accumulated a critical amount of positive cashflow assets to generate enough passive income to sustain one's desired lifestyle. This is the point in time one can absolutely live his/her dream without any financial worries, and can channel 100% of their active income into charitable causes.

As you can see, from Level 2 to 4 consist of 1 common element. That is passive income. Thus one whose only income stream comes from his/her job doesn't qualify for Financial Security or the higher levels yet as income from a job (active income) may be disrupted in the event of retrenchment, retirement, illness, disability or death. Income from rentals, interest, dividends, royalties, and other income that comes into your pocket without one having to continually trade time and effort for money are considered passive income.

Which level are you at today and where do you want to be?