Good stocks to invest – Which Stage of Wealth are You at?

Good stocks to invest

I cannot understand some lunch conversations or small talk during family gathering.

Perhaps because of the structured way I look at things, some of people’s point of view don’t make much sense to me.

One very common one is the definition of Rich.

Here is some of the ways rich is defined:

“She doesn’t use a coupon to get a discount for her fast food when the coupon is there for her, because she is rich.”

” They can afford to have 4 children, therefore they are rich”

“They work in civil service, they are much richer than us”

“He drives a continental car and fetches her to work, he is rich to be able to afford that”

“The family goes for 3 holidays a year, one that is non-southeast Asia, they must be rich”

“If he can buy that 3 bedroom condo he must be rich”

“He plays the stock market, he must be doing damn well”

The Flaws of measuring the Wealth of a person this way

The people they are talking about might well be rich, but notice that there is much inference here.

What we show on the outside and what people see defines how rich we can be.

A person is also “rich”, when they can afford things better than you are.

The flaw in assessing how rich we are is that what you own and the lifestyle you live do not fully show the extend of how financially dependent or financially independent you are. The person driving the Audi could very well be struggling to pay for the Audi but need the Audi due to the sales nature of his job.

Comparing against oneself do not show the extend of wealth as if you are earning $1000/mth a lot of people would be richer by that definition.

We need a better scale or meter.

And we also need a sensible way to show how a person have improved his or her financial situation over time to put them in a better position.

It is this reason why we want to build wealth the right way.

The following 8 different stages are the stages that we can measure how a person have progressed in life when it comes to wealth.


I didn’t create this set of milestones in our journey towards financial indepenfdence. Joshua Sheats from Radical Personal Finance formalize these stages and there is no reason to take and change it when they describe the progression very well.

Through these stages, you can also use it as a benchmark to measure how rich your peers, family and friends are.

Stage 0: Financial Dependent

A person at this stage, to put it simply have a lot of baggage.

Firstly, he or she has to depend on others for survival, for extravagant things or to take care of daily expenses.

Net Worth (Equity) = Assets – Liabilities

Net Worth is usually what we use to determine if a person or entity is in a good financial shape.

The Assets are the stuff that:

  1. Produces current cash flow or potential to produce future cash flow. You as a human capital, investments, savings, insurance savings, investment bonds and properties are some examples
  2. Have a value that you can sell off in exchange for money. The value will depend on how much people are willing to pay for it now. This can be whatever value that is left of the car, the home, your stamp collection, your collectibles, your gold and silver coins

The Liabilities are

  1. Mortgage Debts that is outstanding you took on your home
  2. Mortgage Debts that is outstanding that you took on your investment properties
  3. Debts that you borrowed as part of a leveraged insurance savings plan
  4. Credit Card Debts that you have outstanding
  5. Unsecured Debts that you borrow from a money lending agency (legal or not legal)
  6. Debts that you borrow from family members, friends and relatives
  7. Debts on the purchase of your car

A Financially Dependent person have a negative net worth meaning the assets that he has is less than the liabilities.

A Financially Dependent person has to borrow consistently from banks, institutions, friends and family for the lifestyle that he or she lives.

You might see him always driving the newest cars, switching from a HDB flat to a condo and bringing his family to European holidays for 3 years in a row.

If you assess his net worth it might be a different story.

Secondly, a financially dependent person is unable to keep his cash outflows below his cash inflows.

Net Cash Flow = Cash Inflow – Cash Outflow

Cash Inflow are:

  1. Disposable Income
  2. Dividend Income from Dividend Stocks
  3. Business Income from Side Businesses
  4. Interest Income from bank savings, deposits
  5. Cash Payout from insurance savings endowments
  6. Systematic annual selling of investment assets

Cash Outflow are:

  1. Basic Survival Expenses.These are the expenses that without them, you and your family can’t survive well
  2. Rich Living Expenses. These are the expenses that you do not need to survive but they make your life feel RICH
  3. Repayments for Liabilities

A Financially Dependent person is likely to have a net cash flow that is negative.

How can a person spend out more than he or she earns?

Because you can borrow from others. You can get your family to pay for your house or give you an allowance. The latter is a good situation to be in.


But is the person DEPENDENT on others?

Yes he or she is.

When you are dependent on others, the person have some hold over you.

In this case, they are your friends, boss, company and the banks. If they are not happy about something, they can push that situation to you to create stress in your life.

Can a person be having a positive net worth yet net cash flow negative?

Yes. The person may have assets that is of value, but his family members are servicing his assets.

He may also have lost his job, move on to a lower paying position, but still keeping his cars and big house, but having a very problematic time servicing his home.

Can a person be having a negative net worth yet net cash flow positive?

Yes. The person owes some debt, but he is keeping within payment which is a good thing. The person may be making a conscious effort to pay down the debt or to build up the assets.

He could be taking on debt for studies so that he can earn more in the future.

These are good debts.


But is the person dependent on banks or family members at this point? Likely yes.

Financially Dependent can be good or can be bad, we are not demonizing people at this stage. It depends very much on what the person builds up in his assets.

Stage 1: Financial Solvency

If a financially dependent person proceed to improve in how he or she manages the wealth, they become Financially Solvent.

When they achieve Financial Solvency:

  1. Their net worth can still be negative, but they stop taking on more money from unsecured lending, friends and relatives or parents
  2. They are not behind on their liabilities payments. This means their net cash flow is positive.

A person that is financially dependent and progress to this stage shows either higher motivation, a change of their money beliefs and values, a more conducive environment that assisted them to realize they need to be more responsible.

As their net cash flow is positive, they can start putting money away to building wealth, paying down more debts or saving for some goals.

Stage 2: Financial Stability


A person proceeds to achieve Financial Stability when they manage to build up some emergency funds.

A person’s emergency fund, is more important then paying off all his or her debts.

Without the emergency fund, a financially solvent person would be paying off his debts with all his net cash flows and one hospital emergency, and he would have to turn to his credit card or other family members for help.

An emergency fund of $3000 helps a lot, even if it is not the full amount we usually recommend.

To find out how an emergency fund works and how to build it up, you can read this comprehensive guide that I wrote.

A person that achieves Financial Stability tends to have achieve Financial Solvency as well.

Stage 3: Debt Freedom


Debt Freedom is achieved when a person is able to pay off all his or her debts.

That seems drastic because for most people, their mortgage is 25 to 30 years, which means that it will take a long time to be free from debt.

However, we tend to consider Debt Freedom to be achieved when the person paid off all their high interest debt except mortgage debt.

Mortgage debt due to the duration and that the banks can foreclosed and sell off your place, tend to have the lowest interest, and essentially a dwelling is important to some for stable family building.

A person that achieves Debt Freedom tend to have achieve the previous 2 stages as well.

Stage 4: Financial Security

When a Financially Solvent person have a positive net cash flow, he or she can put the cash flow to building wealth.


When the person develops these Wealth Machines, their wealth fund would grow and be able to distribute wealth cash flow either by selling off assets systematically, or in the form of interest income, dividend income, business income.

Financial Security is reached when your Wealth Machine(s) is able to provide a wealth cash flow that is greater than your annual survival expenses.

The annual survival expenses is not all your current expenses, but is the minimal amount that, with this set of expenses paid, the family does not go hungry and can live on.

There are no luxuries or rich living here.

Financial Security is a stage that is very attractive because it gives a person optionality.

It enables the person to make a riskier career move without worrying too much about the repercussions, take a break from work, or pivot to semi-employment.

The person is one who do not have to give a crap about how the boss thinks when his basic survival is not determine by the moods of his or her boss.

Related: How much wealth do you need to achieve financial security, financial independence and retirement?

Stage 5: Financial Independence

Stage 5 is a progression from Stage 4.

Financial Independence happens when your Wealth Machine(s) is able to provide a wealth cash flow that is greater than your annual current expenses.

We can rate a person having an Audi as rich, but to me if a person has an investment property and a portfolio that provides a wealth cash flow covering what he and his family needs now, that is truly a position to be enviable.

Stage 6: Financial Freedom

Once you are past stage 5, the rest is the stuff of fairy tales.

Financial Freedom happens when your stable of Wealth Machine(s) is able to provide more than your annual expenses but also one or two extravagant things that have previously not considered.

What is life if you slog so hard and not get to enjoy?

When a person reaches financial freedom, he can throw in a few things that they have denied their family for the longest time, be it the premium car that they wanted, or one more holiday for the year.

The difference here is that these new spending goals weren’t a consideration before this stage of their lives.

Stage 7: Financial Abundance

The last stage of the list is Financial Abundance.

A person and his family is really rich when, his net worth is very positive, and his wealth machine(s) provide a level of cash flow that expenses accountability can take a back seat.

This is to say that the cash flow is so strong that they can provide for the family and other goals that money doesn’t run out easily while at Financial Freedom, careful considerations still has to take place.

When your friends or yourself have reached this stage, you are probably at the top 1% of the place that you live.

It is likely you will not have an issue sending your niece to an overseas education out of goodwill, throw an extravagant birthday bash for your daughter’s 21 year old birthday or help fund that poor family that got into trouble whose story was all over the newspapers.


After showing these 8 different stages, you will realize that it is easier to infer wealth from material goods then this meter gauge.

It will take some probing to find out some of the things that people do not want to discuss about:

  • their debt
  • their negative cash flow
  • how much they purchase the assets at

A positive net worth and a negative net worth not to mention the strength of a person net cash flow shows stability, security, optionality.

This also means there may be more to that story then what we see on the front.

You might be richer than the person for all you know.

On an individual level, how do you measure in this 8 stages, has anyone achieve some sort of financial stability, debt freedom or financial security yet?

Let me know.



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