The Seven Stages of Financial Independence

Financial Independence (F.I.) in Malaysia

There are a lot of misconceptions about financial independence and early retirement here in Malaysia. People think you have a high income if you’re able to retire early. No doubt, having a high income helps, but the crucial part of the whole F.I. equation is our ability to save and invest.

Financial independence is achieved in stages, even after you’ve retired, you still have to work at it to keep your money flowing in. It’s a lifelong process.

The Road to Financial Independence

Stage 1 – Dependence / Reliance 

We all begin here at this first stage. We start off being reliant on financial support from our families. They provide us with our daily necessities for the initial years of our lives. We commence to chip away at this dependence when we earn our first income.

Some of us may get a head start by having part-time jobs while still in school. Some may have gotten lucrative scholarships which gives an allowance. All of these help us break free from our reliance and dependence on financial support eventually.

Stage 2 –  Dependence (Continued)

After we are finally financially independent from our parents, guess what? We are still at the Dependence / Reliance stage. Moving out and living on your own doesn’t automatically make you independent. You are now in fact, heavily dependent and indebted to our various financial institutions.

The majority of us after ‘gaining independence’ from our families would have taken out a huge loan to buy their first home. You’re still in this stage if you spend more than you earn (if you’re digging deeper into debt). Basically, if you’re not earning a “profit”, you are dependent on somebody else. You are not financially independent.

After you start earning a profit — and again, this means you’re earning more than you’re spending — you FINALLY make your way down the path to financial freedom.

Stage 3 – Solvency 

Stages of Financial Independence Solvency

Solvency is the ability to meet your financial commitments. You reach this stage when you no longer rely on anyone for financial support. When you have savings at the end of every month, you’re at this stage. This is where you’re no longer accumulating debt. You might still have loads of loan payments, but you’re not accumulating anymore debt.

As a Certified Financial Planner, I’ve found that to get a person to go from the Dependence stage to Solvency is one of the toughest. It is not only taxing physically but also mentally exhaustive for someone to overcome Stages 1 and 2. But once a person finally find themselves with a surplus at the end of the month, they will have the confidence to sail through the next 4 stages.

Remember, it varies from person to person how long it takes for us to reach stage 3. Some people reach this stage in their teens. Some never reach it.

Stage 4 – Stability / Resilience

Stages of Financial Independence DEBT

You achieve stability after you’ve repaid your bad debts (ie. credit cards), established some emergency savings, and continue to increase your savings.  You’ll feel an immense weight lift off your shoulders the moment you make the final payment to your debts. Trust me, it is a great feeling.

It is important to have your ‘rainy day’ fund built up to prevent yourself from falling back to stage 3 due to unforeseen circumstances. The usual recommendation is to save up to 6 months of your salary as your buffer. But if you’re feeling more risk averse, there is no harm in going up to 1 -2 years.

Now you’ve built a buffer of savings to protect you from unfortunate events, you’re ready to put the extra funds to work by investing.

Stage 5 – Security

You reach the Security stage when your investment income can cover your BASIC needs. At this stage of financial independence, you have the ability to live and work as you choose. You have enough saved that you could quit your job at a moment’s notice without hesitation. I am still striving to reach this stage of financial independence. I estimate my basic needs as a young adult in Malaysia to be about RM1,500 per month. With the dividends from my portfolio – the Freedom Fund, I’m almost there.

Based on how much you have saved and invested, you could live a meager existence for the rest of your life without worrying about money. Even if you never worked again, you could afford shelter, basic food, daily essentials, and medical care.

Stages of Financial Independence Time > Money

Starting from Stage 5 on the road to financial freedom, your concerns are no longer just about survival. Money is no longer a safety net. It is now a tool to help you thrive and build the life you want. People who reach this stage will truly understand that money is just a tool. You will learn the value of your time. Instead of spending 8 hours a day for your monthly salary, you start to think about using money to free up your time for yourself and your family. Knowing what gives you meaning and purpose is a vital part of financial freedom and I believe it should be the starting point on this journey.

Stage 6 – Independence

Financial Independence

This is the Financial Independence we should all aim and strive for where your INVESTMENT income can support your current standard of living. At stage 5, you are merely able to cover your basic needs. At this stage, you can finally declare true financial independence. The money you have saved and invested would allow you to live like you do today until the day you die… and then some more.

It is the ultimate goal and dream of mine to reach this stage as I’m sure it is for many of you. All the savings and investments I’m doing has been to eventually be able to reach this stage. Financial independence varies from each person. For some of you, FI is achieved at RM12,000 per annum. Some will only be satisfied with RM24,000 per annum. For me, the sweet spot is RM36,000 per annum. Decide on your number now and start working your ass off towards it.

Stage 7 – Abundance

Financial Independence

In the final stage of financial freedom, you have more than enough. Your passive income will not only fund your lifestyle forever, you can even turn it up a notch or two. Now is the time to indulge in the luxuries in life and enjoy the fruits of your long tedious labour.

Here’s the bottom line: The more money you save, the more freedom you have, and the more risks you can take. As your financial independence increases, you chip away at the wall of worry. You’re able to make financial decisions pro-actively rather than re-actively.


There are tonnes of resources out there on Financial Independence each with their different stages. I’ve sifted through them all throughout the years and tried my best to compile them to best fit Malaysians.

The regular readers here are likely to be professionals (or at least semi-pros) of the personal-finance world. We should take the time out to help others out of the financial binds they find themselves in. I think it’s in our best interest — in the best interest of everyone, really — to get more people into the ‘game’ of Financial Independence.

The more Malaysians we can get on the road to financial freedom, the better off we all will be. I hope I’m able to start cultivating the Financial Independence mindset here at Dividend Magic.

8 Replies to “The Seven Stages of Financial Independence”

  1. Your thinking is quite mature as your age. I am very happy your blog and I enjoy reading your articles very much. I like investing in shares and your thought of Reit stocks is very helpful to me. All the best in your investment.

  2. Found your blog while researching about personal financing stuff. I found a lot of interesting & useful articles here. Thank you so much! Looking forward to your next posts.

  3. I’m 29 this year, the term or thought of “Financial Independence” only started drilling into my life last year. it is so crucial for one to gain freedom through this, but unfortunately it has never been taught in my school nor family at all. I’ve remained on stage 4 for a few years, stashing my savings only in FD… Just applied for HLebroking this Feb, still waiting for approval, the manager said they received twice the volume of application so it is taking much much much longer to process. @.@ soon i will start taking baby steps to stage 5 by investing in shares.

    Thank you so much for sharing your journey, your site has been really friendly for a beginner like me. I hope more young Malaysian will take the initiative to look into this topic a.s.a.p. for betterment of their own future life.

    1. Hey Jun,

      Keep it up with the good questions and thanks for reading! 🙂

      I’ve received feedback from a couple of other readers as well regarding HLe..
      On one hand, I’m pretty disappointed with their handling of new accounts. But at the same time, I’m stoked to see so many new investors joining the fray.

      Help spread the word and lets get a bigger army of young (and older) investors alike!

  4. Definitely an interesting read. I’ve got to admit, it’s a bit disappointing to realize I’m only on stage 3.
    However, I take a step back and understand there are people who never make it past step one. And I’m only 25, so I’ve got more than enough time to reach the final steps.

    Will work hard and focus on increasing my savings. I’m ashamed to say I’m not even saving 10% of my income now. To financial independence!

    Thanks for the write-up Leigh. Really happy to have a F.I. group here for Malaysians.

    1. Hey Vega,

      Stage 3 at only 25 is really an achievement and nothing to be disappointed about.
      Getting your savings up is a good idea, you’ll be past stage 3 in no time.

      Hopefully we get to hear from more F.I.ers soon. Thanks for writing in and hope to hear from you again!

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