Financial Independence: The Final Stage of Money Management

This is the last of a five-part series about the “stages” of personal finance. These stories have intentionally been less polished than most articles at Get Rich Slowly. This is a chance for me to think out loud, to explore an idea with you in an informal way.

In February, I wrote that I was entering the third stage of personal finance. As I made my way out of debt and began to save, I had noticed that many people passed through similar phases of financial development. We took similar steps along the way. In my own journey, the progress looked like this:

  • Initially, I was fumbling in the dark, spending compulsively and accumulating debt.
  • Eventually I saw the light and began to repay my debt.
  • After a hard slog, I reached the light at the end of the tunnel: my debt was gone and I began to save.
  • Now I’ve entered new territory. I have a plan, and I’m sticking to it as I reach for my eventual destination: Financial Independence.

Financial Independence is my ultimate goal. It’s the state in which I will no longer have to worry about money. I would have enough saved so that I could do whatever I pleased. But what exactly does this mean?

Defining Financial Independence
One of the underlying philosophies of this site is that different things work for different people. We each have different goals, different strengths, and different weaknesses. Though Financial Independence is the goal for many Get Rich Slowly readers, we each mean something different by it.

In Yes, You Can…Achieve Financial Independence [my review], James Stowers states: “No person is free, in an economic sense, who does not have adequate investment income entirely unrelated to work.” In other words, Financial Independence means that you earn enough from non-work income to fund your current lifestyle. I think this is the traditional definition of the term.

But the classic Your Money or Your Life offers a little more nuance:

When you are financially independent, the way money functions in your life is determined by you, not by your circumstances. In this way money isn’t something that happens to you, it’s something you include in your life in a purposeful way…Financial Independence is being free of the fog, fear, and fanaticism so many of us feel about money.

If this sounds like peace of mind, it is. Financial bliss. And if this sounds as unattainable as being rich, it isn’t.


Financial Independence has nothing to do with rich. Financial Independence is the experience of having enough — and then some…The old notion of Financial Independence as being rich forever is not achievable. Enough is. Enough for you may be different from enough for your neighbor — but it will be a figure that is real for you and within your reach.

Another view of Financial Independence is presented by George Kinder in The Seven Stages of Money Maturity. Kinder argues that when you understand what you want to do with your life, you can make financial choices that reflect your values. In his view, the final two stages of money management are what he calls Vision and Aloha. (Note that Kinder’s approach contains a spiritual element. He uses language in his definitions that some may find odd.)

With Vision we understand further that money is a conduit through which our souls flow into the world. We have produced as much as we personally need. We discover within us a capacity to reach out farther than we have ever imagined toward meeting the needs of our families and communities. We find no obstacle between what we want to accomplish and what we do.


Aloha conveys kindness, generosity, at-one-ness, and compassion…We give without expectation of return, understanding that living is giving. We know both the limitations and the power of money, yet money no longer agitates us. We rest calm before it. In that calmness we can serve one another from the natural generosity that lies within and waits to be offered tot he world.

In some ways, Financial Independence is just another term for retirement. Think about it. Most people retire at 60 or 65 because that’s when they have enough saved to last the rest of their lives. If they don’t have enough saved, they continue working. If they manage to save the money earlier, then they retire earlier. When you retire, you’re essentially declaring that you are financially independent.

Moving forward
What will Financial Independence, the fourth stage of money management, mean to me? Will it be a purely monetary state in which I have enough investment income to do whatever I like? Will it be the point at which I have “enough”? Or will it be something deeper, more spiritual, as suggested by George Kinder?

I don’t know. In fact, I don’t know if I’ll ever actually reach this goal. But I intend to stick to the path, working my way through this third stage of personal finance, hoping one day to reach that destination.

Your turn: What does Financial Independence mean to you? If you were financially independent, what would you do? How would it change your life? Is this one of your goals? Why? If not, why not?

Lighting the Way

This is the fourth of a five-part series about the “stages” of personal finance. First, I described the zeroth stage of money management, in which I was fumbling in the dark, spending compulsively and accumulating debt. Next, I described the first stage, in which I finally saw the light and began to repay my debt. Last week, I shared the the light at the end of the tunnel: what happened after my debt was gone and I began to save. Today, I share the current state of my personal finances as I begin to explore the third stage of personal finance.

In February, I wrote that I was entering the third stage of personal finance. The first stage, I said, had involved repaying my debt and learning to control my spending. The second stage focused on building savings and developing smart money habits. Now that I had mastered these two steps, I wondered aloud what came next.

Several readers quickly noted something I had forgotten: The ultimate goal — the eventual fourth stage of money management — is Financial Independence, the condition of having saved enough money that you can do whatever you choose. When you reach Financial Independence, it doesn’t matter whether or not you elect to keep working — you have enough saved and invested to follow your dreams.

Once I remembered that my ultimate goal was Financial Independence, the purpose of the third stage became clear to me: it’s the long, slow process of utilizing everything I’ve learned in order to enjoy life while building wealth so that I am truly financially free.

My plan
Although I now know my destination, I’m still a little in the dark about the journey. All I know is that what I’ve been doing seems to work, so I’ll continue down this path. Here’s my current roadmap:

  • Kris and I have refinanced our mortgage, and we continue to make accelerated payments on it. We’ve weighed the arguments for and against this, and have concluded that for our circumstances and our goals, we want the house paid off as soon as possible.
  • I’m continuing to contribute to my retirement as much as I possibly can. It’s my top priority, and as soon as I’ve paid my taxes, I’ll bring my contributions up to date for the year.
  • I use credit, but I use it responsibly. I never buy anything for which I could not pay cash. I don’t buy frivolous things with credit. I pay my credit card in full every month.
  • When I spend, I spend consciously. I’ve learned to prioritize things. Television isn’t important to me, so I don’t pay for a deluxe cable package. Instead, I use that money to fund my comic book habit. Making choices like this is the heart of frugality: spending on the things that are important while cutting back on the things that aren’t.
  • I’m saving for my Mini Cooper. I still haven’t decided whether I’ll buy new or used (again, I know the arguments for both choices), but I do know that I’ll pay cash when I purchase it.
  • At the urging of several GRS readers, I’ve begun to explore charitable contributions. I was not raised with an ethic of giving, so the notion is difficult for me to embrace. But it’s something I’m trying to explore. I find myself more interested in personally providing financial education, though. I feel like this is Good Work over which I have more control
  • I continue to manage my business. That’s right: Get Rich Slowly really is a business, and as a result I have many business decisions to make. How can I increase my income? Which advertisers should I accept? Do I lease an office so that I can separate work from home? What about hiring an employee to help me with research and e-mail? I think about all of these things and more.
  • I find that I’m much more interested in the stories of others who have been successful. It took me a while to get comfortable with the notion, but now I love to take people to lunch to pick their brains. One thing that’s intriguing about the third stage of money management is that concepts and skills that used to seem hopelessly out of reach now seem like distinct possibilities.
  • And, of course, I’m allowing myself a budget for fun. During the first two stages, I tightened the screws on my spending. I pinched pennies. I haven’t become a spendthrift by any means, but I now allow myself a certain amount for “wants”. I don’t come close to spending what I set aside for this, but that’s fine. Just knowing that it’s there, that I’ve given myself 30% of my income to spend on things that bring me joy allows me to not feel guilty for indulgences. I know that I can afford them.

These are the things I’m doing now, but there are others I’d like to do in order to help me along the path to Financial Independence.

For one, I plan to learn more about investing. Right now, I’m putting my money in index funds. But over the next year I plan to spend a lot of time reading books and speaking with smart people, trying to discover other options. It may be that I decide index funds are the best choice for me. I want to explore my options, though, to see what else is out there.

What next?
So, to answer my own question, “what next?” is more of the same. It’s difficult to argue with this steady progress that I’ve made. I’m willing to continue down this path for many years to come.

I feel extraordinarily fortunate to be in this position. Just five years ago, I was deep in debt and struggling. Today I am debt-free (except for the mortgage), have a job that I love, and make a good income. I’ve learned to curb my urge to own things, and have even purged some of the stuff I bought before. I have a great wife, a great life, and a great future.

I do not yet have Financial Independence, and I may never reach that goal. That’s okay. I’m grateful just to have reached this third stage of personal finance.

Note: This series is intentionally less “polished” than most articles at Get Rich Slowly. It’s a chance for me to think out loud, to explore the stages of personal finance with you, the readers.

Salt of the Earth

“Why did you buy a bag of potato chips?” Kris asked me the other day. “You shouldn’t be eating those.”

“I know,” I said, “but I was craving salt.” It’s true. I was craving salt — although “craving” puts it mildly. I was driving home from running errands when I felt an urge to eat raw salt in large quantities. I stopped for a bag of the best chips on earth: Kettle-brand salt & fresh ground pepper potato chips. These things are salt bombs.

My love for salt is nothing new. Many of you have sat with me in restaurants or at fancy dinner parties and marveled as I ate raw salt. I do it even more when you’re not looking. One reason I have a variety of salts in the cupboard (seasoned salt, garlic salt, herb salt, sea salt, bacon salt) is that I eat a lot of it and therefor want a variety on hand.

Why is this? Why do I love salt so much? Why do I need it? I’m not sure. But I’m very glad that, so far, I am not salt-sensitive. I would hate to have to reduce my sodium intake.

This morning I had a grapefruit for breakfast. But that wasn’t enough. When I’d finished both halves, I felt my longing for salt coming on strong. I spied the bag of potato chips on the counter. I poured myself an ounce of them, and then threw in an ounce of smokehouse almonds for good measure.

Ah, salt, how I love you.


Hello, my friends. How are you? I know that it’s been a while since I’ve been here for you. I know that you’ve probably given up on me, and I don’t blame you. Deep in my heart, I have not abandoned foldedspace; I’m only on hiatus. Again.

Still, I can foresee a time when I return. A time Real Soon.

If it’s any consolation, my entire life has been on hold for six weeks. I’m not joking, either. My entire life has been Get Rich Slowly. This may seem absurd, but I do think that ultimately the sacrifice will have been worth it.

In any event, I’ve been thinking a lot about you lately.

Just today, for example, I was reading the Countryside magazine. My first issue arrived in the mailbox today, and I spent two hours soaking in the tub, devouring the reader-submitted stories of modern homesteading. I read about people raising rabbits and chickens and goats. I read about people growing carrots and pears and zucchini. I read about people with no electricity, no plumbing, no cars. I read stories from radical Republicans and from die-hard Democrats. I loved every minute of it. And every minute of it reminded me of you.

You amy not know it, but I talk about you all of the time. I realize that only a few of you read Get Rich Slowly, but rest assured that your stories color the site and inform every article. More than that, when I speak with reporters, I often cite your actions as examples:

  • “Well, my friends Craig and Lisa have an enormous food-producing garden on a standard city lot. They even grow hops!”
  • “My friends Ron and Steve have goats. They love their goats.”
  • “Believe it or not, many of my friends have chickens. Mary and Steve, Mac and Pam, Jeremy and Jennifer.” [Note: I know the latter have “volunteer” chickens, but whatever.]
  • “My friends Rhonda and Mike tore out their front lawn and put in a vegetable garden.”
  • “Kristin and Roger have tons of grapes! Paul and Amy Jo just planted eight apple trees.” [Or was it six?]
  • “My sister-in-law prides herself in frugal fashion. She dresses well, but buys her clothes at thrift stores.”

Countryside magazine makes me long to live, well, in the country. The first page contains real estate ads. “20+ acres in West Virginia, 3BR 2BA. $50,000.” $50,000? Sign me up! (“But then you’d have to live in West Virginia,” says Kris.)

Anyhow — my life for the past three years has been like a runaway train. It picked up speed gradually at first, but before I realized it, it was careening out of control. Now, however, I’ve put the brakes on, and things seem to be slowing. Hell, I even got to go see a movie with Andrew and Dave recently. Can you believe it? Neither can I.

So, I’ve missed you, dear friends. But I look forward to making your acquaintance once again…

The Light at the End of the Tunnel

This is the third of a five-part series about the “stages” of personal finance. In the first part I described the zeroth stage of money management, in which I was fumbling in the dark, spending compulsively and accumulating debt. Last week I described the first stage, in which I finally saw the light and began to repay my debt. Today I share what happened next.

Last night at dinner, my friend Mike told me about his exciting day. “I drove thirty minutes to Hillsboro because a local credit union was opening a new branch,” he said. “This weekend they offered a special deal to new customers: an 11-month certificate of deposit at five percent interest.”

“Wow,” I said. “If I’d known about that, I might have opened one too!”

“You should have seen the line of people,” Mike said. “It was amazing.”

What amazed me, however, was that I not only knew what Mike meant, but that I also regretted missing a chance to move my savings someplace they could earn higher interest. I felt like this was another sign that I’m in (or past) the second stage of personal finance.

Before my financial awakening, I wouldn’t have had money to save. I was still accumulating debt. (What’s more, I had no idea what a certificate of deposit was. And if I had known, I would have thought it was boring.) During the first stage of money management, I had some inkling about CDs and CD rates, but I still didn’t have money to save. My extra cash all went to repaying debt.

But I’ve spent the past fifteen months in the second stage of personal finance. Now a five percent certificate of deposit is exciting. The very thing that might have once seemed boring now seems fun.

The light at the end of the tunnel
In December 2007, after I paid off my consumer debt, I felt lost for a few weeks. For more than three years, I had been working toward a single goal: debt elimination. I had learned to pinch pennies, sacrificing momentary pleasures for a higher objective. But now that my debt was gone, I didn’t know what to do.

Ultimately, however, the transition from the first stage of money management to the second was less difficult than I feared. For one thing, I had already developed solid financial skills while working to get out of debt. By cutting my expenses and increasing my income, I had generated free cash flow of over $1000 a month. Back in the zeroth stage, when I was living paycheck-to-paycheck on $42,000 a year, I could never have imagined freeing up $1000 a month. Yet in just over three years, I did just that.

Once my consumer debt was repaid, that $1000 a month was available for other uses. The old J.D. would have immediately used it for fun and games. The new J.D. was smarter. I used this money to begin saving and investing, to begin building wealth. Since the end of 2007:

  • I’ve increased my emergency fund from $1000 to $12,000. To do this, I took the money I had previously been applying toward debt and funneled it into savings.
  • I’ve begun to save for other goals. I’m saving for a new car, and have also begun to save for vacations.
  • I’ve been teaching myself about investing, and have started to save for retirement. I opened a Roth IRA and a 401(k), and each year I contribute the maximum I am allowed.
  • I’ve taken the skills I had learned in the first stage, and have turned them into habits. The things I did in order to save money to pay off my debt, I now do because they simply made sense.
  • Most of all, I’ve learned to be satisfied with the things I have instead of longing for the things I don’t. A rich life comes from family and friends, not from owning more Stuff (or new Stuff).

For me, one of the toughest battles of the past fifteen months has been the tendency to be too frugal. I’ve sometimes crossed the line from frugal to cheap. I think this is natural for those of us who once were compulsive spenders. We react by swinging too far in the other direction. That’s okay. As long as we’re able to use these moments of miserliness as learning experiences, they’re not bad. I’m not sure that the second stage is the place where we search for balance (I think that’s for the third stage), but it’s where we become aware that spending too little can be as much of a problem as spending too much.

As I say, this second stage is fun. It’s exhilarating. I get a thrill out of seeing how much money I am paying myself instead of paying to other people. I enjoy imagining what my savings will allow me to do in the future. It will let me spend more time reading and writing. If I’m lucky, it may allow me to retire early.

A solid foundation
I’ve been a slave to metaphors during this series. I keep searching for some image to help me convey the journey from financial ignorance to financial independence. Today I want to try out one more (the first one I ever used).

Money management is like building a home. During the first stage, you clear the construction site, hauling away debris and rubble, and getting the area ready to build. During the second stage, you pour the foundation. You’ve eliminated your debt and you’ve begun to restrain your bad habits; now you can establish a solid foundation on which to build the financial home of your future.

A fat savings account and fully-funded retirement plans are not objectives themselves. They’re tools to help you accomplish the things you really want. For me, they’re the keys to financial independence, which is the fourth stage of personal finance.

Note: This series is intentionally less “polished” than most articles at Get Rich Slowly. It’s a chance for me to think out loud, to explore the stages of personal finance with you, the readers. Photo by Jenny Downing.

10 Top Motivational Ads from Nike

I don’t like advertising. Marketing is more powerful than the average person suspects. Marketers are armed with million-dollar budgets and decades of research. We defend ourselves only with our experience. It’s not a fair fight. I wince every time I hear somebody brag that ads don’t affect them; it’s my guess that ads affect these people most of all.

Still, I can’t help but love certain ads. For example, there’s an entire series of Nike commercials that make me want to get off my ass and do something. In a lot of ways, I don’t care if these make me buy more Nike products. They make me motivated to improve myself. In fact, I have an entire playlist at YouTube composed entirely of Nike commercials. When I’m feeling sorry for myself, when I’m feeling lazy, when I’m feeling uninspired, I watch these. When I’m done, I’m ready to go do stuff.

Here are my ten favorite motivational Nike commercials. I suspect that if you watch even a few of them, you’ll have a more productive day.

Awake (how to start your day)

Move (one of my faves)

Training (motivation to keep going)

Courage (dare to pursue your dreams)

No excuses (there’s no reason not to try)

Leave nothing (good if you like American football)

Take it to the next level (good if you like real football)

Failure (Michael Jordan explains success)

A little less hurt (wow — just wow)

After watching these commercials, I’m ready to take on the world. (And the funny thing is: I don’t own a pair of Nike shoes. I have a couple of Nike shirts for running, but that’s about it!)

Some thoughts on the return to traditional skills

I give several media interviews each month. As the economy changes, so do the questions. Recently, as you can imagine, reporters have been asking me what people can do to save money.

This question gets boring after a while. There are only so many ways a fellow can say, “Spend less than you earn by reducing unnecessary expenses.” Lately I’ve been trying to spice up interviews by promoting what I call “traditional skills”.

When I say “traditional skills”, I really mean the do-it-yourself ethic. It seems to me that during the 1990s and early 2000s, as the U.S. moved more toward a service economy, we became so specialized in what we do that we let go of “traditional skills” and began to pay others to do things that we might have done ourselves a decade or two ago.

One example in my own life is changing the oil in our cars. When I was in high school, my father taught me basic automobile maintenance. I could change the oil, I could change filters, and I could even replace my brake pads. I’m by no means a macho auto-shop kind of guy (quite the opposite: I’m an indoor techno-nerd), but I found these sorts of jobs rewarding. Somewhere along the way, I started paying other people to do this stuff for me.

I’m not the only one. Over the past generation, folks seem to have forgotten how to sew, how to garden, and how to perform basic home maintenance.

Obviously there are situations in which it makes sense to pay others to do things. Kris and I are going to pay somebody to repair our gutters, for example. I could do this myself, but I am swamped with work, work that will pay me far more than it would cost to have somebody else repair the gutters. This is a trade I’m willing to make.

In general, however, I think there’s a tremendous money-saving opportunity for people to return to traditional skills, to begin doing some of these tasks themselves again. It pleases me that here in Oregon, at least, there seems to be a surge of interest in this sort of DIY ethic. I am shocked by how many of my friends now grow at least some of their own produce. (And more of them are beginning to raise chickens — and goats!)

But that’s not all. More of our friends are canning now, and knitting, and performing home maintenance. They’re learning to bake bread and to sew and to build their own patios. I think this is wonderful, and I think it’s a great way to save money.

I’ve written about this subject many times in the past at Get Rich Slowly, and am sure to write about it more in the future. I also enjoy covering individual examples of these “traditional skills” in posts like these:

Knitting and sewing, auto mechanics and woodworking, hunting and fishing, baking and canning: all of these are making a resurgence among my friends and family. Maybe it’s just the region in which I live, or maybe it’s just a product of entering middle age, but the people I know seem to have a renewed interest in finding ways to do things themselves.

Have you observed something similar where you live, or in your own life? Have you begun to do things yourself that you used to pay others to do? Which things are worth doing on your own? Do you think it would be a good thing for people to begin doing more of these tasks on their own again? Or will this simply weaken the economy?

Implementing the Debt Snowball: A Personal Journey

This is the second of a five-part series about the “stages” of personal finance. Last Sunday, I shared part one: “Fumbling in the Dark”.

In June of 2004, Kris and I bought a new house. On paper, we could afford the upgrade. In reality, things felt pinched. For one thing, my consumer debt had grown to over $35,000. The increased housing payments didn’t help. But the straw that broke the camel’s back was the extensive remodeling ahead of us.

I have a vivid memory of sitting in the corner of a buffet restaurant, eating lukewarm lasagna while scribbling numbers on a napkin with Kris. We were trying to calculate how much we could afford to spend on the house. No matter how we ran the numbers, we had $10,000 in projects we wanted to complete when we moved in, and an expensive bathroom upgrade the following year.

I felt sick. Where could I find money like that? I didn’t have any savings. The only paths I could see led further into debt. I could foresee owing $50,000 by the autumn of 2005. I was no longer merely fumbling in the dark — I had fallen, and I didn’t know how to pick myself up.

A candle in the dark
Soon after we moved into the new house, I complained about my financial situation to my friend Mistie. She listened patiently, and then she loaned me a book: Dave Ramsey’s The Total Money Makeover. Dave Ramsey changed my life. The book was filled with stories of other people — regular people, just like me! — who had managed to overcome debt on average incomes. It was inspiring. “What have I got to lose?” I thought, so I implemented his debt snowball.

As I worked to repay my debt, I read a book another friend had given me: Your Money or Your Life by Joe Dominguez and Vicki Robin. This book also changed my relationship with money. It helped me to understand that when I spent money on comic books or videogames, I was literally trading time (or “life energy”) for Stuff. If I could reduce my spending on Stuff, I could have more time to do the things I wanted.

By sharing these books with me, my friends had provided a glimmer of light. I was still surrounded by darkness, but now I had a candle to guide my way. I was learning skills necessary to defeat debt and to build wealth. I had entered the first stage of money management.

The first stage
I didn’t master these skills overnight. It took time. I made many mistakes along the way. I suspect this is the same for most who are trying to move from financial chaos to some sense of order. During this first stage:

  • I learned to cut back on things I once thought essential.
  • I paid down my debt, tentatively at first, but more aggressively as I gained confidence.
  • I developed the strength to resist impulse purchases and to conquer compulsive spending.
  • I began to save. Again, I started slowly at first, with just a couple of hundred dollars in the bank. And sometimes I would tap this for non-emergencies. By the end of the “first stage”, I had $1000 in savings, and I haven’t touched the money since.
  • I discovered the lively art of frugal living.
  • And, most importantly, I began to think about my goals. Why did I want to earn money? What was I going to do with it?

A huge part of this first stage was learning to live with mistakes. It used to be that when I did something dumb with money, I let that mistake derail me. I’d give up. I’d feel bad for spending money on something, but my solution was just to spend more money. Obviously, it is best to avoid these sorts of mental lapses, but it’s also important to be able to just move on, to vow to do better next time.

The first stage of money management is like learning to ride a bike. You fall down a few times, and you’re often unbalanced and clumsy. It’d during this first stage that you need the most support. You’re learning how to do this on our own. In later stages these skills will become habits, but at the start they take focus and energy. They take work.

For me, the first stage of personal finance definitely felt like work. Hard work. But it was rewarding.

A whole new world
Once I discovered that I had the power to control my personal finances, my attitude changed. Saving no longer seemed like a chore, but a reward. Repaying my debt was a slog, but it was a burden I was willing to bear. And the process of learning about money was fascinating, like discovering a whole new world.

In my mind, I was in the zeroth stage of personal finance until October 2004, when I first developed a plan to get out of debt. I was in the first stage of personal finance from then until my non-mortgage debt was eliminated in December of 2007.

What about you? Have you always had a good relationship with money? Or did you have a turning point like I did? How difficult was it for you to master the basic skills? At what point did you feel like you were leaving the first stage of personal finance? When your debt was repaid? When you had ample savings? Are there other skills you found useful during this period? What advice would you offer others who are struggling through these things today?

Note: This series is intentionally less “polished” than most articles at Get Rich Slowly. It’s a chance for me to think out loud, to explore the stages of personal finance with you, the readers.

Fumbling in the Dark

I’ve had good control of my saving and spending for nearly two years now. I still make poor choices now and then, but they don’t have the consequences they would have a decade ago. A decade ago, I was in debt. Today, I am not.

That’s one of the advantages of being debt-free: when you do something dumb, the repercussions are not as severe. But I remember a time when each bad choice brought me closer to the brink.

Fumbling in the dark
Night Lights by jdroth -- hey, that's me!During the 1990s, I had a spending problem. I was a compulsive spender. It’s not that I just bought books and comics and compact discs. I spent money on everything. I wanted everything. I had a house full of Stuff, most of which sat unused. I was filling some emotional void by buying.

Saying that makes it sound as if I were aware of the problem. I wasn’t. I had a vague idea that my spending was out of control, and carrying $20,000 in maxed-out credit cards was certainly causing me stress, but I didn’t know how to stop. Every time I paid one card down a little, I’d find some reason to buy something new. A small part of me knew that I had a problem, but I could not stop myself.

When I look back now, it seems as if I were fumbling in the dark. My wife would tell me how she was saving for retirement, and the idea seemed impossible to me. Because we’ve always kept separate finances, I would marvel that she had several thousand dollars in savings. I had nothing. I had no savings account. And my checkbook usually had less than a hundred dollars in it. (Sometimes the balance was negative!)

Although I knew I had a problem with debt, I continued to spend without thinking. Worse, sometimes I would spend with thinking. I’d be out with friends and they’d want to go for drinks or go see a movie, and I’d do it, even though I knew I couldn’t afford it. I’d do it, even though I knew my stomach would be in knots next time I saw my account statements.

As I spent compulsively — as I accumulated debt — I had no concept of proper money management.

I’m a smart guy. In high school, I won a national award for my “business math” skills. Were you to set me down and tell me, “If you spend more than you earn, you will continue to have debt,” I would have understood you intellectually — but I would have kept spending.

I read about budgets, but never used one. I had Quicken for my computer, and I would use it from time-to-time, but mostly I didn’t track my money. There were months at a time when I didn’t write anything in my checkbook register. I operated on a sort of voodoo finance system, where I sort of knew how much I had in the bank, but not really.

I had no idea what I was doing with my money. I had no financial goals.

The zeroth stage
Last month, I wrote about a theoretical “third stage” of personal finance, a place one reaches after mastering the basics of money management. At the time, I posited the stages of personal finance might look like this:

  • The first stage of personal finance is learning the basics: understanding compound interest, reducing debt, beginning to save.
  • The second stage is putting the basics into practice: choosing to live frugally, saving in earnest, and pursuing financial goals.
  • The third stage — the “what next?” stage — comes after we’ve mastered the fundamentals. It’s at this point that we begin to ask “why?” Why are we continuing to save? All of our debts are paid, so what’s the point? (There certainly is a point, but what is it?)

I’ve thought about this a lot over the past few weeks, and I’ve realized that there are at least two other stages that I didn’t include. The fourth (and final) stage is Financial Independence, as defined in Your Money or Your Life. This is the point at which you have “enough — and then some”.

But there’s also an earlier stage, one that comes before the first stage. In the system I’m trying to define here, a person enters the first stage of money management when she’s decided to take control of her life, is learning about the basic concepts, is paying down her debt and beginning to save. What comes before that?

Before that is the zeroth stage of personal finance, where a person doesn’t exercise any sort of financial skills at all. Often, he isn’t even aware that he should do so. He uses money without thinking. And, more often than not, he lives reactively, spending in response to things outside his life.

My behavior during the 1990s? That was all part of the zeroth stage.

Thinking out loud
During the month of March, I’d like to explore the notion of these stages of money management. Each Sunday I’ll write about the next stage. It’s a sort of thought experiment.

Generally my articles at Get Rich Slowly are polished and have a point, but these posts may be rambling. They’re a chance for me to think out loud, and for you to help me refine the concept of money management “stages”.

What do you think of my model? Am I missing steps? Are the stages not as clearly delineated as I would like to believe? What step are you on right now? What challenges do you face? These are the sorts of things I want to talk about this month. It should be an interesting discussion.

Even if nothing else comes of this, I’ve realized over the past few weeks that my goal in life is to help as many people as possible escape the zeroth stage of money management. If I can help more people to join me in the third stage, that would be awesome.