JD talks about the stages of personal finance:
1. learning the basics
2. practicing the basics
3. what next?
4. financial independence
A lot of folks follow these stages with step 0: having lots of consumer debt, step 1 learning that they can get out of debt, step 2 actually getting out of debt, step 3 realizing they can do things like save for like travel (because in steps 1-3 they started disliking stuff), and finally step 4 being able to quit the job they hate and become full-time bloggers (etc.)
Some of us started out not only naturally frugal, but kind of skin-flinty. I strongly identify with Jacq, FGA, and Donna Freedman in this respect. Some of us never got into consumer debt and our only debt was student loans or mortgage debt if that. We were gazelle intense before we ever heard of Dave Ramsey.
We have our own levels of personal finance.
This post is inspired by a recent article by Donna Freedman in which she’s contemplating how she needs more time in order to make more money without killing her health. Doing every tiny thing from scratch is no longer worth her marginal wage. Occasionally it’s worth more to her to *gasp* order a pizza.
So I present to you, the terrified-of-debt-ultra-responsible-perhaps-too-thrifty-by-US-standards levels of personal finance.
Levels:
1. In this stage you’re just starting out. If you have any debt (specifically: education debt, car debt because you need transportation to work, emergency medical debt, or debt your ex-spouse left you) you’re scrambling to pay it off. You don’t live beyond your means. You eat a lot of rice and beans, or potatoes and onions and you know how much everything you ever buy costs. You watch every penny and every wasted penny is mourned. (And you beat yourself up over its loss.)
2. In stage two, your debts are gone and you have a tiny emergency fund. This allows you to feel comfortable adding a little meat and fruit and vegetable to your diet, even if these items aren’t scavenged from the “odd ends” or “eat today” section of your grocery. You still keep close eyes on every penny.
3. In this stage, you have a nice emergency fund and your income has gone up so you feel comfortable that an emergency isn’t going to kill you. Additionally, you realize that your time is valuable because your real wage is pretty high. Instead of saving $5 soaking beans, you could be making $25 working the same amount of time. You start doing cost-benefit analyses, you realize you can outsource things you dislike (or that are just time-consuming) if the monetary trade-off is high enough. You spend nickels and dimes, but mindfully and optimally.
4. In level four you have a really big emergency fund and your income is high enough compared to your spending that you could replenish your emergency fund in a month or two. Say you’re saving 40-60% of your income and you’re not feeling particularly deprived doing so. One day you suddenly realize that you can slip up and it’ll be just fine. Rather than beating yourself up over a lost penny you say to yourself, “it’s only money, and I’m still doing fine.” You stop watching the pennies. Instead you put away dollars and feel free to spend what is left. It’s ok to mess up because the dollars are already saved. At this stage you may even decide it isn’t worth your time to argue when a company mischarges you for something, but you probably will anyway, just out of the principle of the thing. (Even if it’s not an optimal use of your time.) You may do cost-benefit analysis from time to time, but sometimes you decide it is not worth your time to do so. You’re a lot more relaxed about nickles and dimes so long as you’re keeping tabs on the dollars and hundreds and thousands. A certain zen slips in. You’re still frugal on the whole, but that frugality allows you to stop worrying so dang much.
In one of my favorite MSN articles not written by Donna Freedman, Liz Pulliam Weston talks about when you no longer need a formal budget. Basically it’s when you’re out of debt and spend a lot less than you earn just naturally. Your savings are on auto-pilot and an emergency isn’t going to wipe you out. This happens in level 4.
Where’s Donna? I can’t really say because it’s her income, her savings, and her comfort level that determines that. But, based on her recent blog post (the one that inspired this one), it sounds like at level 3. But (hopefully) at some point she’ll be able to look at her savings and at her regular income and realize she’s suddenly at her own level 4. And that will be good for her blood pressure! That level of peace is well worth the hard-effort that built up to it.
I’m not sure if level 4 was what I was aiming for back when I lost my ability to digest red meat back at level 1. But having gotten to level 4, I never ever want to go back. And that’s what keeps me saving a large portion of our income and keeps me wanting to earn more than we spend. If necessary we could go back to level 3, but I’d really rather not.
Do these levels describe you, or are you more the standard, “got into consumer debt and saw the light” or something more moderate entirely? What level are you at? When do you think you’ll be able to stop worrying so much? Or do you maybe not worry enough?
Grumpy Rumblings (of the formerly untenured) 
December 26, 2011 at 4:34 am
My stages were similar but at stage 1, I didn’t have to eat rice and beans because I worked in food service in high school and college and I always had roommates up until I got married, so housing and food were never a big expense. I think my share of the rent in college was $131. It ended up being less than $200/month for rent+utilities back in the day.
I’ve also never had a formal budget. I’ve always done a backwards look at my spending and made goals on how much I should save the upcoming year. If I was running behind schedule, I’d look and see what was veering me off course.
I still have trouble saying, “it’s only money” when it comes to a purchasing transaction, but I don’t seem to have an issue when it comes to giving some of it away…if I know specifically what it’s going to be used for. I realize that at this stage in my life, I need to learn to do this more.
I just can’t imagine throwing something on the credit card without a plan to pay it off immediately. It was so much easier to go without. Once I was able to earn my own money, have a car and drive out of the city, I never really felt like I was going without. Great friendships and being out in nature have always had a way of filling the void that stuff sometimes provides.
Like you, I never want to go back to stage 1. For me the reason is more about time and less about nutrition. I worked A LOT of hours during those lean years. I worked every hour that was offered to me and always had 2-3 jobs at a time. It was pretty common for me to work full time during the school year and up to 80-90 hours/week during summer. My weekends were never my own. Even though my time is still limited, a good chunk of it goes to things I want to be doing vs things I have to be doing.
December 26, 2011 at 7:00 pm
We’ve never done a true formal budget either, but back when we were poor, we sort of did because I kept *everything* in my head (and on the checkbook). There was so little money I could do that. That mental space is freed up now though, so we really don’t have a budget.
My father was just saying the same thing about charitable giving. He has a hard time spending, but not a hard time giving, *if* he can earmark it.
December 26, 2011 at 9:33 am
Hmmm. Not sure if the stages describe my life or not, mostly because I never had really large amounts of debt, thanks to a college scholarship and grad school stipend. But- I definitely was waaaay more frugal back in grad school. I was sort of shocked to realize that, like George Bush senior, I have no idea how much a gallon of milk costs these days, despite the fact that I buy a gallon or two every week when I go grocery shopping. In fact, I couldn’t tell you how much anything on my list costs. I no longer need to track that, so I don’t. I don’t think grad school me would believe that this is possible.
So I guess that puts me in stage 4. The only wrinkles are (1) our whopping big mortgage, which we are upside down on, but which we can easily pay as long as we’re both working, and (2) the volatility of my industry. So we aren’t totally zen yet. We’re pushing to pay our way to above water on the mortgage while I’m in a job that seems fairly stable, and then we’ll probably relax a bit.
December 26, 2011 at 6:55 pm
I never had any educational debt either, but DH brought in a 10K unsubsidized loan into our marriage. We paid that off in very little time because its stupid 8.5% was just going to keep accruing, graduate school or not. But trying to eat that celebratory steak was a big mistake. It didn’t survive the walk home from the restaurant. Thank goodness for bushes…
We spend somewhere between $3 and $4 for a half gallon of organic milk. :)
Good luck on the mortgage! If we ever move to CA that’s going to be a tremendous burden if we try to own. I would love to be able to put 40% down like our friends did.
December 26, 2011 at 6:44 pm
PhysioWife and I are fortunate enough to be at stage 4. Neither of us ever got into any consumer debt at all, and have only ever had educational (all gone now) and mortgage debt.
December 26, 2011 at 6:57 pm
Yay! And you can buy all the fancy expensive cheeses you want. That, my friends, is true success.
December 26, 2011 at 9:08 pm
CHEEZE!!!!!! F*CKE YAH!!!!!!!!!!!
December 26, 2011 at 9:18 pm
My stages are more like yours than the typical ones, but not an exact match.
Stage 1: Money is irrelevant. I don’t have any, and I can’t get any. The bad part about this stage is that I didn’t really learn that it’s okay to ask my parents for super cheap stuff like those fun $1 big bouncy balls. Everything was either given to me or out of reach–pricing and budgeting are irrelevant. (Note: this was a good stage for me, but eventually, your parents want you to grow up.)
Stage 2a: I have to get a job. I can’t get financial aid without providing some of my own aid (summer job).
Stage 2b: I get control of my own money. I invest my extra money in things like my very own fingernail clippers which, since they are mine, I always know where they are, and a backpack, to help me carry my groceries home.
Stage 3a: Graduate with debt. Pay it off ASAP.
Stage 3b: As my income grows, start getting more and more things that I want: guitar, health insurance, emergency fund, party-sized tent, car, charitable contributions, retirement contributions, house. (This would be the fancy, expensive cheese stage.)
Stage 4a: Learn about the possibility of early retirement extreme. After it is too late and I am already addicted to my non-extreme (aka expensive) standard of living (city life, own house–modest but way more expensive than a trailer, good friends–who have all moved away from town and bus stops so I need a car, food that is whole grain and organic and, if possible, humanely-treated, fast internet). Then my job gets highly stressful and stays that way so long that it affects my personal life and my health. Study frugality information like crazy, but try very few new ideas.
Stage 4b: Quit anyway, without enough money to retire, without another job lined up, without a new lower-cost lifestyle set up. (Well, I gave notice, but will not leave for another month. Maybe I’ll have a job by then?) Learning to cook beans instead of getting them from a can. Gave home-made chocolate-covered nuts (or nuts and candied ginger) and homemade chocolate syrup and a hand-knitted hat for some of my presents.
Stage 5: One final job or set of part-time jobs until my pension kicks in. OR buy van, sell house and car, move into van (sorry, boyfriend–you thought my house was too small!).
Stage 6: Financial independence. And aging–who knows how much that will raise my costs?
December 27, 2011 at 6:58 am
Wow!
December 26, 2011 at 10:56 pm
I think that your levels make a lot more sense to me. I learned the basics growing up and saved 80% of my wages when I was in high school, spending the other 20%. I developed a system of “borrowing” from myself and kept spreadsheets to pay myself back when I was 16. I never understood the concept on an emergency fund or putting savings into buckets – I just naturally saved.
I’m definitely at a point now where outsourcing some things makes sense. Why would I want to eat sandwiches with stale bread for lunch when I could just pay $5-15 per day for lunch? Sure, that’s $200/month, but that stresses me out a lot less. Saving pennies doesn’t seem worthwhile in my head, even saving a dollar or two, but high hundreds or thousands of dollars is worthwhile.
I keep large emergency reserves mostly because a very large portion of my monthly income goes towards maxing out my 401(k) and a very significant portion of my savings comes from my not-so-guaranteed-but-so-far-coming-as-scheduled bonuses. In the last few years since graduating from college, I’ve made so many strides to not yelling at myself for spending money on things I value, but still saving/investing a good chunk of my income (around 60% of my income net of taxes this year). Last year, I lowered my emergency reserves a bit to pay cash for a new car and this year I’m lowering them again to put a 20% down payment on a condo. But that doesn’t seem so bad when it’ll probably be left at $10,000. That’s the beauty of having a huge emergency fund.
December 27, 2011 at 6:57 am
That 40-60% savings number seems to be pretty magical. Once you’re there and have that big emergency fund it’s easier to loosen up a bit.
December 27, 2011 at 12:44 pm
Stage 4 is sweet. I have found in being off work (in a down stock market) these last 6 months has been slightly stressful (just a bit though) – and there was a little tendency to go back to stage 3. Fortunately, I’m going back to work in a few weeks and will be back to saving at that 50%+ rate without feeling at all deprived. I like that feeling of not having to think (much) about purchases or regular expenses – or the state of the market. It’s good to have had the time off though because I know now that I want a bigger fudge factor in there for the next time I’m not working. Having no mortgage too would be best. And it was worth it to wait for a job with one of my BFF’s that we’d initially discussed way back in May or June. (Ironically – I’m going to be working in budgeting this time.)
But I think I will always cook ahead, it’s just more efficient time-wise than ordering pizza or takeout (and I enjoy the process of cooking). And I’m really kind of a fussy eater I guess. But for xmas, I bought all of the appetizers and didn’t make them myself – so that’s progress!
December 27, 2011 at 9:18 pm
This is fascinating. I was a financial mess after finishing grad school (well, quitting, with consolation-prize Master’s). I was lucky to get a decent job and able to pay off my ridiculous credit card debt in about 2 years, and my dad advised me to save as much as I was allowed in my 401k from the first paycheck onwards, so I’d never “miss” the money. Smartest advice I ever got.
Thanks to my super-responsible then-boyfriend, now hubby, I had started saving a good chunk of cash from each paycheck once I paid off my debt, and had a decent emergency fund by the time we got married and combined finances. Since hubby *likes* financial planning, he does the hard work now of tracking and allocating it, for which I am grateful. We’ve been solidly in category 4 for a while but live in a place where housing is super-expensive so our mortgage is sizable and we’re not planning to pay it off completely anytime soon.
In college I heard a professor mention she never balanced her checkbook because she knew she had enough money. I couldn’t imagine living that way then, but that was my goal. We now balance it because my hubby needs to, but we don’t stress, which was my true goal.
We hope to teach our daughter more about money than we learned growing up (basically we had parents who never talked about it at all.) The first bank account I had was in college.
January 8, 2012 at 7:35 pm
Balancing my checkbook reassures me that I *do* have enough money. If I didn’t do it, I wouldn’t know *exactly* how much “enough” money I had. Oy!
December 29, 2011 at 9:13 am
I am probably in stage four but I would like to get back to stage three. We have no debt except a mortgage which is luckily not upside down. I have a solid 401k that is maxed out every year and we could live off our emergency fund alone for 2 years. The emergency fund is from very generous bonuses throughout the years and we never spend the bonuses, just put them in the savings account and pretend they aren’t there. The problem with this method is we aren’t learning to save a portion of our salary in case something ever happens. I don’t like using the bonuses as our only method of saving since there is no guarantee the bonuses will always be there.
My husband is a librarian and in this current economic environment there is a good chance his job may be eliminated. We decided to take some austerity measures to see if we could live off one salary, and we can, but as soon as that test was finished we went right back to our current ways. I think the trick for me now is to figure out how to not feel deprived while saving 50% of our income. I want to roll back to stage three and not get dumped to stage one in case something horrific happens!
On a side note, I really love your blog. This is my first time posting but I have been reading for a while. Thank you for making me laugh and think. I appreciate it!
December 29, 2011 at 10:34 am
We keep having the same kind of dilemma, though I only visit it about once a year when trying to decide on how much to withhold for retirement. If DH loses his job… how much do we really need to be not spending before that happens. Will he really be bringing in nothing? How much of a sacrifice should we make now to ameliorate sacrifices later? (We’ve got some posts on this in the archives, probably around summer or September each year… but not 100% sure where.)
Thanks for the props! Hoping for more comments from you in the future!
January 2, 2012 at 7:01 am
[…] from Nicole and Maggie: Grumpy Rumblings presents Yet another “levels of personal finance”, and says, “We present the […]
January 3, 2012 at 7:23 pm
I don’t think I’ll ever stop worrying. That is my nature.
I guess we’re in stage 3. I sometimes make it to 40 percent of my income, although we’ve done a fair bit of spending this last year, and T certainly is not at that level.
I hark back to my first years of independence as the poorest. In my first year (17) I literally did not have $20 a week to spend on myself. I watched my shampoo and toilet paper usage, ate lots of pasta and jam sandwiches, and snacked on fatty potato chips as they were filling and cheap.
Around 19/20 was again tough, as T and I moved in together, and added a vehicle to our expenses. He worked long hours and made decent money, but I’m ashamed to say that my naturally frugal ways suffered a bit during this time. He also needed to buy a lot of things as he left home and started out with literally nothing but a few changes of clothing. And he got saddled with somebody else’s four-figure debt, plus racked up a similar amount of his own.
January 5, 2012 at 9:21 am
I’m more typical. Not really sure where I am right now. I guess Practicing the Basics.
January 8, 2012 at 8:18 am
I enjoyed this post (came here from GRS). I wasn’t really naturally frugal when I was younger – an awful lot of money slipped through my fingers on stuff I can’t remember – but I never took on any credit card debt despite making a small salary in an expensive city after graduation. I treaded water paying minimums on my student loans for five years, and then one day I looked at how little principal I’d paid off during that time and got mad. I suppose I “got gazelle” at that point, though I’d never heard of Dave Ramsey, and paid the rest off within a year. Now that I find myself widowed in my early 40s, practicing financial responsibility for the past 15 years has proved a huge blessing. We had adequate (though not enormous) life insurance so college for my son and my retirement should be secure. We always lived below our means, so I have an emergency fund separate from the life insurance that is greater than my mortgage balance. I kept my career going part-time when my son was younger and was able to transition back to a full-time job that easily covers our expenses and allows me to still max out retirement and other savings. Sometimes I don’t know what I’m saving for, since all the big “goals” of life seem to be met – but one thing I have learned is that life is uncertain and being in the later stages of financial independence gives you a lot of comfort and choices when things go wrong.
January 8, 2012 at 7:37 pm
Welcome! Good for you to keep going through hard times. I hope that one day soon you will find something you really want to have or do, and then you will already have the money to make it happen!
January 9, 2012 at 6:36 am
Preferably want, not have!
January 8, 2012 at 9:20 pm
I’m not sure how this would fit into the stages, but I’d just like to mention an alternative that no one seems to talk about — except the people who are into the “geographic arbitrage” thing and move to some country where the cost of living is much lower and tell you that’s the answer, which really doesn’t work at all for most people who don’t want to move to Thailand in order to have a nice life.
If you don’t need very much to live on, and you have a useful skill that people will pay you for, you can actually quit your job well before you have what you would need to constiute true “financial independence” (i.e., having enough saved that you would never have to work again). You can work as much as you need to in order to sustain yourself, and use the free time doing other things that you want to do.
I’ve been doing this for 10+ years, making between $16,000 (bad year) and $32,000 (good year) doing freelance work. I live in a house that I own, in a part of the country with a fairly low cost of living, and do a lot of free work for people I want to help. I don’t have to worry about what to do with the excess salary that I’m earning but don’t need to live on, or question whether I’m saving too much, because I don’t make it in the first place.
This is the Your Money or Your Life approach, but with a slight shortcut — you don’t work and work until you have enough saved to quit and never have to work again, instead you get your expenses down to a point where you can make that amount from odd jobs/contract work without too much trouble. And once you get to that point, it’s like living in a parallel universe, you have roughly the same quailty of life as most people you know for a fraction of the cost. (One of my friends was describing my life to a friend of hers and said that I live like everyone else they know for one-fifth the cost.)
The interesting thing to me about J.D.’s journey was that he was totally on this road, spending less and less, and then all of a sudden he took a U-turn. He had the moment with the cocoa, and decided he’d gone over the edge and needed to move in the other direction, working more and making more money and spending more and not worrying so much about saving.
Probably more useful for most people who read the site, but I for one was disappointed. I was looking forward to him hitting the parallel universe and writing about that.
January 9, 2012 at 6:38 am
The parallel universe is definitely not for everybody. We at Grumpy Rumblings enjoy the finer things in life more than we would all that extra time. Not everybody is cut out for homesteading. We’re more the Erica Whatshername approach.
January 9, 2012 at 9:55 am
Homesteading is not parallel universe, it’s a different mode of life. Homesteaders look like smelly hippies to the rest of the world.
Parallel universe is when it looks like you are living like everyone else … but are not. If you do it right, you don’t give up anything you really care about. You’re just more strategic about it, so you actually enjoy the things you do get even more than you would otherwise.
And I guess this depends on how much you make, but if you are saving 60% of your income and not feeling deprived, it seems to me that you are already basically doing this. With parallel universe, you just go in a slightly different direction and instead of making a lot and saving half of it, you make what you need and don’t worry about saving more. (You keep what you saved before for retirement or in case of emergency.)
In the Tightwad Gazette, Amy Dacyczyn has a good article that talks about “active tightwaddery” and “passive tightwaddery”. The key to parallel universe is to find exactly the right balance — you do active tightwaddery for things that are easy or that you enjoy (for instance I make my own cleaning products, because it takes just a few seconds, they work great, and they save you from icky cleaning product smells; and also I cook most everything myself because things I cook myself are much better than things other people cook) and you do passive tightwaddery for everything else (for instance I am still driving the car I bought in 1989 because it runs like a dream and gets 40+ mpg highway).
This is why I was looking forward to JD getting to that place, so he could write about it and help people see that it wasn’t what they thought. But alas … he turned around.
Who is Erica Whatshername?
January 9, 2012 at 11:32 am
Doing things oneself is a form of homesteading. Some people don’t want to make those trade-offs. Not everybody has a list of tightwad things they want to do. Some folks like not cleaning. Some folks like luxury travel. And that’s ok. JD is finding his own path, as are we all. Personally, my path requires money so that I can do things like fund relatives’ college education or help keep my son’s private school afloat. Those things aren’t cheap. I’m happy with my money-making/time/spending trade-offs at the moment, though I would be happier if I’d been getting regular raises.
January 9, 2012 at 2:15 pm
Not sure if this reply is going to go in the right place.
Yes, everyone needs to decide what tradeoffs are worth to them, what they value, how they want to spend both their time and their money.
Maybe I wasn’t reading the discussion right — or was confusing it with a different discussion — but it seemed to me that it was going in the direction of talking about what to do if you feel like you’re saving too much. And I feel like when you get to that point, it’s worth considering not just (a) what could I spend money on that would make me happier than saving it (i.e., more vacations, charitable donations, nicer car, etc.) but also (b) could I work less to make what I actually spend and stop worrying so much about saving.
That’s all.
Interesting discussion. Thanks.
January 9, 2012 at 3:36 pm
Of course. But I don’t think JD has made the wrong decision for himself just because he decided it was silly to deny himself material pleasures he can easily afford. He’s been doing a lot of all of the above– outsourcing jobs he doesn’t like doing, travel, comic books, and so on. And he did quit his day job to become self-employed, which is itself a form of financial independence.
August 17, 2015 at 1:28 am
[…] a third note, 3. Your system may change with your income levels and required expenses, and that is […]