The 5-Rung Wealth Ladder: How to Climb Your Way to Financial Independence
How is wealth created? How can I climb the wealth ladder to reach a point where I’m financially independent and free of worry? These are the burning questions of this generation, and it can be tough to analyze your financial position without a working knowledge of wealth as a whole.
In order to secure yourself a financially independent future, you’ll want to answer these questions in your head. Once you know the wealth landscape inside and out, you’ll be able to apply important principles to your lifestyle.
So, today we’re going to delve into the wealth ladder, what it all means, and how you can use the theory to your financial advantage.
The 5-Rung Ladder to Financial Independence
To start answering the questions, “how is wealth created” and where you might stand in the scheme, it’s important to layout the wealth ladder in concrete, comprehensive rungs. Below, I’ll lay them out and give an overview of what they each entail.
Hopefully, with this information, you’ll be able to pinpoint where you fall and identify any areas you’d like to improve on your journey to financial freedom.
Rung #1: Support Yourself Financially
The first rung of the financial ladder is the barebones section of financial independence, aptly described as being able to support yourself financially without outside help from friends, relatives, or others.
Before the first rung, one is potentially making some of their own money, but could not live the lifestyle they would like to solely funded by their own personal income. While support shouldn’t be frowned upon (everyone has different circumstances), the reality is that anyone unable to support themselves has not made progress to financial independence yet.
So, the first rung serves as the entry point from financial dependence on others. However, once you get here there is still a lot more to go before you might have the freedom to live a certain lifestyle.
Once on this rung, one would have to stay there by mastering the art of paying bills on time, have rent accounted for each month if applicable, and have a steady enough income for future planning.
To get to that point, it can be tough. Climbing from the bottom of the ladder to a secure position on the first rung can prove to be a challenge; after all, it’s always harder to make serious money from scratch. Some people might struggle with a back-and-forth between the bottom rungs for life, and this guide is meant to help you avoid that.
Ascending from the first rung
You can choose from two general ways to ensure a spot on this rung with considerable upward movement: securing employment or self-employment. Sometimes, the move is to have a combination of the two or a side hustle.
No matter which way you aspire to reach the top of the ladder, it has been done by others—and you can do it too.
To add to that, simply securing a job or dreaming up business ideas will only be enough if you are providing a valuable output. Success can come proportionally to how much value you are adding to your field.
In fact, the best way to ensure that you ascend the wealth ladder is to never stop investing in your own skills. In the end, you are the one interested in becoming financially successful, and you can’t do that without hard work to accentuate your professional strengths and overcome your weaknesses.
With time, perseverance, and drive, you should easily be able to reach and eventually graduate from rung #1.
Rung #2: Become a Saver
Contrary to popular belief, simply earning a ton of money doesn’t automatically equal financial independence, nor does it mean that one will ever reach the top of the wealth ladder. You could be making a killing each year from various streams of income, but if you don’t know how to save it, you might never even reach the second rung: becoming a saver.
It’s common knowledge that the more you save, the more your money can grow. Taking home $250,000 each year won’t mean much if it can’t compound on itself through investment or simple interest. In fact, saving up can shave years off your working life, allowing you to retire much earlier and more comfortably.
There are multiple ways you can save your money. It will take some self-control and maybe living below your means for a while, but it’s imperative that you think long-term when it comes to saving. 100,000 today could grow into a multiple of that if it’s not spent on immediate purchases.
As for where your money can go to stay safe, there are a few different kinds of accounts you could set up. Things like reserve funds (either personal or business-oriented), retirement accounts, investment savings, and even leisure funds could help you stick to your plan and curb frivolous spending.
Once on the second rung of the ladder, you’ll need that self-control, but it will be worth it once you have enough to start investing.
Rung #3: Buy Investment Assets for Growth and Income
The concept of freedom in the financial realm means that if or when you get tired of working, or start feeling burned out, you won’t need to stay in something just for the money. By the time you’re really free, you’ll be able to make money management your side gig, overseeing multiple streams of income.
At this stage, your money begins to work for you if you play your cards right at the beginning. The beauty of investing is that there are so many paths to take, and you get to choose where your money goes.
Choosing investment opportunities
One of the most popular methods to make high returns is through real estate investing, a booming industry that has created hundreds of success stories. In fact, since selling my business I’ve made real estate investing one of my main streams of income.
Other than more niche forms of investing, there is also great opportunity in the stock markets. If you’re not as clear on how to make the best stock investment decisions, it may be best to hire a financial manager that can do it for you. Either way, with the right investment tactics you could see your money grow itself to new heights.
There is a general rule for investing though, and here it is: make a concrete plan before you even start deciding. Evaluate how much capital you want to put towards an investment, what your desired return is, and which investment strategy is best suited to help you reach your goals.
Of course, all this talk of investing can seem like a dream come true, but no investment comes without ample risk. Next, I’ll talk a bit about how to use your knowledge to mitigate as much risk as possible. Even high-reward situations with immense risk can be made less dangerous with the right risk analyses.
Rung #4: Reduce Your Risk
The previous 3 rungs of the wealth ladder serve to help you live the life you want to without worrying. Once you make it past rung #3, you’ve reached a point where you can start diversifying even more. There are always more opportunities to make even bigger money than you were before, but you shouldn’t take them on until you’re a master at reducing risk.
There are tons of ways to mitigate risk, but the ones you’ll face at this stage after investing are unique to those with diversified assets. The 4th rung of the ladder can be a tough one to stay on if you’ve just entered, but there are a few ways to ensure that your spot is safe.
To keep advancing on the ladder, here’s what you can do to reduce your risks:
The first piece of advice I can give you at this stage is to settle or pay off any outstanding debts you might have accumulated, whether they be loans for investments, personal debt, or other types. If you’re on this rung, you should focus a lot of attention on eliminating as much debt as you possibly can.
Debt can be helpful if taken on to pursue large profits, but if you are at a point where you can do this, eliminate them. Debt is an unnecessary point of risk when it comes to investments, as it’s not protected from lenders should you default for any reason. In any case, it’s always preferable to keep your investments free and clear of debt.
The second point of risk reduction is protecting your assets. There are many ways to do this, but I prefer to look at asset protection as keeping your investments diversified and purchasing liability insurance where needed.
If you’re unclear on how to gauge your liability protection, you can hire an insurance agent to walk you through how to best secure your assets. If you don’t have enough liability insurance on assets like properties, it’s highly recommended that you invest in it now. Anything could happen, and you’ll want to come out unscathed if something does.
If you do pay for liability insurance, it may seem like an unnecessary expense to some, but if you’ve invested well the cost will pale in comparison to the profits you could make.
Don’t be afraid to sell
The third way to effectively reduce your risk is to sell investments or properties that are underperforming or have too much baggage. There’s no reason to hold onto something that you feel may take a turn for the worse, especially if you’re already ahead.
If something in your portfolio is underperforming, you’ll want to analyze all the possible factors that are affecting it. Evaluate whether it looks like a temporary lull, the market history surrounding your investment, and future opportunities. If you weigh every factor and decide it won’t improve enough, let it go before you take on too much risk.
Overall, with time you will gain many skills necessary to identify and mitigate risk in your investments. There is always help available if you need it, and investing in it may be the right choice to ascend to the top rung.
Rung #5: Hedge Against the Unpredictable
Now, we have the top rung of the wealth ladder. This stage is where you’ve “made it,” with an array of well-performing assets and well-invested equity. By now, you should be able to live on investment income alone, or at least fund a big chunk of your lifestyle with it.
However, even though the basic worries are long gone and you’re set up for considerable wealth gain, there will always be unpredictability in the markets and the general future.
At this point, your main concern will be to hedge against what you won’t be able to control and learn skills to adapt when these events inevitably occur. With the right hedging, you can avoid catastrophe where it might have struck.
In our world, if you are on this rung of the ladder it’s unlikely that you will descend dramatically in any case, but there are a few factors that could affect your portfolio’s overall performance: deflation, inflation, and lack of liquidity.
To protect your portfolio against these three demons, you’ll need to hedge early. For deflation risk, hedge by offering long-term leases and contracts to your real estate tenants and invest with as little debt as possible. For inflation, hedge by using fixed rates and rental contracts with adjustable interest rates to keep up with the dollar.
In any case, it’s essential to keep a store of money that can be easily liquidated, as you never know when you’ll need to use cash. A common mistake people make is keeping too much of their money in an illiquid form, and regretting it later.
The Purpose of Financial Independence
Hopefully, that overview of the wealth ladder has answered your burning questions and given you a head start on the journey to financial freedom. Achieving this goal is one of the most fulfilling things you can do—but you really have to want it.
The goal of reaching the top of the wealth ladder isn’t one shared by everyone, so along your journey, it’s helpful to evaluate each year what your goals are, if they have changed, and if the pursuit of wealth is still what’s driving you to succeed.
The road to financial independence may be a long one, but knowing the ropes and what each rung demands are crucial to succeeding faster. These are points I wish I’d known earlier myself. If there’s one more key takeaway from this post, it would be that it’s never too late to ascend. Best of luck on your own journey to financial freedom.