The Three Stages of Financial Maturity

When it comes down to it, there are really only three things you can do with money. You can save it, spend it, or give it. Each action is fundamentally different from the others, and bears different results.

As you might expect, by human nature we do all three, although in varying amounts. There are people who are naturally Savers (probably you who are reading this blog), natural Spenders, and natural Givers as well.

Knowing where your temperament naturally leans is very important. A person like me who is a natural Saver has a much harder time giving than someone like my wife who is more prone to Giving and Spending. She’s now very good at saving and I’m better at spending (I just spent over $100 on a single book…more on that later!), so there is certainly something to be said about developing new habits and finding the path to better balance.

This path takes a lot of work, however, and does not come overnight. Mentally, both you and I have to make decisions every day on what to spend our money on, how to give it, and when and how much to save it.hand with money

Drawing from Stephen Covey’s masterpiece, The Seven Habits of Highly Effective People, there is what Dr. Covey calls the maturity continuum. In short it works like this.

The lowest level of maturity is Dependence. We all start in this state when we enter the world. We can’t do anything without the help of others. Our mental attitude and our happiness are dependent on other people and external circumstances. Sadly, I feel that this is where most people are mentally, emotionally, and financially, even when they grow up physically. “I can’t because he won’t let me”, and “How am I supposed to pay these bills when you won’t help me,” are phrases that typify this stage.

The natural next step is Independence. This is a much more empowering place to be. It is typified by statements like, “I can do it.” “I’m going to work to make sure things happen.” “I have a choice.” We have a lot more power over our circumstances when we make the choice to take action. Independence is often worshipped by society as the ultimate state. What is often not addressed though is the next stage…

Interdependence is the highest form of maturity, Covey argues. Interdependence is when there is true synergy in a group or organization. Two oxen pulling a yoke together can pull more weight than four can individually. It works the same with human beings. The more that you and I are able to effectively work with others, the more successful and happy we will ultimately be.

Applying these principles to personal finance, how does the financial maturity continuum play out in real life? What does each stage mean when it comes to our money?

Financial Dependence is pretty easy to understand, as most of us have been there or are still there. There’s a constant need for a check or reliance on someone else to pay for things. There’s also often an obligation to pay back borrowed money.

Financial Independence is quite simply having enough passive income to meet and exceed your expenses. This income should come from multiple, diversified sources that provide more cashflow year in and year out. In order for a person to reach this stage, they must consistently underspend their income, and they often save 50% or more of it in order to reduce liabilities and purchase assets during the accumulation stage of their life.

Financial Interdependence is when one’s financial situation has a strong foundation and is in harmony with helping the community at large. A couple that owns a rental house could exhibit financial interdependence by living off of the income from that rental house, and also by providing business to the various contractors and vendors required to keep the house up to date and in good shape. They might exhibit interdependence by giving a portion of their profits away to a charity that is close to their hearts. There is a deeper understanding and acknowledgement with the flow of money that it’s not all about me. It’s about us. We certainly can’t neglect our own family and our own well being, but at the core helping others really helps us as well.

An important thing to keep in mind is that you cannot skip stages. I once had a friend who seemingly exhibited a lot of characteristics of someone who was financially interdependent. They’re a natural Giver and Spender. Once, we went to brunch with a few other friends and at the end of the meal, they promptly picked up the tab for all of us.

My friend insisted that no one should help pay. I naturally assumed that, since they were around my age and had just graduated college as well, they had either inherited money from family or had just done a really good job earning a lot and managing what they had. Eventually, I discovered that this friend who loved to spend and give was really deeply in debt beneath the surface. They would take lavish trips and vacations, picking up the expenses for family members to come with, but do it all on credit and end up agonizing about it later. Society glorifies independence, but true financial independence and interdependence is something that has to be earned through wise self-management. You have to truly step away from financial dependence in order to move to the other stages.

Here’s another example of the inability to skip stages. Let’s say Person A inherits a trust fund from the day they are born. Automatically, it would seem that they have been blessed with financial independence. This is certainly an amazing head start in life, but I wouldn’t necessarily classify this person’s situation and mindset as being truly independent. From a purely financial lens, yes, there is enough income flowing from various investments to provide a certain level of lifestyle.

However, at the core Person A is dependent on the income they are receiving. At least they are much more so than Person B who studied investing or started their own business and put aside money consistently over the years in order to build up the passive streams of income themselves. If a catastrophe of some sort happens to the investments in the trust fund, Person A must rebuild their income some other way and rely on developing their skills to provide income. In the same situation though, Person B who built up their own investments is shown to be more truly independent because they already have the knowledge, skills, and experience to re-build from scratch.

So really, at the core no one can skip the progression through the stages of financial maturity. It is also worth noting the various ratios involved in spending, giving, and saving (investing) at each level. A financially dependent person spends all he/she makes, and thus is completely reliant on the next paycheck coming in (regardless of the source of the money). A person who is closer to financial independence places a higher priority on saving and giving. Saving may tend to take priority, however, because assets must be built up and liabilities reduced to ultimately reach a state of financial independence.

At a truly interdependent stage, a person has balance between saving, giving and spending. They recognize that good things happen when you do each of those things, without excluding any one. Giving tends to increase at this level because basic needs are met and exceeded, money is already piling up in the bank, and there is an increased awareness of the ability to help others.

The ratios of saving, spending and giving tend to be correlated to the level of a person's financial maturity.

The ratios of saving, spending and giving tend to be correlated to the level of a person’s financial maturity.

Spending all of your money will ultimately lead to ruin because – well – you’ll run out and go broke! Giving all of your money away can help a lot of people in the interim but it is at the expense of both your own current and future needs. Saving all of your money will spring you much closer to financial independence, but in the long run less can be given and spent in the here and now.

It’s a tricky and highly personal endeavor, but finding the right ratios for your money exhibits a high degree of financial maturity. As you and I develop the skill of balancing helping now and helping later (because all money is meant to be spent at some point, by someone), I believe that we can ultimately find more happiness in our lives as we manage that balance.

The Mortgage is 40% Paid Off

Exciting news to report!  This August, we finally reached the 40% mark for paying off our home loan.  We have been consistently sacrificing in order to put as much money as possible toward this debt.  It’s a big one, and we’re really excited to be making progress toward our goal.

We bought our home in May 2013, so it’s been a little over a year as I write this.  I still remember sitting there with my wife at the closing table, with our realtor and the mortgage lender there across from us.  A million and one forms were signed, and we knew exactly what we were getting into.  Even though we were diving into debt, we knew it was very conservative compared to our incomes, so we knew we could comfortably pay the regular payment even if things got tight and one of us lost our jobs, or some other catastrophe.

But enough reminiscing.  Here’s the progress we’ve made so far.  I’ve also included the percentage of our take home pay that we’ve been putting forth to pay this thing off.



As you can see, the mortgage balance is declining slowly but steadily.  There were no big windfalls.  No lottery winnings.  No calls from the NBA telling me I’ve been drafted.  Just regular, boring, extra payments each month.  It doesn’t seem like much as we make the payments, but over time we can really start to see the progress.

In the second chart, you can see how volatile the extra payments have been.  There are some months where we can really devote a lot of extra income to the mortgage, and sometimes we can’t.  Other times, the payments we make at the end of the month just aren’t reflected in the numbers because our lender hasn’t processed the payment yet (this is why August’s numbers look a little low compared to the last few months).

The amount we put down to eliminate principal, as a percentage of take-home pay, is trending toward the 40% mark, which is pretty exciting for us.  In a year’s time, we should be close to having the mortgage paid for.  That’s certainly a day I look forward too – a step closer to financial independence.