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The 4 financial stages of life. Which stage are you in?

Updated: Jan 1, 2022

The more we are different from one another, we are all the same. Life on earth typically follows a similar path. We are born, we learn to walk, speak, go to school & college, start working, gain experience, grow old, and finally - bid goodbye. Our financial lives too, follow a predictable trajectory. The only exception though is that not everyone goes through all the financial stages. Most peak at the mid-stages and stop growing thereafter. Only a handful get to the final stage, the pinnacle of financial fulfillment.

Ironically, an overwhelming majority spends most of the waking hours slogging but still die broke. By the time our children inherit our fortune, inflation eats into it so much that they can hardly afford to live off it (if they had to) for more than a handful of years. If only we invested a little time learning about managing and growing money (a minuscule of the time we spend slogging to earn it) – we would lead far richer lives.

The key is to get to the fourth and final financial stage as early as possible. Some get to it in their twenties and some never! Here’s what my journey through the 4 financial stages has been:

Stage 1 - Dependence (Birth to Age 22)

Like most, my parents too, were my ATM. All I had to do was to ask! Toys, chocolates, clothes, education – and my parents would fulfill my demands to the best of their ability. The only habit of wealth accumulation I had inculcated was to quietly slide one or two coins every other day and put them in my secret piggy bank. But only to spend my hard-earned money on a picnic with friends.

I don’t remember learning anything about money at school. There were plenty of subjects as part of the 19th-century education system, but none related to money. We had calculus, so was chemistry and how to measure the circumference of a wire by using a vernier caliper – none of which I ever used in my professional or personal life. But money, which I use every day was a subject left for life to teach me – albeit the hard way!

Warren Buffett may have bought his first stock at the age of 15 and Elon Musk may have developed a game at 13, but I was occupied in figuring out how to get good marks to get admission in a good college.

Stage 2 - Ignorance (Age 22 to 30)

After graduation, I started earning and managing my own money. But all I did was, what I was aware of at the time - Earn/Burn/Borrow/Save. Earned enough to lead a good life and then spent enough to sustain that life.

Took a mortgage for a dud real estate investment. Invested in instruments such as Fixed Deposits - barely beating inflation. Don’t think I was even aware of how inflation was eating my money. I knew about compound interest but never cared about using it to my advantage. I knew about interest rates but still maximized my expensive home and car loans.

Stage 3 - Cognizance (Age 28 to 32)

By my late-twenties, I began realizing that my wallet had holes in it, and I needed to repair it. I started becoming prudent with money. Savings rate grew, compulsive buying & expensive dinners went down but investing remained stagnant. I got into the wealth-accumulation mode but wasn’t paying attention to maximizing the return of every dollar that I was saving.

Stage 4 – Competence (Age 32 to RIP)

One fine day, talking to a friend, I realized that my finance movie was not compelling enough. It had a cliché opening (most are dependent on their parents for money growing up) and a mediocre pre-interval.

But then I realized that a movie can still be a blockbuster if it picks up pace after the interval. I realized that the second half of the movie, especially the climax, is entirely in my hands as the Writer/Director/Producer/Actor. So, the journey of making sense of the financial jargon started and continues today, as I set my goals on the fourth and final stage – Competence.

“Competence is the ability to see clearly through clutter and jargon – and to act decisively, maximizing the long-term earning potential of every dollar saved.”

It is the ability to choose Investment B over A, even if A seems to offer better short-term gratification and is insanely popular. Financial competence is the ability to listen to a professional talk about complex products but still stay the course. It is the ability to think rationally about one’s financial future, like a marathon and not a sprint.

Growing old is inevitable, getting competent is not. Growing old is not a question of choice, getting competent is.

Which one of the 4 financial stages are you in?

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