Money Management

5 Money Management Levels – the Way from Poverty to Freedom

By  Opher Ganel

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We each start our money journey from different points.

Each of us is born into a different level of affluence, a different familial situation, different innate talents, and ethnic background and gender that can help or hinder us.

We each have different early-life and early-career experiences.

Each of us gets different support, education, and mentorship; learns different skills; and gets different opportunities.

However, no matter what your starting point and early experiences and opportunities, it’s up to you to make the most of them. The better you do in this regard, the higher your money-management level will be, and the closer you’ll get to financial freedom and the faster you’ll do so.

Level 1: The Debt Spiral – You Spend More Than You Make

If you spend more than you earn, barring gifts, charity, or miracles, you’re falling deeper and deeper into debt. Considering that 54 percent of Americans share your situation, you’re in a plentiful (if not good) company.

As the well-known saying goes, “The ultimate insanity is doing the same thing over and over, expecting different results” (misattributed to Albert Einstein).

If you want to stop spiraling deeper and deeper into debt, you have to change something. The change can come from cutting expenses (challenging because most poor people aren’t poor due to wasting money), increasing income (more on this below), or a combination of both.

If you do spend money you don’t have on things you don’t need, stop it, of course. Until you have the money, and even then, only if those purchases align with your priorities.

To make more money, there are many simple things you can do. Unfortunately, none are easy. Some examples:

  • Work more hours (either at your current job or at a second job)
  • Do gig work (e.g., driving for Uber or Lyft, doing last-mile deliveries, walking dogs, etc.)
  • House-hack by letting someone (trustworthy) rent (or sublet) a room in your home
  • Learn useful skills and start a business based on those
  • Build a business around buying low-cost items (e.g., at thrift stores) and selling them for a profit online

Once you get to parity between your income and your spending, you’ve escaped the lowest level of money management, and are one step closer to financial freedom.

Level 2: Paycheck to Paycheck – You Spend Every Dime You Make

According to, 61 percent of Americans live paycheck to paycheck. This isn’t limited to low-income earners. That same report states that more than one in three Americans making $250k or more still live paycheck to paycheck, and CNBC reports that 36 percent of 6-figure-salary employees are in the same boat!

Obviously, there’s no way 54 percent earn less than they spend AND an additional 61 percent make the same as what they spend – that would be more than 100 percent!

Rather, their definition of paycheck to paycheck most likely includes the above Level 1, so an additional seven percent are probably in this second level.

If that’s you, kudos on escaping the basement level of money management.

However, the ground floor is far from the penthouse. You need to up your game a notch or three and start climbing those stairs.

Here too, you need to follow the same advice as those in Level 1, except that you have the benefit of not having to dig yourself out of the hole (or if you do have debt, you’re at least able to service it without going deeper).

This means that even a small positive difference in your net income after expenses can make a big difference.

Another crucial difference is that at Level 2, you more likely picked up some bad purchasing habits, simply because you can.

That means you should first take a good hard look at what you’ve been spending on, and for each transaction, ask yourself which category it belongs in and take the appropriate action:

  1. Not aligned with your priorities – a waste of money, cut it out.
  2. Aligned with your priorities, but not efficient – find cheaper alternatives and budget for those.
  3. Aligned with your priorities and reasonably efficient – budget for it.

After the above exercise, you should already be spending less than you earn, so you’ll have graduated to Level 3.

Turbo-charge that climb by also increasing your income (see examples above).

Level 3: Saving Money – You Spend Less than You Earn, but Squander the Opportunity

CNBC says that more than half of Americans don’t invest.

They quote Ramit Sethi, best-selling author of “I Will Teach You to be Rich“ who wrote, “One of the most surprising things that people don’t realize about money is saving is not enough.”

Again, we can discount those who simply can’t invest because they literally don’t have any excess money or income. That leaves “over half” of the 39 percent who do better than living paycheck to paycheck. Say that’s 20 percent.

If this is you, keep in mind the following facts:

  • There have been very few times when cash hasn’t lost purchasing power (a.k.a, inflation). Even at the very-long-term average of 3.5 percent inflation a year, your money loses half its value in 20 years. At the latest 9.1 percent rate, all it takes is eight years!
  • Savings accounts currently pay an average interest of just 0.13 percent. That means you “earn” a measly $13 a year on a $10,000 deposit. At 9.1 percent inflation, that means you lose $822 worth of purchasing power from that $10,000 deposit over a single year.
  • Over the very long term, the stock market never loses money. There hasn’t been a single 20-year period on record where the stock market has gone down. On average, it goes up 6 to 7 percent a year faster than inflation!

When you take these three facts together, putting your excess money under a mattress, or in a checking or savings account, or in a CD, or even in bonds, you’re squandering a huge opportunity to let your money work as hard as you do, and ultimately harder than you (more on that below).

If you don’t like the stock market or want to diversify beyond it, you can invest in rental real estate, and/or in building your own business.

I do all three.

Level 4: Investing in Assets – You Spend Less than You Earn and Leverage the Opportunity

Unless you were born to wealth (or marry into it), this is the level you should aspire to.

This is how most millionaires are made, according to “The Millionaire Next Door.” According to the authors’ research, four in five millionaires are self-generation-wealthy. And you don’t get there by living frugally and stuffing the excess income under a mattress.

Whether you invest in stocks, real estate, your own business, or some other (prudently) risky asset, this is the path to true wealth. You bring in a good bit more than you spend, and you leverage that extra income as much as you can.

You get your money to work as hard as you do, if not harder, to build your net worth up.

Ultimately, when you’ve done this well enough for long enough, you automatically graduate to the fifth and final level…

Level 5: Financial Freedom – You’ve Invested Enough that Your Investments (More than) Cover Your Costs

Half of Americans over age 55 are retired, not all by choice. That’s over 59 million Americans.

More than 40 percent of the 35 million Americans over age 65 are financially insecure (making less than 200 percent of the federal poverty line).

Put those stats together with the woeful level of retirement-plan balances even among those in their 50s, 60s, and 70s, and you know that Level 5 is a small fraction of the population.

However, if you manage to get to Level 4 early enough, and are aggressive enough in both your savings rate and your willingness to take prudent risks with your investments for long enough, you can get to true financial freedom.

What Is Financial Freedom?

Financial freedom isn’t a set number of dollars. Having a million dollars, or even $10 million doesn’t necessarily mean you’re free.

It’s the relationship between how much your investments bring in passively and how much you spend that determines your freedom (or lack thereof).

Say your net worth is $10 million, and your investments bring in 5% a year after adjusting for inflation (we’ll ignore the fact that more than likely a chunk of that $10 million is in your home equity and brings in $0).

If you spend $750,000 a year, you’re not free. 

In Year 1, your investment income is $500k, but after covering your $750k spending, you have $9.75 million left. The following year, your investment income may be $487.5k, because your net worth is lower. If your spending stays at $750k, you’ll be left with less than $9.5 million. 

Continue this way, and after less than 24 years you’ll be broke.

On the other hand, if your net worth is “just” $2 million, brings in just 4% annual real return, and you spend $75k, you’re free, because your money works hard enough to cover all your expenses, so you don’t need to work.

The Bottom Line

It’s far too easy, and all too inaccurate, to assign financial success or lack thereof fully to individual choices.

Each of us was dealt a different hand.

Some were born into wealth. Others into abject poverty. Most start out somewhere in the middle, but even there, some benefit from more privilege than others. Are you part of a disenfranchised minority or the white majority? Are you male, or do you suffer the gender-based pay gap? Does your family have a history of pursuing professional or academic degrees, or are they all “blue-collar” workers? Research shows that even something as unexpected as how many of your peers come from wealth can and does have a major impact on your ultimate financial outcomes.

However, no matter our starting point, each of us can and should do our best to take advantage of any opportunities that come our way. As ancient Roman philosopher Seneca said, “Luck is what happens when preparation meets opportunity.

The more you prepare, invest in yourself, take prudent risk, and persevere in the face of challenges, the higher the level of money management you’ll achieve.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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About the Author

Opher Ganel

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.

Connect with me on my own site: and/or follow my Medium publication:

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Learn more. Wealthtender is not a client of these financial services providers.
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