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Four Fundamental States of Personal Finance

This article was written by in Personal Finance. 10 comments.


Students of chemistry are likely aware of the four fundamental states of matter. The most advanced chemistry course I’ve taken was in high school, although I must have learned about this basic concept earlier than that. Solids have a definitive shape and volume; liquids assume the shape of its container and flow easily; gases also take the shape of the container but can be compressed in volume. The fourth state, plasma, is like gas, but produces electromagnetic fields and electric currents.

Scientists will argue that there are a number of additional states of matter, but the four fundamental states roughly equate to financial stability. To create this metaphor, there’s no need to look at superfluids or Bose-Einstein condensates.

Using the four fundamental states of matter to describe financial stability may be more relevant to someone’s life than, for example, stages of personal finance. When you break life into stages, you imply a smooth progression, or at least a linear, one-directional progression, across the stages. This has not been my observation of financial progress. Like states of matter, life can progress in any direction. And, although it’s difficult as it is with matter, one can jump from one state of personal finance to a non-adjacent state, in either direction.

State of personal finance: plasma.

Of the four fundamental states of matter, plasma has the highest levels of energy and the highest levels of chaos. Sub-atomic particles break away from each other. Two real-world examples of plasma are lightning and fire.

Lightning and fire are best avoided, and so is the plasma state of personal finance. This is when your finances are in disarray, perhaps due to a desire to ignore what might make you upset or being on the aftershock side of a financial catastrophe. Like the electrons in plasma, you have no control over your financial state of being. You are not aware of your net worth at any particular time, your expenses, or how much of a deficit you have each month.

My personal finances were in this plasma state of matter for too long as an adult. With a job working eighty hours a week or more, earning much less than minimum wage because I didn’t qualify for overtime, with a tiny non-profit salary living in a state with one of the highest costs of living, I knew my finances were heading towards danger, but I managed to find ways to survive — until the lack of financial foundation resulted in a devastating collapse.

State of personal finance: gas.

The gas state of matter is more organized than plasma, but it still has no form of its own. Just like the oxygen in the air, we need gas to live, and to survive financially, we need our personal finance situation to be in the gas state or beyond.

This fundamental state lines up with financial awareness. The molecules in a gas are not yet properly organized, but at least they are not falling apart. Financial awareness is the beginning of organization your financial life. You’ve begun understanding the importance of long-term financial health. You’re documenting your spending, tracking your net worth, reading about living below your means, evaluating strategies for getting out of debt and putting them into action, and otherwise taking steps to improve your life.

After my financial collapse, I realized I needed to make some changes to my life. I started reading the Motley Fool message boards, where amateurs would share their tips for making better financial decisions.

This was before personal finance blogs existed, before I created Consumerism Commentary. This was before popular financial blogs, like the one you are reading, Get Rich Slowly, Bargaineering, and Mr. Money Mustache were changing people’s lives.

I created a rudimentary budget, used free software to track my financial activity, and traded my job at a non-profit where I had no hope for advancement for one in which I actually had a path for development.

State of personal finance: liquid.

The molecules of a liquid are well-organized. They stick together and form a pattern, though the matter is still very fluid.

Investors talk about liquid assets, and that pertains to how easily one can turn that asset into cash for spending or investing. Your bank account is very liquid because you can withdraw money immediately; your house is not a liquid asset because it would take a lot of effort and money to sell it to realize its cash value.

To continue with the metaphor, the liquid state of personal finance is a little different than a liquid asset. When your financial situation is in the liquid state for the purposes of this article, you have control. You are in the process of getting out of debt, and you have put a priority on increasing your income. Your goals are more clear and you are determined to reach an event like being debt-free for the rest of your life or retiring with enough money that you won’t need assistance. You have excess cash flow each month, and you’re using the excess to pay off debt, save for the future, or invest.

Two changes I made between 2001 and 2002 were the most effective for moving myself out of the gas state into the liquid state of personal finance.

  • The new job helped. It wasn’t my dream job, not my passion, but at least I could make a living and build a foundation for the future.
  • I drastically reduced my living expenses by moving into a large apartment with three roommates. It wasn’t always comfortable, but I was able to save a lot of money with rent.
  • Taking my finances seriously allowed me to see my situation for what it really was — and that provided motivation and inspiration for improvement.

Eventually, I was getting to the point where I was able to invest more in myself. I could save money for the future in the form of investing in stock market index funds, a technique I gleaned from the Motley Fool online forums, and I worked hard every night after my nine-to-five job learning and writing about personal money management, investing, getting out of debt, and making better decisions with money.

State of personal finance: solid.

When matter is in its solid state, the molecules are incredible organized. There is no chaos. Solids have a definite size, shape, and volume, and these don’t change unless some kind of force influences it. The idea of solid financials is so strong that financial companies often use images based on solidity in their public messaging. Solids are stable, and stability is an apt aspect for any company that wants to be trusted with your money.

One investment and insurance company formerly used the Ashford and Simpson song from the 1980s, “Solid (As a Rock),” as their jingle, and that company still uses one of the most famous geological rock formations in its logo.

In the solid state of personal finance, one has no debt, except, perhaps, for a home mortgage, or strategic debt related to investments. (But the amount of debt in any case is controlled.) A household has and maintains a positive net worth, and cash flow is positive each month. There is enough excess cash to save for the future — there is no living paycheck-to-paycheck. Your emergency fund has your back to handle unexpected financial events.

Many people’s finances never reach this solid state. It is possible to survive in the liquid state, but it’s living on the edge, always in danger of returning to gas. It’s much more difficult for a solid to change to a gas — in chemistry, that process is sublimation — but liquids often change to gas under certain circumstances. A solid money management approach protects your money from vaporization.

I didn’t reach a truly solid state of personal finance until I was supplementing my day job income with a side business. I could have gone without the extra income, but it would have taken a much longer time to reach a point where I was no longer concerned about my ability to pay all my bills each month. Although it wasn’t overnight — in fact, one might say my business was more than ten years in the making — creating my own asset out of thin air was the quantum jump I needed to generate significant progress towards my financial goals.

Bonus state of personal finance: supersolid.

In chemistry, supersolids exist, or perhaps it’s more accurate to say that some matter exhibits supersolid properties, but to be honest, my knowledge of chemistry does not extend far enough to have a working knowledge of what that might mean. When I started my personal finance journey, I didn’t even know of the existence of this state of being, much less this state of matter.

If the solid state of personal finance requires a steady stream of income to maintain that state, and that income requires a trade-off of time and effort, then the supersolid state of personal finance is that point at which you no longer need to trade your time and effort to afford to live however you want to live your life. It’s kind of like the classical retirement — by classical, I mean the 20th century, upper-middle class concept — wherein you quit your job, relying only on income from your pension, or more recently, your own investments.

Beware people who promise that you can retire early. There is a very popular movement extolling the virtues of extreme saving and “retiring early,” but if you look closely, some of the loudest voices are still working. They’re just working at something they enjoy, relying on income from such work, and calling it “retirement.” The supersolid state of personal finance isn’t merely retiring, it’s being truly financially independent.

Followers of Consumerism Commentary know that I sold my business a few years ago. Between profit from the business as it was ongoing and proceeds of the sale, I’ve been able to save and invest more than I would have earned from my day job over the course of the remainder of my lifetime. I’m not bragging; I simply consider myself lucky and happy I had some foresight into a profitable trend, and I only state this to point out that it is possible, if rare, to reach this supersolid state, financial independence.

And still, life can change at any time. There’s no reason to believe that my finances will definitely not return to any other state in the future. Solids can melt, liquids can vaporize, just as gases can condensate, and liquids can freeze. And as I mentioned above, it’s even possible but rare to jump from one state to another. Solids are stable, and supersolids even moreso, so the goal in terms of personal finance, at least for most people living in a developed nation with reasonable opportunity, should be to reach those states.

Published or updated May 5, 2014. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Kathy

I never have understood the concept of working in retirement. If you are working, even just part time, or at a job you love, you are not retired.

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avatar William @ Drop Dead Money

Kathy, I think the concept of “what is retirement” is changing. It’s no longer “playing golf in plaids” or playing bridge with the blue-rinse set. It’s “doing what you always wanted to do.” If by some chance you can earn a few shekels doing that, that’s nice, and IMHO that doesn’t constitute un-retirement.

People today are living, on average, 20 years longer than our grandparents’ generation. We’re able to do more for longer. That was a gradual shift, as is the shift in how we want to spend our golden years.

I think Luke is a living example of someone who is able to retire in the old-school sense of the word, but continues to do what he enjoys doing, making him a role model for people who want to see what “new-school” retirement looks like.

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avatar Aldo @ MDN

Being a Chemist I have to say I love this post!

I’ve never thought of relating stages of finances to chemistry but it makes perfect sense. I will use some of your analogies with my co-workers… I need some nerd talk for our break-room conversations.

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avatar Luke Landes ♦127,485 (Platinum)

I’m pleased to get the seal of approval from a chemist. I was a little out of my comfort zone with this one, so I’m glad it landed.

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avatar Jason

“You no longer need to trade your time and effort to afford to live however you want to live your life”. I don’t understand why you criticize the Early Financial Independence Community with this as your criteria. Most people I read in this community meet your own specified criteria – they no longer need to work, as their assets are throwing off more income than their expenses. If they choose to do work, many are choosing that work for the sake of the activity and not as a means to increase their spending. I can understand that you and they may have different definitions of the word retirement, but that to me isn’t enough of a reason to blanket caution against an entire group of people due to a terminology difference.

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avatar Luke Landes ♦127,485 (Platinum)

I agree with you — but what I’ve seen from a few of the louder proponents of the community — and maybe we’re looking in different places — is that they don’t actually have financial assets throwing off the full amount of income they’re using to pay for their expenses… maybe they’re managing a profitable website community of like-minded individuals and calling it “not work.” Maybe their spouse is contributing to the household income by continuing to work while the individual is talking about living in retirement. Now, for those who are being completely honest with themselves and their readers or colleagues, I agree with you 100%. There’s nothing wrong with early retirement other than proponents who paint it as an easily achievable goals for everyone. But sometimes things aren’t what they seem.

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avatar Ashley@bamboo

I like the way that personal finance is represented as chemistry, in this way, more people can easily understand how the personal finance works. Your idea on describing and sharing this article is a creative one. Keep it up!

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avatar Louise

I love the way you presented the four states of personal finance. Need to do some more reading that can help in planning my future. Will look forward to your future posts!

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avatar Mike Collins

I love this analogy. I’m no scientist but I love science and I enjoy looking for lessons in unusual places.

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avatar qixx ♦1,890 (Half-Dollar)

I like the idea of states of personal finance. I usually see it presented as a spectrum. To me i see some of the states having various stages. For myself while probably still in the liquid stage i’d say my finances are more like a gelatinous mass than water. Starting to congeal into something solid but not all the way there yet.

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