When it comes to your relationship with wealth, there are two distinct phases: building and enjoyment. Or, at least there should be. 

During the building stage of your life, you should be focused on growing your wealth as fast as possible. In contrast, during the conservation stage of your life, you want to focus on maintaining your wealth. 

But why is this separation important? And how will you know when to switch phases? In this article, I’ll answer those questions and explain why the separation is important. 

Where this idea comes from

I first learned about these two phases after watching a YouTube video. Meet Kevin, a popular finance YouTuber who talks about this concept.

In one of his videos, he goes on a bit of a rant about these two phases and how they’re not taught and rarely talked about.

As he describes it, there’s a building phase of life and an enjoyment phase. Once you’ve acquired enough assets to generate the amount of money you need to live on, you can retire and enter the enjoyment phase of life. Or, if you want, you can stay in the building phase even after you’ve reached the minimum amount of money you need to retire, “the choice is totally yours,” he says.

“And once you retire, you shift to the enjoyment phase and basically the retirement phase. Unfortunately, because we aren’t taught these two parts, we usually never realize that there is a point in our lives where we do have the option of retiring as long as we were on the right path and we were actually building!” he continues. 

He points out that if you invest all of your money – say $50,000 – into stocks and generate a 6% return, you would make just $250 per month in cash flow, “Yay! $250 a month of cash flow! But guess what, you can’t retire.” 

The problem with cash flow

Even though there are many buzz words drilled into us like passive income, cash flow, and dividend payments, making consistent money like this probably isn’t the best thing to do in the early years of your life for a number of reasons. 

During the “building phase,” as Kevin calls it, you want to make money as fast as possible without it being taxed. So although you might be thinking about dividends and cash flow, that isn’t the best way to build your wealth. 

“Notice we’re not talking about building our cash flow during the building phase; we’re going to have cash flow in the retirement phase. But wait, wait, I just said don’t worry about cash flow, and I know I might lose some of you, so let me explain that,” Kevin starts. 

“Let’s clean the slate for a second. Remove all thoughts we have about cash flow and passive income and all that, and ask yourself this: when you’re not retired, do you need passive income to survive? … And the answer is probably not, and in that case, you should probably focus on your wealth,” he continues.

But what’s wrong with cash flow? Even if you don’t need it, you can still save or reinvest the money.

“But what usually happens when we get cash flow? Well, there are two problems with cash flow. One is when we get cash flow and we’re still working, most of us kind of see that as bonus free money.”

And this is a very fair critique. Many people will be tempted to spend the money instead of actually reinvesting the money. But if you know yourself and aren’t concerned about spending the money, what’s wrong with cash flow during your building stage?

“When you’re working, and let’s say you make your first fifty thousand dollars a year at your job, cool, that goes through the tax brackets, and you get taxed, but then you make extra money, you make extra cash flow that gets tacked on to the end, and it usually gets taxed at your highest personal income tax rate with the exception certain investments.”  

This, in my opinion, is the real reason why cash flow is terrible during the building phase while you’re still working. 

“When you make money and make cash flow on top of that, the cash flow usually gets taxed at a high rate. And let’s say that rate is somewhere around 35%. But you’re saving for retirement, right? You’ve written down your goal and your saving for retirement, and you’re getting a bunch of cash flow. So you get $100 of extra cash flow, and you’re disciplined, and you’re going to reinvest it. But wait! You received the 100 dollars, but because you received it, you have to give $35 to the government in taxes. Now you’re only left with $65 to reinvest. So you actually just made it even harder to get to your wealth figure,” Kevin emphasizes.  

So this is why you really shouldn’t focus on cash flow – or at least until you reach the enjoyment phase of life – because a significant amount of the money you make will be taken in taxes. If, instead, you invest for growth, you won’t have to pay those taxes every year, just when you sell the asset. 

“You’re better off telling that dividend company during the building phase of life, ‘keep the dreaded dividend, just make the company more valuable,’ because that’s going to increase my net worth fast, and it’s going to prevent me from having to pay taxes now.”

Building phase 

When your investing money during the wealth build phase, focus on growing your wealth rather than generating cash flow. Whether this is through real estate, growth stocks, starting a business, or another way of growing your money, it’s crucial that you don’t get sucked into increasing cash flow because thats, not an effective way of building wealth. 

When to switch 

So now that you understand the phases, when should you switch from the building phase to the enjoyment phase? Well, there’s no exact amount of money you need to make the switch. But you need enough money to generate enough yearly interest to live off of. Assuming you can generate an average of 6% interest each year, you can do the math to figure out how much money you need to retire.

Start with the amount of money you want to make yearly in interest. Theoretically, this could be any number, but if it’s too low, you won’t have enough money to live off of. But if the amount is too high, it will take a long time to save that much money, even though you’ll be able to live a better lifestyle.

So it’s important to find a good in-between. Depending on your location and lifestyle, estimate an amount of money that you would like to make yearly in interest. Then, take this number and divide it by 0.06, or an average yearly investment return you feel more comfortable. This will give you the amount of money you need to have to generate your desired yearly interest. 

Enjoyment phase 

Once you have enough money and decide to switch to the enjoyment phase of life, adjust your investing strategy to conserve your money and generate consistent cash flow. I won’t dive into exactly how to do this in this article but during the enjoyment phase is the time to really focus on cash flow. 

The bottom line 

A crucial concept to understand is the two phases of your life, the building phase, and the enjoyment phase. Understanding how to invest during the different phases of life will help you to retire as early as possible and maintain your wealth. The sooner you understand these phases and when to switch between them, the sooner you’ll be able to make the best financial decisions.