Playing Financial Chess, Part 2 (Three Phases of Wealth)

Yes, I’m a chess nerd.

But in the worst sort of way. I love chess but am terrible at it. At least compared to most people who consider it a hobby. That’s because I usually only play blitz chess, a quick version where the time allowed to move is severely limited. The long version just takes too much time for me. Which makes me not a great player as I’m not a deep, strategic thinker (at least when I play chess).

That said, I still love it. And because I’m retired, I get the chance to think about it and play frequently.

I’m also thinking about money frequently (you have to as a financial blogger). Combine the two and we get yet ANOTHER post on how chess and personal finances are similar. (My first one was Playing Financial Chess in case you missed it).

Three Phases of Chess

For those of you who don’t know, there are three phases to every chess game. Here’s a good summary of them:

• The Opening — The opening consists of the first moves of the game. There are three main aims in the opening: 1) Develop pieces, 2) Control the center, and 3) Shelter the King (usually by castling)
• The Middlegame — The middlegame occurs in between the opening and the endgame. This is a time when players begin to coordinate pieces and attack their opponent’s fortifications. The middlegame is usually considered to begin once the pieces have been developed, and the Kings castled.
• The Endgame — The endgame occurs when there are few pieces left on the board. The exact line between the middlegame and endgame is blurred. However, there are two main themes that usually distinguish this phase: 1) Promotion of a pawn and 2) Bringing the King into the action.

I know. You are salivating at this newly found knowledge that you probably care very little about. But stick with me. 🙂

Three Phases of Wealth

As I was considering the above it struck me that there are three phases of wealth as well. I’d list them as:

• The Opening — This stage is early in a person’s working career. They are focused on their job, trying to buy a house, paying down debt (usually from college), and so forth. They are using their income to become established financially and there’s not much left over after the basics are covered. Unfortunately many people have a broad view of the “basics” and thus spend much of their lives in this phase. IMO, you should be in it for five years at the most.
• The Middlegame — Over time, a person gets a handle on his expenses/debts (hopefully) and his income starts to climb. He begins seeing a bit left over and works on growing his gap. He saves and invests more and more each year, growing his net worth over decades until he has created significant wealth for himself. This is the bulk of a person’s lifetime — perhaps 40 years or more in length.
• The Endgame — Once a person has accumulated enough wealth and wants to retire, his challenge is to transfer this wealth into income, at least in part. He will need to spend part of his wealth as well as income that wealth generates in order to provide for himself in retirement. Or, if he has done well at saving/investing his wealth might produce enough for him to live without him ever having to spend any principal.

See! Money and chess do mirror each other! 😉

My Three Phases

The three phases of my financial life have happened this way:

• I started out with an MBA which gave me a huge headstart. From there I worked to grow my career while keeping expenses relatively low (it helped that I lived in low cost of living cities).
• Doing the above gave me a large gap between income and expenses. I was able to pay off all my debt, including my mortgage and start investing in a big way. I maxed out my 401k and saved a ton in taxable accounts to boot, putting all my money in index funds. Eventually I invested in real estate as I started to eye phase 3.
• I’m just beginning this phase, beginning with retiring not that long ago. As for the rest of the steps in this phase, that’s what this blog is about! I’ll be sharing all the issues, decisions, etc. along the way.

How about you? What phase are you in and what are you doing there to get to the next phase?