I have read many blogs and watched many YouTube videos that have all told me to invest for passive income.

From dividend stock investing to cash-flowing rental properties, I was sold on the idea of replacing my active income with passive income.

I mean, who doesn’t want to quit their 9 to 5 job and sip piña coladas on the beach while getting paid to do nothing?

But the dream is much harder to achieve when you are focused on the wrong goal, which made me realize that passive income won’t help me retire early.

That’s when I changed my investing strategy.

When you’re not retired, do you need passive income to survive?

In my case, no I don’t.

Although I would like to quit my full-time job in the near future, I don’t think I am in a position to do so right now. I am still very much in the “building” phase of my life and am focused on substantially increasing my net worth.

Until I am in the “retirement” phase, I don’t necessarily need to receive passive income to survive. I am fully capable of paying my bills and sustaining my life off of the money that I earn from my job.

Why not invest for passive income?

For anyone to retire, they have to reach a certain retirement savings goal, which, once achieved, would provide passive income for the rest of their life.

Until I reach my retirement savings goal, I won’t be focusing on investing for passive income.

If I did, it would probably take much longer for me to reach that goal than if I invested to accelerate the growth of my net worth.

Lifestyle inflation

When we receive cash flow while still in the “building” phase, most of us will see that extra income as bonus spending money instead of putting it towards our retirement.

It’s easy to earn an extra $50 a month and treat ourselves to a nice dinner or use it to pay off our phone bill.

We are essentially robbing ourselves of our retirement.

Soon, the passive income that we receive is paying for vacations and cars just because we have the means. When we increase our cash flow, at the same time we create more expenses.

So, we’re increasing our standard of living which defeats the purpose of investing for retirement. This can get very dangerous if lifestyle inflation spirals out of control.

Paying taxes

If you are disciplined with your money, perhaps you reinvest all your dividends through a DRIP and put your rental income towards another down payment.

But if you are still in the “building” phase while receiving cash flow on the side, your passive income will most likely get taxed at the highest personal income tax rate.

Usually, short-term dividends get taxed higher than long-term capital gains.

Here in Canada, if you receive $100 in dividends, they can be taxed up to 29%. You’re only left with $71 after taxes to reinvest, so you just made it even harder to get to your retirement goal.

You’re better off not looking for dividends but instead, investing in companies that will grow and increase your net worth faster with capital gains.

If you buy a stock that goes up by $100 in a year, you won’t have to pay taxes on that gain until you sell.

Even at a personal tax rate of 35%, only 50% of the capital gains are subject to tax. So you would only have to pay $17.50 in taxes, leaving you with $82.50 left to reinvest.

Similarly, when you buy real estate, you don’t pay taxes when your house appreciates unless you sell. However, the cash flow on your rental income would be subject to income tax.

As long as you are in the “building” phase of your life, focus on growing your wealth.

Once you are within the “retirement” phase, then you can begin to focus on generating passive income through cash flow and dividends, as you will likely be working less and, therefore, taxed at a lower rate.

How do you build your wealth?

After shifting my focus from passive income, these are the ways I find are the most effective in building wealth and rapidly increasing my net worth.

Growth stocks

Instead of investing in dividend stocks, put your money in growth stocks that have the potential to 2X, 5X, or even 10X your money.

Of course, this strategy comes with greater risk, but if you believe that the company will survive and flourish past this pandemic, then you could potentially grow your money faster than putting it into a dividend stock.

Another strategy is to look for smaller stocks that have a high potential of growing quickly in the near future. These stocks are generally in a low-competitive market and are showing signs of positive earnings.

Just be careful to not risk money that you are afraid of losing. Your money could grow just as quickly as it could vanish in the stock market, so always do your research before buying into a company.

Real estate

In the case of real estate investing, instead of buying properties for their cash flow, try to look for undervalued homes that need minor cosmetic improvements, such as fresh paint or new flooring.

By rehabilitating the home, you can force appreciation to increase its market value.

Once you have finished the rehab, look for tenants to rent to, get the house reappraised, and enjoy the boost in your net worth. Repeating the process is called the BRRRR method.

Start your own business

Alternatively, you can also start your own business.

Running your own business takes a huge amount of effort and has a high chance of failing. It may take several tries but once you get it going, your net worth can take off.

From there, you could sell the business or hire someone to manage it, effectively removing yourself from working.

As of right now, I am dedicated to building my wealth through stocks, real estate, and business. With these strategies, I plan to accelerate my income to reach my retirement savings goal as soon as possible.

As I approach my “retirement” phase, I will begin to change my investing style to produce more passive income.

But until then, I am ready to risk and invest my money to potentially see higher gains in exchange for early retirement.