How to build Wealth in Canada ?

A Million dollar question. Maybe a multi-million dollar question ? As an immigrant and a new father, I want to get to this ‘wealthy’ stage of life faster. The North American dream is what I envisioned when I decided move to Canada.

What’s your “Why” ?

An important question that we want to ask ourselves is why we want to do this. I think what drives me is the ability to become work-optional a few years from now. Good old Financial Independence. For you, this could building generational wealth or it could be achieving a sense of status.

Mrs. Frugal New Canadian has a different take on this. She thinks that her “why” is because she brings amazing value to any organization or activity that she undertakes. Competence leads to value addition and value addition leads to recognition which can lead to making more money. Wealth is an after-math of value addition.

I have a friend whose family borrowed several thousand dollars while he was growing up. Much of his income until recently went back to furnishing that debt. He’s vowed to not fall in this trap. Being debt-free even if it means living with less is his why. That’s his definition of acquiring wealth.

Find your why and let it drive you. Its one thing to have a New Year resolution that fades away in a couple of months. Its another to have an internal motivation to keep on going.

What does Wealth mean to you ?

Our definition of wealth can be different based on where we are in our lives. A common theme that I have observed in the Financial Community is the ability to buy back time. Time gone by is just gone forever. Imagine being able to do more of the things that you like if you had enough wealth.

Personally I like the 4% withdrawal rule. You can work backward to find my Wealth number using this. Assuming you need $40K for your expenses, the amount you’d want in your investment and retirement account would be $1,000,000. (Not considering the impact of inflation in these examples) Our expenses, for example, are about $7,000 a month. We would like to be work-optional and would like our investments to cover 50% of our monthly bills. Using this equation, our Financial Independence number would be just over a Million dollars. In a more recent evaluation, we found our target wealth acquisition number to be $1.725 Million by the time we are 65.

You could also define wealth by potentially looking at the rest of the Canadian population. For instance the top 20% of Canadian households (2016) had a Median Net Worth of $1.8 Million. I would expect that this number is exponentially higher in 2023. Perhaps, your wealth acquiring journey could be reaching the top 10% (or 1% !) of the country.

A distant cousin defines wealth as being able to eat in whatever restaurant they choose to once a week without worrying about running out of money.

Step one is to identify and lock in this number.

So, what can I do to become Wealthy in Canada ?

Here’s what we have been doing to grow our wealth over time in Canada.

1. Changing our Mindset from Limited to Abundant

This is going to sound easy but I would argue that this one is the most difficult of them all. I am a big fan of Carol Dweck and her work around Growth Mindset. We believe that we are worthy of wealth and we believe that acquisition of wealth is happening continuously in our life. A wealthy mindset towards money for me means respecting money but not throwing or spending it all at once. It means practicing delayed gratification. It means believing that your systematic investments in broad and diversified markets and assets will pay off in the long run.

2. Understand that building wealth takes time

Warren Buffet calls Compounding the eight wonder of the world. The more time you give investing, the more Compounding works for you. If you are in a job making an average or even an above average salary, understand that building wealth will take time. Decades to be honest. If you invest $500 a month towards your nest egg, it would take you 35 years to accumulate a Million Dollars at an annual rate of interest of 8%. If you invest $600 a month at an annual interest rate of 8%, you would end up with $1.2 Million in 35 years. Investing is amazing and compounding is magic but it takes time. And that’s the bottom-line.

3. Ask for more money at work, Upskill, seek Promotions and/or Change your Job more frequently

If you are like us and are looking to continue being employed than venturing out on your own, then you need to maximize your monthly take-home. For the first 4 years of my career (starting at the age of 28) I increased by income by 20%. Yes, 20% over four years. So, if I started at $50K a year, I only reached $60K per annum by year 4. (Yes, I realize that this is a lot of money for many people and I am grateful for every cent I made). The point is my employer was able to get away with annual increases of 2% to 5% each year. I just accepted what they gave me.

I switched roles by year 4 at a 40% jump. And then in the last 3 years, I have managed to increase my income by 25% on this base salary. I did this by literally telling my bosses I am worthy of more money twice and asking (you read it right !) for a Promotion. See I started understanding that I was bringing value and once I understood that I did not fear what ‘they’ would think. Look for opportunities within your work to provide more value. Target those promotions. Or maximize your income by finding employers that pay more. This could mean changing jobs every few years. Be cautious in your approach and plan things in detail before making such requests though.

4. Invest in Assets

This is perhaps the biggest one. While you work on maximize your income, consider paying yourself first and allocating money to assets. Assets could include stocks, ETFs, rental/investment properties, gold etc. You could also consider investing in Assets that help you generate passive income for reinvestments. Examples could be dividend yielding stocks or ETFs or rental properties. These sources of passive income can help you reach your Financial Independence number faster. For us taking advantage of tax sheltered accounts such as RRSPs and TFSAs has been key. These accounts help you grow your wealth tax-free. Please do your own research prior to investing in asset classes.

5. Aha — Side Hustles !

This one we’re still trying to figure out. But the overall goal is the same as getting promotions or changing jobs or investing in passive income producing assets. Try and leverage your interests into something that translates into little or a lot of cash flow. It could be starting a blog or a YouTube channel. Perhaps driving an Uber or picking up groceries. It could be walking dogs or babysitting or clicking pictures . It could be House Hacking or renting out an empty garage for a monthly fee. Many people are able to grow their side hustles to the point that they exceed their primary incomes. A lot of people were able to make this transition during the initial COVID wave. I think writing about side hustles here is easier than actually picking one up.

6. Reduce your Expenses

Growing your net income is a function of either increasing the money you make and reducing your expenses. Personally, I think that being frugal is a great lifestyle choice but it should not be at the expense of missing out on awesome experiences or healthy foods or exercise. There maybe only so much where one can cut-back. But yes, we should try and control our need for instant gratification and impulse buying. Here are some ways that we save money on the daily. For us, we don’t mind the once a week takeout or the more than occasional coffee from Tims (Sorry Starbucks). But we do allocate greater attention to larger categories. For example, we want to upgrade our home but not at the cost of being house poor. We want to eat at a restaurant every now and then but not get habitual about it etc.

7. Allocate investments based on returns but manage your risk wisely

Simply put, take the free money and higher rates of return when possible. We are blessed to have the ability for our money to grow Tax free within a TFSA account. We’re also able to save money for retirement within tax sheltered accounts such as RRSPs. In-fact, if you are a high income earner, RRSPs might be a great tool for you to save money in taxes in the years that you contribute. If you are looking to buy your first home soon, maybe learning about FHSA account is something you should take on. Other than this, if an employer has a matching pension plan or a Group RRSP account, take it. This is a 100% rate of return in paying yourself.

I feel that investing should also be based on your personality type. For us, managing tenants is not ideal but it definitely works for some people. Choose your investments based on what works for you. But be cautious and please do your own research before investing.

8. Avoid Consumer Debt as much as you can

Look, lifestyle inflation is a real thing. Its happening to us but we do understand that we need to maintain a Savings/Investment rate of over 25% each month without fail. We still try and avoid purchasing things on debt. But we are planning to get a new pre-owned car in a couple of years and maybe even a new home in two-three years. We’ll build Sinking funds for these. And a part of it will go on debt but we have to minimize how much we pay in debt month. Why should we pay corporations and banks more money each month than what we’ve determined the fair value of a product/service to be ? Nothing will hamper your wealth building journey than giving away free money in the form of interest.