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Building wealth is a lot like running a marathon.
Running a marathon is a big task, for anyone. I’ve ran half marathons, and it’s still a big ask. You have to train consistently, for months, always building on the previous run. You have to have your diet right, eating to give yourself energy, build muscle and repair your body. You have to have the proper gear, to help you along the way. You need to build the mindset that you can run for hours on end. And once you have all of the pieces together, you still have to run 42.2 km, or 26.2 miles.
There’s a lot that goes into running a marathon. It’s not just the final time during the marathon itself. It’s months of discipline and commitment. To me, that’s why running a marathon is like building wealth.
Most people aren’t born rich, or born into financially savvy families. The people that I know who really understand how money works, have taken it upon themselves to learn about it. I really believe it’s something we should all know about, because knowing benefits us all. No one is put at a disadvantage if they know how to make the most of their money. But just like with running a marathon, you don’t just wake up one day and do it. It takes time and effort to get your finances in order.
There’s essentially five peaks, or milestones to work towards to get into your best financial position: financial freedom. The point where you’ve eliminated debt, maximized your cashflow, have your money working for you, and you don’t have to worry about your finances anymore. At that point, it becomes automatic, your finances just run on autopilot.
The most detrimental thing holding people back from financial freedom is debt, more specifically high interest debt. According to an Equifax report published in 2020 (found here), on average Canadians are carrying almost $24,000 of non-mortgage debt (credit cards, loans, and lines of credit). These types of debt usually come with a high interest rate. Often, with a higher interest rate than what you’d expect to consistently receive from your investments.
If your credit card charges 20%, you’re paying $200 for every $1,000 of debt over a given year, or about 1.7% per month. That’s why credit card debt is so difficult to pay off. If you’re only making the minimum monthly payments, then you’re just barely paying off the interest charged to you. The balance almost remains unchanged by the payment. It’s the hamster running in the wheel image, a ton of effort, but not going anywhere.
It is tough to pay off credit card debt. It takes a lot of discipline to pay off debt, and at first it can seem overwhelming, but it’s not impossible. There are things you can do, like transfer the balance to a lower rate credit card, take out a lower interest rate line of credit to pay it off (then pay off the line of credit), or just really make an effort to limit your spending so you can increase your payments.
No matter how you do it, it will take time. So don’t get discouraged. Most people want to go 0 to 100 immediately, it’s sometimes better to go at a manageable pace because you have the opportunity to learn and avoid the same situations in the future.
Once your high interest debt is gone, you’ll start to realize you have more money than before. What used to go to paying off debt, is now happily sitting in your bank account. In my opinion, this is a very crucial point. It would be easy to use that extra money to go and buy things, and potentially bring back that debt you just got rid of. It’s easy to fall into the same trap here.
Being financially smart isn’t all about being the most fun right now. But if you do things properly, it’ll be a lot more fun in the future. If you can put your money in a position to work for you, then you don’t have to work so hard for it.
With that extra money you see in your bank account, throw it into a high interest savings account. It’s time to build an emergency fund. We want it to be in a high interest savings account because we don’t want to risk the money to loss, and we want to readily available. Hopefully you won’t need it, but in the case of an emergency you’ll be glad you have it. Think about the world right now, no one anticipated the world economy shutting down. Some people have had to dip into their savings, and without a dedicated savings account, they might have to borrow money or dip into their retirement savings.
When we set up an emergency fund, we want to accumulate about 6 months of obligation payments. This would include your rent/mortgage, bills, food, the necessities. The nice thing is, once you reach your 6 month amount, the account will slowly grow by earning interest. Overtime, as you make more money, your emergency fund will slowly follow you along.
The easiest way to save for your future, is with money that isn’t yours (right now). What I mean by that is imagine you could save your retirement without having to take money out of your bank account. That’d be easy right?
A lot of employers offer some sort of retirement savings plan, either through a Group RRSP Plan, or a Pension Plan. Its free money. Not taking part in a plan like this, would be like declining a portion of your salary — it doesn’t make sense.
Usually you have to contribute a small percentage of your paycheque, and your employer will match it. You’re doubling your money, which is the best return you can get, plus if you’re contributing to a tax deferred plan, you’re going to get money back during tax season. It’s a no brainer win-win.
If you’re able to, this is a great thing to start as soon as you can. Even if you have some debt, or you don’t have all of your emergency fund, because you are doubling your money instantly. Initially, it might seem like a burden for your paycheques, especially if you have debt to pay off, or an emergency fund to build, but you’ll get used to it. Studies show that overtime, people adapt to 90% of their paycheque and find they can even contribute more. It’s all about building habits that will turn into automatic wealth building vehicles.
When you get to this point, you’ve already taken a ton of positive steps. Give yourself a hand, you deserve it.
This is the point where we are thinking long term. What do you want your life to look like? What goals do you have? What do you see your retirement looking like? The answers will be unique to all of us. Just because two people make the same amount of money, doesn’t mean they have the same financial needs. Your lifestyle, your family, your hobbies and interests, will all have an impact on how you spend your money.
In Canada we have two main investment vehicles when we think of long term saving: Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA). With an RRSP when you contribute you get taxes back now, but pay taxes later. With a TFSA when you contribute you pay taxes now, and don’t pay taxes later. Figuring out which one is right for you depends on a lot of things.
If you’re saving for a house, using an RRSP to take advantage of the Home Buyers Plan can be great. You’ll get taxes back now, which save significantly increase your down payment, or create a fund for an emergency or renovations. If you have a Pension Plan through work, then using a TFSA might make sense for retirement because you don’t want too much taxable income during retirement.
By this point, you should have freed up cashflow. Not as much money going towards bills, or setting up your emergency fund. You could create simple, manageable automatic contributions. This way, you can set it up and forget about it. Saving without realizing it, or having to think about it, is the easiest way to do it.
The best bet, is to sit down with a Financial Advisor so they can help put together a plan for you that’ll match your goals, and ultimately make sure your money is working as hard as you do.
If this was a marathon, this would be the point where you can begin to see the finish line. Everything should be automatic, you might even forget you’re doing some of the things you are. You’ve maximized your cashflow, and everything is trending in the right direction.
We don’t want to reverse all of the hard work you’ve done up to this point. Staying on top of things and making sure everything is still working for you is key. But this is the point where you can kind of do what you want.
If you have a mortgage, you could look at making extra contributions in order to pay it off faster. Most mortgages will allow you to contribute a certain amount per year, and these extra contributions to straight towards the principal, so you’re saving the interest down the road. This would be great because as an Advisor, I see the main financial obligation people have to pay monthly is their rent or mortgage. By eliminating your mortgage sooner, you free up even more of your cashflow. Without as much burden, you can spend your money more freely.
Another thing you could do is increase your savings for your future, so you can retire early. I think most peoples biggest fear with retirement, is what if you get to the point of retirement but for money or health, are unable to do what you’d like. Being able to take initiative and make your retirement happen, rather than waiting for it, is very empowering. You can go out there and get the future you want, not just accept the future you’re given.
Getting into your best position financially can seem like a daunting task, but you can do it. By having a plan in place to follow, a financial advisor to keep you accountable, and goals you want to achieve, you’ll have all of the support and motivation you need.
So what are you waiting for?
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.