How do you become a millionaire in Canada? It’s easier than you might think.
There are many different paths that you can take to reach a 7 figure net worth. I’m not going to be talking about a get-rich-quick scheme, or suggest something harder to replicate such as starting your own business.
I’m going to discuss a replicable, actionable, and proven step-by-step process that anybody can follow.
The main idea? To become a master of your own money by knowing exactly how you’re using every dollar, and using saved money as a tool to make you even more money.
Allocating a larger percentage of your income to saving, and away from non-purposeful or impulsive spending is the most straightforward way for you to grow their wealth.
The 5 Steps
Step 1: Identify your why
Step 2: Set your target savings goal
Step 3: Choose the right savings allocation to reach your goal
Step 4: Invest your savings (start with Questrade)
Step 5: Build passive income streams that surpass your daily active income
1) Identify Your Why
I can’t stress how important it is to establish a clear, meaningful purpose in your pursuit of becoming a Canadian millionaire.
Do you want to stop worrying about paying your bills?
How about never having to work a 9-5 job again?
What about being able to pursue your passion and spend more time with the people you love?
Without a clear purpose or goal in mind, it’s extremely easy to get demotivated and deviate from your long-term plans. If you’re saving just for the sake of saving without knowing why, chances are you won’t succeed.
Whenever you feel like not following your plan, the best way to refocus is to think about the high-level purpose or goal you are trying to achieve. Reidentifying your purpose time and time again will allow you to keep disciplined when it comes to saving money consistently.
For example, my purpose is to provide a financially secure lifestyle for myself and my loved ones, while also freeing up valuable time to travel the world and spend all the time I can with friends and family.
Identify your purpose and the wealth building process becomes a whole lot more worthwhile!
2) Set Your Target
It’s important to set a target for yourself to help you stay motivated and look forward to a meaningful accomplishment.
Is your goal to reach a certain net worth, or a certain level of recurring passive income?
Your target, at minimum, should be set at a point where you could comfortably pay off your monthly expenses for the rest of your life using passive income sources generated by your assets. This is the point where you have truly achieved financial independence.
Not everybody will have the same target, and it’s up to you to determine how much you need to live a happy and comfortable life. Whether that means becoming a Canadian millionaire or multimillionaire is up to you.
I have set a personal target at $5 million. An investment portfolio of this size could reasonably generate an equivalent of around $150,000/year in passive income after taxes by investing in dividend stocks and bonds. Your target could be higher or lower depending on your desires and goals.
Setting a target also lets you see the “finish line”. If you plan on living below your means in order to save at a quicker rate, then you can use the target you set as an indicator of when you can increase your quality of life.
If you’re uncertain exactly what number you want to target, that’s okay. Set a target range and refine it over time.
A word of advice however – if you doubt that you can reach your target, don’t lower it. As the real estate mogul Grant Cardone puts it, take massive action to reach the goal that you set.
Your mindset of what’s considered obtainable really changes when your goals are elevated, and you’ll be surprised with where your true potential really lies!
3) Allocate A Savings Budget
Before I talk about forming a savings plan, you might have noticed that I haven’t focused on methods of increasing your actual income.
This is because this entire process works regardless of how much you’re making at your job every year. The key lies in the percentage of after-tax income that you save.
In the long term, how much you save is more important than how much you make.
This is an important concept that has to be stressed.
I’m not saying that income doesn’t matter. All things equal, a higher income is obviously advantageous, but only if you’re saving proportionately and know how to manage issues like lifestyle creep.
The problem is that for most people, a higher income leads to instant lifestyle inflation.
Instead of saving more towards financial independence, it’s more fun to save up for a brand new car or go on a lavish vacation because it feels well deserved after all the hard work put in to make that money. As a result, most of the paycheck is blown on short-term wants.
It gets worse if people come across a large windfall – just take a look at how many lottery winners manage their winnings. It is widely cited that 1/3rd of all lottery winners end up declaring bankruptcy.
This just clearly shows how important it is to understand how to save, invest, and manage your wealth.
The most important factor in gaining wealth is how much you save relative to your income. The simple truth is that the more you can set aside to save, the faster you’ll become a Canadian millionaire and enjoy your life of financial freedom.
If you don’t want to live frugally, then practice purposeful, conscious spending on the things that make you the most happy.
Get rid of the habit of buying things that you don’t need and buying things that only bring temporary happiness.
An Example of High Income vs. High Savings
Consider the following hypothetical financials of Adam and Bob.
Adam makes $100,000/year after taxes and spends 90% of his paycheck while saving the rest. He or she is left with $10,000/year to invest.
Bob only makes $60,000/year after taxes, but saves 40% of his income because he minimizes his discretionary spending and instead chooses to save it instead. Bob is left with $24,000/year to invest!
Admittedly, for many years Adam will be enjoying a far superior lifestyle compared to Bob.
However, Bob is saving at a higher rate. Soon enough, Bob will have a drastically higher net worth than Adam, simply because he saved more of his income.
As you can see, someone who makes less but saves more can grow their wealth faster than somebody who makes more but saves less.
Hopefully this insight will allow you to appreciate how important saving is to truly accelerate your path to become a millionaire in Canada and achieve financial freedom.
If you’re still tempted to spend your discretionary income instead of saving it, here’s another way to frame the trade-off: assuming a 7% annual return, $100 saved and invested today will be worth $816 in 30 years, and $1,644 in 40 years.
So if you choose to spend money on something today, you’re foregoing the opportunity to buy something much more valuable for yourself later down the road.
Three Saving Strategies
When it comes to setting aside a portion of your paycheck to save, there are three different approaches that you can take. Each approach has its own set of advantages and disadvantages.
As your financial circumstances change over time, you can adjust how you save to accommodate what suits you the best.
a) Save A Fixed Amount Every Period (dollar-cost averaging)
As long as you have some form of consistent income, you can take this approach.
Simply determine a target amount of money to save periodically, such as when when you get paid, or every month.
For example, suppose you wanted to max your TFSA contribution. You could invest $500/month into your TFSA. This means you would contribute $6,000/year to your TFSA, which is exactly the 2019 annual contribution limit. Any profits you make (such as from capital gains or dividends) are tax-free since withdrawals are not taxed.
Using this simple strategy, your $500/month investment would increase to a whopping $610,000 in 30 years, and a mind-numbing $1,312,400 in 40 years!
Benefits of fixed saving:
- Easy to implement – If you plan to dollar-cost average, you can more than likely automate the process. If anything, it’s easier to remember the exact amount you need to save, making it simple to keep track of your progress.
- Extra income can be spent – Since you are keeping a fixed savings amount, extra income means that you can use that money to buy what you please.
Drawbacks of fixed saving:
- Lifestyle creep – If you keep with this method, luxury goods may eventually become perceived as necessities to maintain your current lifestyle. This makes it increasingly difficult to allocate discretionary income to saving rather than consumption.
- Opportunity cost of saving increases as your income increases – By spending instead of investing any excess income, you are foregoing the effects of compound interest and will not reach your full potential net worth.
You may want to consider increasing the amount that you invest every year to account for inflation and increased income.
b) Save A Percentage of Your After-Tax Income
If you’re more serious about becoming a Canadian millionaire, you should consider creating a budget by allocating savings, necessities, and wants as a percentage of your after-tax income.
Pay yourself first: you should always first set aside a percentage of your paycheck to savings. Then, portion the rest to paying your bills and expenses, and treat yourself with the remainder.
Here are some potential saving allocations you could use depending on your preferences.
Modest Saving (20% of after-tax income)
This is a conventional approach to saving that aligns with the 50/30/20 rule of budgeting. The rule of thumb is to allocate 50% of after-tax income to paying the expenses necessary for survival. 30% goes to whatever you’d like, such as entertainment or luxury goods. The remaining 20% is saved towards retirement.
This option is best suited to those who want to retire with a comfortable amount of savings, but are not concerned about racing towards financial independence and living frugally. They just want to get there eventually, not necessarily as fast as possible.
Aggressive Saving (40% or more of after-tax income)
This option is for people who are willing to sacrifice more of their excess income now to achieve financial independence quicker.
If you are committed to saving a substantial amount of your earnings, this is an excellent savings strategy to follow. You can even save more than 40% of your after-tax income if you can afford to. It really depends on your own income and expenses, as long as you can sustain yourself!
By saving aggressively, you will accumulate wealth at a rapid pace. I would recommend most people that are serious about financial independence to follow this saving strategy. With this approach, you’re essentially transferring as much of your spending to savings instead.
Regardless of the proportion of income that you save, saving by percentage has its own set of benefits and drawbacks.
Benefits of Proportional Saving
- Balanced solution – How much you save and spend will depend on how much you make, which is a great solution for those who want to both spend and save more when they get a pay raise.
- Know exactly where every dollar goes – By dividing up your paycheck systematically and allocating money to different accounts, such as investments, expenses, taxes, and emergency funds, you’ll know exactly how your income is being used.
Drawbacks of Proportional Saving
- It can be a hassle to implement – The dollar amount you save changes every time your income changes. This can take extra time and effort to monitor.
- Difficult for lower income earners – If you don’t have much to spend to begin with, most of your income will likely go towards your living expenses. It may be simpler to start off with dollar cost averaging.
c) Maintain The Same Expense Budget And Save The Rest
This method is for those who are willing to do whatever it takes now to reap the rewards later down the road.
To achieve financial freedom sooner rather than later, you need to maximize your wealth in the long term. This requires living below your means. If saving is your primary objective and you’re willing to live a more frugal lifestyle to grow your net worth, this option is for you.
Going with this approach also means keeping your expenses stable regardless of your income. Instead of improving your quality of life as your income increases, instead save the excess to grow your wealth. By saving all that you possibly can, you’ll be able to maximize the effects of compounding return on your net worth.
If you do try this approach, you may get demotivated when you see your friends buying new cars and going on nice vacations while you may have nothing to show for but a used car and a small apartment.
But only you can see your bank account growing.
Here’s a tip to get into the right mindset. You know that you could afford to buy it if you wanted. Yet you choose not to.
Enjoyment comes from the freedom of choice – not the choice itself.
Benefits of Maximum Saving
- Fast-track your way to financial independence – If your goal is financial independence retire early (FIRE), this is the way to do it. You’ll be growing your net worth at the fastest rate you can.
- Live with a minimalist mindset – By limiting spending to the essentials, you learn to appreciate what you have and be happier with less.
Drawbacks of Maximum Saving
- Hard to follow through – If you don’t have the discipline to stick to saving, you may end up making impulsive decisions (like if you’re easily tempted by discounts of products and have FOMO)
- Not for everyone – If you don’t want to sacrifice so much quality of life just to save at a faster rate, that’s perfectly fine, and a matter of personal preference. This strategy is for people who are obsessed with saving and are happy just seeing the money in their account go up.
Now that you know how you can allocate your savings, create a budget that will enable you to reach the target that you set!
4) Don’t Just Save Your Money – Invest It
When I say to save the money that you earn, I don’t mean to just park all your cash in a traditional savings account.
Saving accounts are ideal if you’re planning to use the money soon, or if you need a liquid source of money such as an emergency fund.
These accounts are not a way to grow your wealth since you’ll be earning next to no interest income. Typically, banks offer only 1-2% in interest per year.
In fact, you won’t even be able to keep up with inflation, and the real value of your money will actually decrease!
Most people, especially millennials who have a long savings horizon, should take advantage of the higher expected return that the stock market has to offer.
Investing in the market also allows you to enjoy the magic of compounding returns, which is when the money you earn in interest then earns more interest for you.
As you can see, compounding returns makes a huge difference in your portfolio in the long run. It’s part of the great appeal of investing.
Capitalize on long-term compounding returns
If you’re in your 20s or 30s and looking for the simplest way to become a millionaire in Canada, it’s as easy as investing consistently into a tax-free savings account (TFSA) until retirement.
Let’s say you’re 25 today and want to retire at 65 with the equivalent of $1 million in today’s dollars. If you invested just $12.50/day into an index fund tracking the S&P 500 until you were 65, then based on historical returns averaging around 7% (adjusted for inflation), you would have around $1 million saved up at retirement, tax-free.
Now, I keep using 7% as a benchmark return for investing in the market, but is this a fair assumption?
According to Investopedia, the S&P 500 index has returned approximately 10% annually since the index was formed almost 100 years ago. This comes out to ~7% after adjusting for inflation.
As you can see, the overall stock market is making money far more often than it’s losing money.
But take a look at some of the sharp negative yearly returns, and you might be a little concerned. Think about the 2000-2002 dot-com bubble and the Great Recession of 2008, where stocks plummeted 38.49% in a single year. What if you invested right before a stock market crash?
The key here is to save for long-term investing.
Long-term investing is simply the greatest mitigation to short-term market fluctuations.
Let this single fact sink in: Since the inception of the S&P 500 in 1926, the rolling 35-year annual return has never fallen below 8%.
What does this mean? It means that no matter which year you started investing in the S&P 500, your worst case average annual return after 35 years would have been 8%.
If that’s not a compelling reason to start investing today, think about the opportunity that translates to: $12.50 a day to retire a Canadian millionaire.
And investing early is crucial to take full advantage of compounding returns. With a long investment horizon, you can generally also take on more risk since you have more time to recoup any short-term losses. Over time, your average rate of return is much more likely to approach historical averages if you follow the market by investing in index funds.
Leverage the power of compounding growth by investing into the stock market. Invest with a long-term horizon to hedge against market fluctuations.
Take action – open an online discount brokerage account
Now that you understand the power of investing, what action can you take to get started today?
Well first off, you should begin by learning about index investing, a passive investing strategy otherwise known as the couch potato method. Index investing has proven to be the best hands-off approach to investing for most Canadians.
There is perhaps no better place to learn about index investing than at Canadian Couch Potato, one of the most popular Canadian investing blogs and managed by well-respected portfolio manager Dan Bartolotti.
You will also need to open a discount brokerage account to buy and trade stocks. For Canadians, my favourite option is to open a self-directed Questrade account.
I have been personally using Questrade since 2017 when I first started investing and have never looked back. My strategy is as simple as dollar-cost averaging into an all-in-one asset allocation ETF.
When it comes to choosing a discount brokerage, I like to recommend one platform that I genuinely believe is the best option for my audience, instead of a selection of many options. When there’s too many choices, it’s easy to get confused and end up not taking any action.
Questrade offers one of the lowest commissions of all discount brokerages in Canada. If you’re just getting started investing and don’t want commissions to cut into your returns, I strongly recommend them.
With Questrade, you can open a TFSA account (do this if you haven’t maxed out your contribution room) where you don’t need to pay tax on any capital gains and dividends from your stocks.
What you get with a self-directed Questrade Account
- One of the lowest commissions in Canada – Questrade charges a mere 1 cent per share, with a minimum of $4.95 per trade and capped at $9.95 per trade. This is really as low as it gets.
- Buying ETFs are free of charge – One of the best things about Questrade that really suits index investing is the ability to buy ETFs without paying any commissions. This makes the incremental saving strategies we discussed very appealing since you won’t be repeatedly incurring commissions.
- Buy US equities with ease – Questrade accounts allow you to hold both CAD and USD, so you can trade on both Canadian and American exchanges. You can cheaply exchange CAD and USD within the account by using a process known as Norbert’s Gambit.
If you’re looking to get started investing and buying stocks, Questrade is the best option for most, simply for it’s low commission fees and easy-to-use interface. I would say that for the 95% of people who have straightforward investing needs, Questrade is the clear best option.
Not just about the stock market
There are many other different ways to invest your money. Generally speaking, the more capital you have access to, the more options you’ll have to grow your wealth even faster. For example, those with more money saved can consider investing in real estate.
The key is just to actually invest your money somewhere, so you can let your money work for you more and more over time.
5) Create streams of passive income
This step will really help you reach the target that you set and become a millionaire in Canada. Having passive income will allow you to have multiple streams of income coming in, not just the income from actively working at your job.
There are many different ways to make passive income. Generally, you will require either up front work (such as starting a business) or money up front (such as investing in dividend stocks).
Ideally, you’ll want to work toward building up your passive income to match or even surpasses your active income. At the very least, you’ll want to be able to cover your living expenses with it when you retire.
When you finally reach this benchmark, congratulations! You now have the luxury to choose whether to keep working your normal job, or quit your job to fulfill your purpose.
For example, if you wanted to retire early and replace your active income with passive income, you could take advantage of Canada’s favourable dividend tax advantages and live off of passive dividend income while paying only 1% in tax.
Of course, you could also continue working to accumulate more and more in passive income, but that depends your own goals and ambitions.
Regardless, one thing is clear. By setting up assets that generate you money, you are securing your financial future by not relying on day-to-day work. That’s the definition of financial independence!
Start saving for your future today
As you can see, becoming wealthy isn’t just a pipe dream if you’re not making high income. It’s what you do with the money you have that matters.
The takeaway here is to really get you thinking about how you spend each dollar you earn.
I hope that this equips you with the knowledge required to take action today. By following these steps, you’ll be on your way to reaching financial freedom sooner rather than later.