How do you get rich in Canada in 2023?
There are many different paths that you can take to reach a 7-figure net worth, but many require a combination of lots of effort and good fortune, such as starting your own business. And if you’re looking for a get-rich-quick scheme, then you’ve come to the wrong article.
I’m going to discuss a simple, replicable, and actionable step-by-step process that anybody can follow.
The main idea? To get on top of your personal finances and understand how you’re spending every dollar, while using your heard-earned savings as a tool to make you even more money through a historically proven strategy known as index investing.
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: Take advantage of compounding returns and build passive income streams
1) Identify Your Why
Sure it’s great and all to want to get rich in Canada, but it’s important to establish a clear, meaningful purpose that you can return to in your pursuit of becoming a Canadian millionaire.
Do you want to stop worrying about paying your bills?
How about having the option to retire from your a 9-5 job?
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 easy to get demotivated and deviate from your long-term plans when things get rough. If you’re saving just for the sake of saving, chances are you won’t succeed.
Once you have established the why that resonates with you, you’ll be much more likely to stay the course, as demonstrated by the goal setting cycle below. When you do hit a period of burnout or boredom, you can quickly refocus through remembering your why and get back on the right track. Reidentifying your purpose will time and time again allow you to keep disciplined when it comes to sticking to your plan and your goals.
As an 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 to keep yourself accountable and to help you stay motivated.
Is your goal to reach a certain net worth, or a certain level of monthly 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 achieved financial independence.
A common benchmark is to target 25x your annual expenses as the target net worth to aim for.
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 through the index investing strategy to be discussed in Step 4. Your target could be higher or lower depending on your desired lifestyle.
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. Even if you fall short of your goal, you’ll probably end up in a better position than you thought possible at the start. You’ll be surprised with where your true potential really lies!
3) Allocate A Savings Budget
Before I talk about savings allocations, you might have noticed that I haven’t mentioned anything about increasing your active income, or “just find a higher paying job”.
This is because this getting rich in Canada can be accomplished regardless of how much you’re making 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. It’s more fun to save up for a brand new car or go on a lavish vacation instead of saving more and reaching financial independence sooner.
As a result, most of the paycheck is blown on short-term wants.
Therefore, it’s not as simple as making more money. There’s perhaps no better example than taking a look at how people who come across a large windfall manage their finances – such as lottery winners. 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.
Accumulating long-term wealth starts with being intentional about 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 get rich in Canada and enjoy your life of financial freedom.
There is also something important to be said about balancing living frugally and living in the moment.
You don’t always need to live below your means to achieve financial independence. A good tip is to focus your spending on experiences rather than material wants, as experiences such as travelling are unique to each person and can’t be compared like material goods can.
The point is to practice purposeful, conscious spending on the things that make you the most happy, and to get rid of the habit of buying things that you don’t need that only bring temporary gratification.
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 getting rich 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 a slice of your paycheque.
For example, suppose you just turned 18 and wanted to max out your 2023 TFSA (Tax-Free Savings Account) contribution room of $6,500. You could invest $540/month into your TFSA. With a TFSA, any profits you make (such as from capital gains or dividends) are tax-free.
Benefits of fixed saving:
- Easy to implement – If you plan to invest the same amount every period, it’s usually possible automate the contribution process. It’s also easier to remember the exact amount you need to save.
- Extra income can be spent – Since you are going with a fixed savings amount, aby sources of extra income means that you can use that money for discretionary spending.
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 savings 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 reach your target goals at a slower pace than the allocations discussed below.
- Real value of savings decreases due to inflation – Over time, your effective savings contributions decrease as a result of inflation. A prime example of this phenomenon in action was in 2022 when the inflation rate hit 8-9% and the price of everything went up.
Based on the drawbacks mentioned, you may want to consider increasing the amount that you invest every year to account for inflation and income increases.
b) Save A Percentage of Your After-Tax Income
If you’re more serious about getting rich in Canada, you should consider creating a budget by allocating savings, necessities, and wants as a percentage of your after-tax income.
Pay yourself first: In this savings model, 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 for the basic necessities and expenses. 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 still want to experience life in the moment are not concerned about racing towards financial independence as fast as possible. They just want to get there eventually.
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 savings strategy. With this approach, you’re essentially converting much of your would-be 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.
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 returns on your net worth.
If you do try this approach, you may get demotivated when you see your friends buying the latest product and going on nice vacations while you may have nothing to show for. 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 promotional sales 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 the prospect of retiring early as fast as possible.
Now that you’ve learned of the various ways you can structure your savings allocation, pick the one that suits you best and stick to it. Consistency and diligence will enable you to reach the financial targets that you’ve 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 savings accounts that return a measly 0.1-2% 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 and Gen Z’s who have a long savings horizon, should take advantage of the higher expected returns that the stock market has to offer.
Most importantly, investing in the market allows you to enjoy the magic of compounding returns, which is when profits made from investments remain invested and therefore earn more money for you, leading to exponential portfolio growth.
As you can see, compounding returns makes a huge difference in your portfolio in the long run, and it is one of the main appeals of investing.
Capitalize on long-term compounding returns
If you’re in your 20s or 30s and looking for the simplest way to get rich in Canada over a few decades, it’s as easy as investing consistently in index ETFs (exchange-traded funds) within a tax-free savings account (TFSA) until retirement.
Investing in ETF index funds is known as index investing, where you essentially are buying the entire stock market. You don’t need to be a stock picking expert to do this. Best of all, it’s a strategy that generally outperforms individual stock picking and takes much less of a time commitment.
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?
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 index 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 with an index investing approach.
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 more 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.
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 online brokerages in Canada, along with an intuitive an easy-to-use trading interface. 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. 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
This serves as an introductory article to savings and investing as a means to get rich in Canada. Aside from the stock market, there are also a variety of 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) Take advantage of compounding returns and build passive income streams
This is the final step once you approach your target and reach financial independence. This is the stage where you have enough money invested to generate a “passive” income stream. Having passive income will allow you to have a stream of income coming in that is not directly tied to your time.
Investing aside, there are other ways to make passive income to supplement your retirement income. You will generally required to either put in a lot of up front work (such as starting a business) or have money up front (such as investing in a rental property).
Ideally, you’ll want to work toward building up your passive income streams until you at least hit your target. At the very least, you’ll want to be able to cover your living expenses with it when you retire.
When you finally hit your financial target, congratulations! You now have the luxury to choose whether to keep working your normal job, or quit your job to fulfill your purpose.
Of course, you could also continue working to accumulate even more wealth, but make sure not to fall into the trap of the hedonic treadmill (shifting the goalposts).
Regardless, one thing is clear. By setting up assets that generate you money, you are securing your financial future by not relying on trading your time directly for money as in the case of a job. That’s the definition of financial independence!
How to get rich in Canada starts 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 start investing as soon as possible and to really get you thinking about how you spend each dollar you earn.
I hope that this step-by-step guide equips you with the knowledge required to take action today. By following these steps, you’ll be well on your way to getting rich in Canada and reaching financial freedom sooner rather than later.