Financial independence is a goal that many Canadians aspire to, but few actually achieve. It means having enough wealth or passive income to cover all your living expenses for the rest of your life without needing to work. Sounds amazing, right?
But how do you get there? What are the steps you need to take to become financially independent in Canada? Here are six tips that can help you on your journey
1. Increase your savings rate
Your savings rate is the percentage of your after-tax income that you save. The higher your savings rate, the faster you can grow your wealth and reach financial independence. To increase your savings rate, you need to either earn more or spend less (or both).
One way to boost your income is to ask for a raise, negotiate a better salary, or start a side hustle. Another way is to invest your money wisely and earn passive income from dividends, interest, or capital gains.
To reduce your spending, you need to track your expenses and budget accordingly. Focus on the big three categories of housing, transportation, and food, and see where you can cut costs. For example, you can downsize your home, use public transit or bike instead of driving, and cook at home more often.
2. Start investing early
Investing is one of the most common ways to achieve financial independence. You probably won’t get rich overnight by investing, but you can benefit from the power of compounding over time. Compounding means earning interest on your interest, which makes your money grow exponentially.
The earlier you start investing, the more time you have for compounding to work in your favor. For example, if you invest $10,000 at a 7% annual return for 30 years, you will end up with $76,122. But if you invest the same amount for 40 years, you will have $149,745.
Investing is a critical component of financial independence. As a Canadian, you have several investment options:
Exchange-Traded Funds (ETFs): These diversified, low-cost investment funds can be easily traded on stock exchanges. Canadian ETFs often track major indices like the S&P/TSX Composite Index.
Mutual Funds: Mutual funds pool money from multiple investors and are managed by professionals. However, they often come with higher management fees.
Individual Stocks: While riskier than ETFs or mutual funds, individual stocks can provide higher returns if chosen wisely.
Diversify your investments to minimize risk and consider using a robo-advisor like Wealthsimple or a discount brokerage like Questrade to manage your investments at a lower cost.
3. Utilize Tax-Advantaged Accounts
One of the biggest obstacles to achieving financial independence is taxes. Taxes reduce your income and your returns, which slows down your wealth accumulation. Fortunately, Canada offers several tax-advantaged accounts that can help you save more money for retirement.
The most common ones are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). The RRSP allows you to deduct your contributions from your taxable income and defer taxes until withdrawal. The TFSA allows you to contribute after-tax money and withdraw tax-free at any time.
Both accounts have annual contribution limits. For 2022, the RRSP limit is 18% of your earned income up to $29,210, and the TFSA limit is $6,000.
You should try to max out both accounts every year if possible, but if you have to choose one over the other, it depends on your situation. Generally speaking, the RRSP is better if you expect to have a lower income in retirement than in your working years, while the TFSA is better if you expect to have a higher income in retirement or need more flexibility
4. Increase your income
Another way to accelerate your path to financial independence is to increase your income. This can be done by advancing your career, developing new skills, or creating multiple streams of income.
To advance your career, you need to demonstrate your value and potential to your employer or clients. You can do this by taking on more responsibilities, delivering high-quality work, seeking feedback, and pursuing learning opportunities. You can also look for a promotion, a raise, or a bonus within your organization or switch to a higher-paying job in another company.
To develop new skills, you need to invest in yourself and your education. You can enroll in online courses, attend workshops, read books, or join professional networks. You can also seek mentorship or coaching from someone who has achieved what you want to achieve.
To create multiple streams of income, you need to leverage your existing skills, knowledge, or assets and offer them to a wider market. You can start a side hustle, such as freelancing, consulting, blogging, podcasting, or tutoring. You can also create and sell digital products, such as ebooks, courses, or software.
5. Live below your means
Living below your means is a simple but powerful principle that can help you achieve financial independence. It means spending less than you earn and avoiding unnecessary debt. It also means being content with what you have and not succumbing to lifestyle inflation.
Lifestyle inflation is when you increase your spending as your income increases. For example, you may buy a bigger house, a fancier car, or more expensive clothes when you get a raise or a bonus. While this may make you feel good temporarily, it will also make you dependent on your higher income and delay your financial independence.
To avoid lifestyle inflation, you need to have a clear vision of what matters to you and what doesn’t. You need to prioritize your needs over your wants and focus on your long-term goals over your short-term gratification. You also need to practice gratitude and appreciate what you already have.
6. Find a like-minded partner or spouse
Achieving financial independence can be easier if you have a partner or spouse who shares your vision and values. Having someone who supports you, motivates you, and holds you accountable can make a huge difference in your journey.
However, finding a like-minded partner or spouse is not always easy. Money is one of the most common sources of conflict and stress in relationships. According to a survey by Credit Canada and Capital One Canada, 36% of Canadians have lied to their partner about their finances.
To avoid money problems in your relationship, you need to communicate openly and honestly with your partner or spouse about your financial situation, goals, and expectations. You need to respect each other’s opinions and preferences and find common ground. You also need to work together as a team and celebrate your progress.
7 Be patient and stay the course
8. Review and adjust your plan
Conclusion
Financial independence is not a myth or a miracle. It is a realistic and attainable goal that anyone can achieve with the right mindset, strategy, and action. By following these six tips, you can increase your income, save more money, invest wisely, and live the life of your dreams.