First off… not everyone has the financial ability to pursue all of 5 of these tactics at the same time. So, as always, do what you can right now. When you can do more, then do more. This post won’t be about starting your own business or making money through real estate. It’s geared at those who have income, who want to invest some of it for their future selves, and who want to eventually be millionaires. So with that proviso out of the way, let’s turn to the five paths you can take to join the Double Comma Club.
Tax Free Savings Account (TFSA)
The name sucks. It really does. As I’ve mentioned elsewhere on this blog, the government did a disservice to people by calling this a “savings” account. It should be viewed as an investment account. The money that you put into this account will grow tax-free. You can withdraw money from this account and you don’t have to pay taxes on the gains. In light of this feature, this account should be used for investing for the Care and Feeding of Future You.
There are rules about contributing and withdrawing money in the same year. You can read those details here. Essentially, if you take any amount of money out in a calendar year, i.e. 2024, then you cannot return that same amount of money to your TFSA in 2024. You can return that money in 2025 or later. (If you mess this up, then the Canada Revenue Agency will penalize you. So don’t mess up.)
Right now, the annual contribution room to TFSAs is $7,000. Ideally, you’re able to stuff that much into your TFSA all in one shot. If you can’t, please don’t let that stop you from contributing something. Set up an automatic transfer so that you’re contributing something to your TFSA every time you get paid.
If you’re paid bi-weekly and you contribute $50/paycheque, then you’ll be setting aside $1,300 in a year. That’s way better than $0/year. Remember, this is money that will grow tax-free. Start where you can and increase your contribution amount as you’re able to do so.
Should you come into a lump sum of money, then stuff your TFSA right away so that it can start growing for you as soon as possible. The sooner your money is invested, the higher your odds of reaching the Double Comma Club. Here are some examples of lump sums:
- inheiretance
- tax refund
- divorce/lawsuit settlement
- lottery win
Do not let the money just sit in the account. You must invest it. Personally, I invest my money in the stock market by using exchange-traded funds from Vanguard that are in the equity category. Equity products are those that are growth-oriented. They are suited for people who don’t want their investments decimated by inflation. Equity products have more volatility, but they deliver the best return over the long-term. You should be stuffing your TFSA with equity products to maximize the compound growth of your contributions. When it’s time for Future You to live off the money in your TFSA, you’ll be glad that your cash cushion is as large possible.
I used to invest in dividend ETFs because I loved the monthly dividends they paid me. However, I would have done better overall by investing in growth-oriented ETFs. Don’t make the same mistake that I did. Start investing in the growth-ETFs first. You can worry about getting dividends later.
Registered Retirement Savings Plan (RRSP)
In all fairness, it takes $269.23 bi-weekly to contribute $7K to your TFSA. If you’ve been fortunate enough to max out your TFSA contributions every year, then you should do the same with your RRSP. You can find out how much RRSP contribution room you have by going to CRA’s website.
The RRSP gives you a tax deduction for every dollar that you contribute. It’s a tax-deferred account, which means that you pay taxes on the withdrawals that you’ll eventually have to make. In short, the government will make you draw down your RRSP starting at age 71.
In the mean time, the money in your RRSP will grow tax free!
There’s a lot of debate about whether the RRSP is a tax-trap. In my little opinion, it’s better to pay taxes on money that you have than not pay taxes on money you don’t have. When Future You is too old or too ill to work, you probably won’t mind having a fat and juicy RRSP that gets taxed when you withdraw the money that you need.
As with the TFSA, I would urge you to stuff your RRSP with any lump-sum monies that you received. Do so after stuffing your TFSA. After all, the TFSA is the home of money that will never be taxed. As such, you should aim to have as much of your money in your TFSA as you possibly can.
If you’re not in line for lump sums, then go back to your tried-and-true automatic transfer. Each time you’re paid, send some money to your RRSP. When your income goes up, the increase the transfer amount. Eventually, your RRSP contributions will be maxed out. Yay for you!
Invest in equity-products, ideally ETFs. I’m not a fan of mutual funds because they’re too expensive. They have higher management expense ratios than ETFs, yet they do not – and cannot – guarantee higher returns. If I’m not getting a higher return, then why would I pay more money?
The MER is the slice of each investment dollar that goes to the investment company offering the product. My ETF has an MER of 0.22%. This means that $0.22 of every $100 that I invest goes to Vanguard. I used to own the equivalent mutual fund (at a different company), where I was paying an MER of 0.76%. Essentially, I was paying an extra $0.54 for every $100 invested. I saw no good reason to continue that trend so I switched from mutual funds to ETFs.
I know that $0.54 is a very trivial amount of money. Keep in mind that eventually you will be worth over $1,000,000. At that point, the extra MER of 0.54% means that the MER to be paid will be $5,400 per year. This is unnecessary! I don’t know about you, but I don’t see any need to fork over an extra $5,400 to anyone when I can get the same thing for less. Check out this calculator and play with your own numbers if you need more convincing.
Non-Registered Investment Account aka: Brokerage Account
Okay – this is where the steak starts sizzle. Unlike the TFSA and the RRSP, there’s no limit to how much you can invest in your brokerage account. You will pay taxes on your capital gains and dividends each year, but that is not a reason to avoid investing in this account. If anything, you want to earn as many capital gains and dividends as you possibly can because they aren’t taxed as heavily as income you get from your employer. I’m not a tax expert so speak to an accountant if you need more details. Trust me when I tell you that you need a brokerage account to better your chances of joining the Double Comma Club sooner rather than later.
Let’s say you’ve maxed out both your TFSA and RRSP. Don’t cancel that bi-weekly contribution. All you need to do is re-direct it to your brokerage account. Never forget that your automatic transfer is proof that you’re living below your means. It’s the amount of money between what you earn and what you spend. When you see money being automatically sent to your various accounts, be proud of yourself! Living below your means is no easy feat.
Once the TFSA and RRSP are fully funded, you should re-direct your automatic savings to your brokerage account. After all, you’re used to living without that money in your budget. Also, investing every time you get paid is a fantastic habit. There’s no good reason to break a good habit. The money going into your brokerage account will be working alongside the money in your TFSA and RRSP to ensure that Future You lives a comfortable life.
In my little old opinion, you should be investing atleast 25% of your take-home pay. (For transparency sake, I’ll admit to investing one third of my paycheque. It’s a good chunk and it’s easier to do when one is debt-free and childfree.) As always, the choice of how much to save is yours alone. It’s the money you earned so you have final say over where it goes.
For the third time, you can contribute lump sum amounts to your non-registered account.
The money should be invested in equity-focused ETFs with low MERs. My definition of low is anything less than 0.35%. Others only buy ETFs with MERs less than 0.10%. Don’t let the MER be the sole factor you consider when purchasing your ETFs. I have one ETFs with an MER of 0.55%, but it’s consistently paying me a 4-figure dividend every month so I’m loathe to sell it at this point.
Pay Off All of Your Debts
I have to admit that I had qualms about putting this method in the fourth position on my list. You see, I didn’t follow my own advice. I paid off my debts first – student loans, car loans, mortgage – then I seriously started investing. My former mortgage payment went into mutual funds and later ETFs. The same thing happened with student/car loans.
Looking back with the wisdom gained from experience, I should not have accelerated my mortgage payments every year. I should have been putting that money into the stock market. I would’ve had my mortgage for a lot longer. (It was paid off in 2006.) However, I also would’ve had a lot more money in the stock market, which was on a tear from 2008 to 2020. In short, investing my money in the stock market sooner would have meant greater compounding over a longer period of time on a bigger pile of cash.
Live and learn.
You need not repeat my mistake.
If you have the money, pay off your debts while you’re investing for Future You. It’s in your interest to ensure that you have as few financial obligations as possible. Make all of your minimum payments as required while stuffing your TFSA and your RRSP. If your debt is paid off before you’ve stuffed those accounts to the gills, then take that former debt payment and send it to your other debt payments. In this way, your debts get paid off faster than originally planned.
Should you receive a lump sum before your debts are entirely gone, I would suggest splitting it in half. Send half of the lump sum to the Care and Feeding of Future You accounts, aka: your TFSA and then your RRSP. Ensure that the other half goes to your debts, particularly your credit card debt if you have any. That’s almost always the most expensive debt so it’s in your best interest to get rid of it first.
You’re free to do what you want with your hard-earned money. I kindly ask that you consider investing for your future while at the same time you’re working hard to pay down your debts.
Oh, also – once you’re out of debt, don’t go back into it. Do what you need to do to save up your money before you spend it. Paying as you go is far preferable to committing future income to today’s needs.
Spend Your Money
Yes – you read that correctly. I want you to spend your money – not all of it, but some.
Look. I know that I am constantly asking you to invest a part of your paycheque for the future. But I also realize that every single one of us lives in the present. We should all be able to enjoy some of our money today. Right?
My story involves a lot of travel, entertainment, and various stuff. It’s just that it arrived at different times of my life. Once I’d paid off my house, I started sending my former mortgage payments to my RRSP and my brokerage account. When the TFSA came into being, I started sending money there too.
And while I was paying off my mortgage and investing for Future Me, what was I doing to live in the present?
I was eating out with my friends two or three times a week. I travelled to the US to see family and to visit different places. I went to concerts. I did renovations to my house. I bought my beloved SUV. Once I’d maxed out my accounts and hit a savings rate of 1/3 of my take-home pay, I decided to spend a little bit more money. Some people want to hit a savings rate of 50% or even 70%. Living on that little of my paycheque wasn’t the goal for me. I could achieve my goals by saving one third of my paycheque. Everything over and above that target could be spent however I wished. In my case, I started travelling overseas. I did bigger renovations to my home. In the past 8 years, I’ve been to Europe 4 times… and that 8-year period included 4 years of not travelling by plane. I even paid for a professional financial planner. (That was money very well-spent because he told me that I could retire 2 years earlier than I’d planned!)
That’s a long-winded way of saying that you should spend some of your money along the way. Investing for Future You and paying off your debts are two very important financial goals. Living in the present is also a very important financial goal. Spend some of your money today so that you’re building up your inventory of memory dividends and making your dreams come true. Future You will thank you!