These 7 steps will help Canadian families build wealth and get ahead. Being able to get ahead through the daily grind of family life is important for successful future.
- Measure your net worth
- Get on a budget, or at least track your spending.
- Cut out the unessential expenses
- Get out of debt and stay out of debt
- Build a safety fund
- Automate investing. Start with RRSP contributions every pay period
- Plan and save for larger purchases
MEASURE YOUR NET WORTH, QUARTERLY. If you don’t measure it, you can’t control it. Open a spreadsheet or grab a piece of paper. List the value of everything you own – bank balances, TFSA, RRSP, value of your home – all assets. Then list everything you owe – bank loans, credit cards, student loans, mortgages. Subtract everything you owe from everything you own and that is your net worth.
Track these statements quarterly. Every March 31st, June 30th, September 30th, and December 31st and compare how you are progressing. What areas increased the most? What areas decreased? What areas can you improve upon for next quarter end. This is the first step to building wealth – measuring it.
GET ON A BUDGET, OR AT LEAST TRACK YOUR SPENDING. Another spreadsheet solution. You can set it by month or by your pay period (eg bi-weekly). Start with the activities in your bank account. Top line, list your income – most likely your take home pay. The amount that hits your bank account. The below, track your expenses: Rent / mortgage, utilities, groceries, clothing, entertainment, transportation, savings. Set your parameters or limits for each category.
CUT OUT UNESSENTIAL EXPENSES. Review each of the items to understand where your money is going. At least once a year question your discretionary costs, particularly those on a subscription basis. Eliminate the unnecessary expenses until you are debt free, have an emergency fund, and contribute 15% to retirement.
GET OUT OF DEBT AND STAY OUT OF DEBT. With the exception of mortgage for your principal residence, debt is a bad idea. Never get into debt to make purchases. If you can’t pay cash for it, you can’t afford it. This is particularly true for cars. Debt is the most sure-fire way to limit your ability to build wealth.
If you find yourself in debt, temporarily stop all savings and retirement funding. Focus your efforts solely on debt elimination until it is fully paid. Debt is something that you can wander into. But you can’t wander out of. It follows you around like an anchor, weighing you down.
BUILD A SAFETY FUND. Three (3) to six (6) months of expenses set aside in a savings account or placed in a safe spot in your house. Don’t invest it in the stock market. Make it easily accessible where you can get a hold of it quickly. Consider this insurance against the little things in life. Protection from surprised expenses. It will allow you to avoid going into debt to solve an issue. Having a safety fund is able to turn a near-crisis to an inconvenience.
AUTOMATE SAVINGS. CONTRIBUTE 15% TO YOUR RRSP. When you are out of debt and have a safety fund. Contribute 15% to your retirement and 5% to long-term savings / big purchases. The new robo-advisers are great tools to automate your savings and investing and provide you with low-cost, diversified investing. I’ve had good success with both Wealth Simple and Quest Wealth.
PLAN AND SAVE FOR LARGE PURCHASES. Don’t let the need for that next car lead you into debt. Set aside funds for that next big purchase. New car, trip to Disney, new roof on your house. All these things can be foreseen and should be budgeted for in advance.