Your Wealth

How Do I Build Wealth

Your financial capital position is determined by the net of your income and expenditures. Whether you focus mostly on income or expenditures is a life choice.

You need an income to support yourself and family. How large that incomes needs to be, relates to your life goals. Generally, your ability to earn income is your largest asset. Therefore, make it a priority to secure well paid and secure employment. You may have to invest time and money in education to secure suitable employment. The right employment or business should support you in starting a savings and investment program.

With secure and protected income you are in a position to start to accumulate capital. Initially your focus may be on a personal home. Once you are in a position to accumulate assets, you should look for ways to create positive cash flows. You will need to balance returns with risks to your capital and ensure your investment decisions are in harmony with your values and life goals.

Generally, your first step should be maximize your Tax Free Savings Account(TFSA). As of January 2021 you can put up to $75,500 into a TFSA. There is no tax deduction for TFSA investments; however, your funds accumulate tax free and can be withdrawn tax free. Money you withdraw from your TFSA can be put back in the TFSA in the year following withdrawal.

Another vehicle for accumulating savings is a Registered Retirement Savings Plan(RRSP). The amount you can contribute to an RRSP is based on your income from employment. Your CRA Assessment from the previous year will state the allowable contribution. There is a tax deduction for money placed in an RRSP and the funds do accumulate without tax. However, all funds in an RRSP are fully taxable as income on withdrawal or on death. There are a couple of exceptions that allow withdrawals from your RRSP. These are the Home Buyers Plan(HBP) which allows withdrawal up to $35,000 and the Life Long Learning Plan(LLP) which allows withdrawals up to $20,000. With these two plans, funds must be repaid to your RRSP within a defined schedule, otherwise tax becomes due and payable on the withdrawal amount.

Bear in mind, that your TFSA and RRSP are investment vehicles defined by income tax legislation. They are not a type of investment. These two investment vehicles can hold stocks, bonds, mutual funds, insured segregated funds, and some other limited forms of investments. Your current verses your expected future income tax status can influence your decision whether to use your TFSA allowance first and carry forward RRSP deduction room for future periods.

These two investment vehicles are recommended as the base of your investment plan because of the income tax advantage. If you have sufficient funds, you should also consider investing directly in stocks and bonds outside of these plans. Your earnings from these investments will be taxable annually for interest earned, dividends issued, and capital gains realized. Real Estate is another form of investment that can provide rental income and capital gains. An important consideration is any funds borrowed to generate income are tax deductible.

Unless your investment horizon is short term, or you expect a market downturn, or you do not want to incur risk to maximize long term returns, the largest portion of your money should be in common stock. History and knowledgeable investment professionals both indicate this is the way to achieve the best long term returns.

Determining the specifics of your investment portfolio is a whole other discussion..