I have two kids, a non-verbal six-year-old daughter with a dual diagnosis of Autism and Rett Syndrome, and a three-year-old son. With my daughter’s disability, I missed out quite a bit of experience in the early stages of parenthood. With my son, I became very protective of him because of what we went through with my daughter and I scrutinized every stage of his development. As a parent, regardless of my kids’ ability, my expectations for them are the same.
One of my hopes for my kids is to be financially literate and responsible when they grow up to be adults. This is easier said than done as I know that most kids don’t like to listen to their parents’ preaching (myself included). My way of getting around this obstacle is to use this blog and personal finance community as a platform to document and share my thoughts. Hopefully, this post can do a better job of communicating my thoughts to them than my verbal communications can.
So, what do I want to instill in their young minds and to share with this personal finance community? The stepping stone to building wealth and financial security for oneself. With this post, I am going to walk you through how I built financial security for myself and got to where I am today. One of my philosophies is, “if I am going to talk the talk, I’ll need to walk the walk first.” By that, I am not going to expect my kids or anyone else to do something if I haven’t done or not willing to do it myself. Let’s start the journey.
Start With The Zero-aire
Have you heard of a Zero-aire? Me neither. I just made up this term. Why did I make up this term? It’s to set the first net worth goal for young adults to achieve. A Zero-aire is someone who has a net worth of zero, nothing and is also debt-free.
Why is this number significant? If anyone wants to have any chance of making a decent salary, the basic requirement is a post-secondary school degree or diploma in this day and age. You can’t get a degree or diploma without attending post-secondary school. For the majority of Canadians, they’ll most likely graduate post-secondary school with an average debt of about $26,819. Hence, paying off your mountain of student debt and not inheriting any additional consumer debts along the way is no easy feat.
For the majority of young adults, their money habits and discipline after graduating from post-secondary school will have a meaningful impact on their finances later in life. This period is the time that most people have their first real (full-time) jobs and need to start paying for their everyday expenses. Your money habits and discipline will determine how long it’ll take you to be debt-free.
The real lesson from becoming a Zero-aire is not how fast you can get to being debt-free. It’s that if the money that you are borrowing does not help you to earn more money, you should pay it off as soon as you can. If you are one of the fortunate few to be debt-free after graduation, you’re set to start building wealth for yourself.
Build The Thousand-aire Foundation
How does it feel to be debt-free and not having to see a chunk of your hard-earned money leave your account? It definitely feels great. Don’t stop here and start to loosen the belt after you’ve achieved debt-free status. Use the extra money that was once allocated to pay off debt to build up your bucket of funds.
The first fund that you should start thinking about is an emergency fund. Whether it’s three months of living expenses or six rent payments or nine months worth of Big Mac combos from McDonald’s, it’s prudent to start setting financial goals. Setting small and achievable financial goals will help you get into the habit of saving and determining your money priorities.
The next fund that you should start is a retirement fund. It’s never too early to start investing in your future. Even if you can only contribute $25 a month, which is less than $1/day. Every dollar counts. My philosophy is to get your money working for you as early as you can so that one day, you’ll have the option of not working if you choose to. Here’s an easy way to boost your retirement savings by $100,000 to get you started early.
Depending on the stage of life you’re at and your priorities, there are a few more funds that are worth saving for. Here’s a list of funds to allocate your money towards:
- My First Home Fund: It’s always a great idea to invest in your own lifestyle and well-being
- The Wedding Fund: The average wedding can cost $8,937 or more. If you add in a honeymoon trip, it can easily break $15,000.
- The Vacation Fund: Everyone needs to take a break from time to time. Why not build that into your financial plan. I must admit, this fund was not on my list until this year and I definitely feel a little deprived.
- The New Car Fund: I don’t recommend that new graduates go off and buy brand new $100,000 car after graduation, but if you need a car, then you need a car. $10,000 can get you a decent roadworthy used car.
Develop The Ten Thousand-aire Habit
Once you’ve reached this milestone, you should have a decent emergency fund. There should be an automated saving plan in place to contribute to your registered retirement account on a regular basis. This is what financial advisors called, “paying yourself first.” At this stage, the priority is to start or beef up your first home fund. This fund will help you develop your forced saving habit and set you up for home ownership.
There are ongoing debates about home ownership being a good investment or not. Based on my personal experience, if you treat your home as a wealth building asset, more often than not, you’ll be better off owning a home than not. Here are my observations, “how many millionaires out there that don’t own a home?” A lot less than those that do.
Another important habit to develop at this stage is to be aware of free money. There is no better way to get an easy 72% return on your savings than the free money from your employer matching, tax refunds, and government grants. The more free money you can get, the faster you’ll grow your net worth. Based on my estimate, about 30% of the money in my saving accounts were free money.
Grow Your Hundred Thousand-aire Assets
Congratulations! If your net worth has reached this level, you are in the middle 20% of the population. This means that you are richer than at least 40% of the individuals in the Canadian population based on Statistics Canada data referenced from the MoneySense net worth calculator. To reach the next net worth level, saving diligently and paying off your mortgage is doable. However, it’s not the most efficient way to grow your wealth.
One of the most efficient ways to increase one’s wealth is to invest money in our tax sheltered registered accounts (RRSP, TFSA) in the stock market. Many people have the perception that the stock market is very volatile and it’s very risky. If you don’t understand what you are investing in, it can be risky. However, if you invest in market index ETF such as the S&P 500 index over the long term, it’s quite safe. Here’s some investment basic resource to help you.
Another effective way to increase your wealth is to invest in the real estate market. Although, being a landlord may not be everyone’s cup of tea, the potential, and rewards that come with owning real estate are too great to pass up. There are three main benefits to owning real estate.
The first benefit is being able to leverage your investment up to three times. For example, if you have 25% of the value of your investment property, you can borrow the other 75% (three times your investment) to purchase an investment property. The second benefit is someone else will be paying off the mortgage for you when you rent out the investment property. Third, diversifying your money away from stocks will lower your investment risk and volatility.
Depending on how comfortable and disciplined you are with debt, borrowing to invest will further accelerate the growth of your net worth. For example, if you can access $100,000 in home equity and the income to cover the monthly loan payments, you can take out a $100,000 investment loan. Use this money to invest either in real estate or stocks. The more money that you have working for you, the more sources of passive income you’ll generate.
When you borrow to invest, it’s important to build up access to funds. This way, you’ll create a safety net for yourself in case your investments are not performing or do not work out according to your plan. The most important thing to remember is to never borrow more than you can handle comfortably.
Reaching For The Millionaire Status
Even though a million dollars is not what it used to be (it may not even be enough to buy a detached home in Toronto), a million dollars is still a million dollars. Having accumulated a net worth of a million dollars will put on a great path to achieving financial independence. Saving your first million dollar is the hardest. However, the path to accumulate your next million will be much easier.
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How easy? To get from a Zero-aire to a millionaire, it took me about 10 years. For readers that are interested, here’s my million dollar journey summarized in a four-part series. After reaching the millionaire status a bit more than a year ago, my net worth stand at more than $1.25M now, which puts me more than a quarter of the way to my second million.
When you are at this stage, it’s important to ensure that every dollar of your net worth is working hard for you to make even more money. Your goal is to have your money working to replace your main source of income so that one day, it’ll surpass that source of income and working will be optional for you.
Achieving Financial Independence With A Multi-Millionaire Net Worth
Whether you are pursuing Financial Independence Retire Early (FIRE) or not, knowing the net worth number that will provide you with the freedom to chose what you do is liberating. Last year, I was able to calculate my target FIRE number of $2M in personal net worth. Just by knowing this number, it had completely changed my mentality.
I finally have a concrete long-term financial goal that I am looking forward to achieving. My motivation to reach any goals had never been higher. I am truly happy to know that if I can grow my net worth at an aggressive, but achievable compounded rate of 10% per year, I’ll reach my FIRE goal in five years (2022). On a normal pace of $100,000 increase per year, I’ll reach it in seven years (2024). On a more conservative pace of $75,000 increase per year, I’ll reach it in 10 years (2027). Below is the table depicting the three paths.
| Year | Age | Agressive | Normal | Conservative |
|---|---|---|---|---|
| 2017 | 39 | $1,300,000.00 | $1,300,000.00 | $1,300,000.00 |
| 2018 | 40 | $1,430,000.00 | $1,400,000.00 | $1,375,000.00 |
| 2019 | 41 | $1,573,000.00 | $1,500,000.00 | $1,450,000.00 |
| 2020 | 42 | $1,730,300.00 | $1,600,000.00 | $1,525,000.00 |
| 2021 | 43 | $1,903,330.00 | $1,700,000.00 | $1,600,000.00 |
| 2022 | 44 | $2,093,663.00 | $1,800,000.00 | $1,675,000.00 |
| 2023 | 45 | $2,303,029.30 | $1,900,000.00 | $1,750,000.00 |
| 2024 | 46 | $2,533,332.23 | $2,000,000.00 | $1,825,000.00 |
| 2025 | 47 | $2,786,665.45 | $2,100,000.00 | $1,900,000.00 |
| 2026 | 48 | $3,065,332.00 | $2,200,000.00 | $1,975,000.00 |
| 2027 | 49 | $3,371,865.20 | $2,300,000.00 | $2,050,000.00 |
My Two Cents
Building wealth does not require a six-figure income, but it can certainly help. It’s more important to develop the discipline and habits to save diligently, invest wisely and prioritize the use of your money responsibly. It’s also important to know and to set financial goals that’ll motivate you to achieve.
So readers, which wealth building step are you on? What are your long-term financial goals? Do you have any inspiring stories to share to motivate our kids to build wealth?
About Leo
As usual your advice is very sound. I wish we had started some of these funds with your kids. But we were able to make sure they left school without student loans and bought their first (and second with my daughter) car, so they didn’t have that to worry about. When they decide to get married, we’ll figure that one out then, but they have sen that a huge wedding is not necessary as my husband and I went to the JOTP 23 years ago.
It’s very important to be disciplined if you want to grow your wealth…you have shared great ideas which I will be following from now. I am very weak in financial planning
sound advice for those with young children and want to start thinking about their future. I believe in having no debt. My husband and I are in our 50’s with no debt – our house is paid for so is our cars, boat, and motorcycle. We try and teach our son the same thing. Stay out of debt. so far so good LOL. He does have savings towards a house and his car is paid for. Great advice.
We live frugally and within our budget, and thankfully we have a small amount set aside for emergencies. That being said, my son had a medical emergency over a year ago out of stare that, even with our health insurance, has left us with a lot of debt. We’re barely making ends meet, and saving any more is off the table. It’s definitely not a pleasant situation to be in.
Personal finances is something that I have always struggled with and continue to struggle with to this day so I like the idea of ‘Zero Airre’. I admit though money is often something that I find hard to understand so I will be pinning this for later!
Your advice is always great and teaches me something new all the time and what I should start doing.I still need to have a great strategy for emergency funds and keep at it instead of digging into it when I really need something.
I like your posts on these topics. We do not always get a guide for such things from our elders. This is a post where I see myself coming back to.
I try to to to cut down on credit cards to increase my spending levels and increase my savings levels. I still do however need a more aggressive savings plan .
I live in a country where the figures of one million dollars are inaccessible. With a salary of about $ 100 a week, it’s hard to save money. however, I am proud because my total debt does not exceed $ 3,000 and I plan to repay it in the next 10 months.
Great tips and you explain it very easily to understand. Some people really need to pay attention to their habits when it comes to money, it is very easy to lose track of expenses if we are not mindful of what are we going to make our money grow.
This is a great plan for starting out debt free and building your savings. I wish I had follow this when I was in my 20’s. It took forever to get out of that student loan debt.
The infographic from the “How much do canadians spend on weddings” is nice! I was shocked at the low number of <$9000. It's the number that Canadians THINK they should be spending but they are actually averaging abut $30,000 on a wedding. My wedding was definitely more than $9000 🙂 But under $30,000. Your children are lucky to have such a financially sound dad to guide them! 🙂
My oldest son is working on this. He’s doing it for the right reasons so I think he will succeed.
This is awesome information for anyone wanting to build their financial wealth. It is so important in my opinion to teach our children the value of a dollar and how to save. My kids have had a savings account since their were babies and now the y are both men. When they were little they would save their money for months for what they wanted and still have money in their accounts . Thanks for sharing the information.
Saving money and prioritizing are spending has helped us so much. As a financial advisor, I understand the importance of investing and Saving. Thanks for the reminders, these thing are certainly overlooked. When the flood hit my brothers home in Texas he realized his rainy day fund was not enough, we recently increased ours as well.