5 Pillars of Wealth Creation

Have you ever wondered why some Canadians seem to accumulate wealth effortlessly while others struggle to get ahead? The secret often lies in understanding and mastering Canada’s financial systems. Fortunately, wealth-building isn’t reserved for the few, and anyone can build lasting wealth by following key principles.

In this article, we’ll explore five foundational pillars of wealth creation  for Canadians and how they contribute to a wealthy future for you. 

1. Removing Bad Debt

2. Building an Emergency Fund

3. Investing Smartly

4. Real Estate (When the Time is Right)

5. Increasing Income

   
   

   

   
   

1. Removing Bad Debt 

In this context, "bad" debt refers to consumer debt such as credit cards, high-interest car loans, and payday loans. These debts are considered "bad" because their interest rates are significantly higher than the average returns from investments like the stock market or the housing market. Not only do they provide no positive return or asset in exchange, but they also drain your money. The longer you hold on to these debts, the more they can spiral out of control, becoming a heavy financial burden.

It is crucial to tackle bad debt immediately. Being debt-free gives you the financial breathing room necessary to save and invest, allowing interest to work for you, rather than against you. The sooner you free yourself from the weight of high-interest debt, the sooner you can start building your wealth.

Let's look at an example to illustrate bad debt in action. In Canada, the average credit card has an interest rate of 20.99%. In comparison, the average return of the S&P/TSX 60 (A stock index of 60 large-cap Canadian companies) over the last 50 years is ~8%. This means you are paying the bank significantly higher rates to use a credit card than you receive from investing your money, making it clear why you must pay off all bad debt as soon as possible.

Looking for effective ways to pay off debt faster? Discover proven debt payoff strategies in our detailed guide: How to Pay Off Debt the Right Way

2. Building an Emergency Fund

An emergency fund is exactly what it sounds like: an easily accessible account that is to be only used for emergencies such as car repairs, recovery after a job loss, or unexpected veterinary bills.

Why do I need an emergency fund? An unexpected expense or job loss can occur at any time and being unprepared can lead to you having to rely on credit cards to bail you out, thus sending you into a loop of consumer debt that is difficult to break free from. An emergency fund will relieve the financial stress from your already stressful event, giving you a great financial safety net for recovery.

How much should I put in? We recommend to have at least $2000 or one month's worth of expenses, whichever is higher as a starting point. Stow this fund in a high-yield savings account so that it gains interest and is easily accessible at a time of need. As your overall financial situation improves, consider increasing this fund to 3-6 months of total expenses out of an abundance of caution. 

For an extensive look at creating and managing your emergency fund, visit our article on the importance of an emergency fund here!

3. Investment Once you’re free of bad debt and have an emergency fund in place, it’s time to make your money work for you.

What does it mean to invest?

Investing involves buying assets (e.g., stocks, bonds, ETFs, real estate) that appreciate or generate income over time. Unlike saving, investing grows your money through compound interest, a powerful tool for long-term wealth creation. 

Example: Compound Growth in Action

Let’s say you invest $1,000 upfront and contribute $100/month (a very reasonable contribution) with an average 8% annual return.

• After 1 year: ~$2,323 ($2200 of which is your own contribution)

• After 10 years: ~$18,000 ($13,000 of which is your own contribution)

• After 20 years: ~$55,000+ ($25,000 of which is your own contribution)

  
  

After 20 years, the interest has far outpaced your own contributions, illustrating how your money can work for you! As you can see, the more time you have in the market, the greater the earnings, as compound growth is able to work its magic. This means that the best time to invest is as soon as possible to maximize the earnings potential of compound growth.

Want to know more about compound growth and how it adds to your wealth journey? Check out more about the power of compound growth in our article: The Money-Making Magic of Compound Growth

Now, you may ask, where do I invest?

In Canada, we have access to three fantastic investing accounts: the TFSA, RRSP, and FHSA which each have fantastic benefits for your short-term goals, retirement, and first home purchase. You can find a description of each account below but be sure to visit the respective links for details on how you can leverage these accounts for your benefit.

TFSA (Tax-Free Savings Account) The TFSA is one of the best tools for growing your wealth because any investment gains (whether from interest, dividends, or capital appreciation) are completely tax-free. With a TFSA, you can invest in a variety of assets such as stocks, bonds, or ETFs, and the growth remains untaxed, even when you withdraw it.

Why a TFSA? The TFSA is perfect for Canadians looking to save and invest for both short-term and long-term goals, such as a new car, vacation, or even retirement. The tax-free growth and flexibility to withdraw funds without tax penalties make it an excellent tool for wealth-building.

Discover how to use this tax-free investment account to grow your wealth without the tax burden. Dive into our much more detailed guide: Maximizing Your TFSA for Wealth Growth.

RRSP (Registered Retirement Savings Plan) The RRSP is a great vehicle for saving for retirement. Contributions to an RRSP are tax-deductible, which reduces your taxable income for the year and can result in a tax refund. However, when you withdraw funds from your RRSP (typically in retirement), those withdrawals are taxed as income.

Why an RRSP? The RRSP is a valuable tool for retirement savings because it offers tax-deferred growth. By contributing to an RRSP, you’re able to lower your tax bill now and delay taxes on the growth of your investments until retirement, when you’re likely in a lower tax bracket. 

FHSA (First Home Savings Account) The First Home Savings Account (FHSA) is a new, powerful tool designed specifically for  young Canadians that are saving for their first home. The FHSA combines the best features of the TFSA and RRSP: you can contribute tax-deductible contributions like an RRSP, and when you withdraw the money to purchase your first home, it's tax-free like a TFSA.

Why a FHSA? The FHSA is perfect for anyone planning to buy their first home. It helps you save up to $40,000 ($8,000 annually) for a home, and you can withdraw it tax-free when you use it to buy your first property. It’s an ideal way to reduce your tax burden while saving a significant chunk of money for your down payment.

4. Real Estate (When the Time is Right)

Real estate is currently the trickiest pillar to achieve for young Canadians. It has long been considered a staple of wealth-building in Canada, however, with the soaring rate of prices compared to incomes, it can seem like a downright impossible goal to reach. The good news is that there is still hope that younger generations can own a home. Through proper leverage of the TFSA and FHSA, diligent saving/budgeting, and increasing income whenever possible, owning real estate can be achieved. 

Why Is Real Estate Important for Wealth-Building? Real estate has always been a powerful wealth-building tool in Canada, and for good reason. The value of properties generally appreciates over time, meaning your home could increase in value as the years go by. Plus, real estate can generate passive income if you decide to rent out part of your home or own a rental property. This income directly boosts your net worth, and in many cases, your property could become a source of long-term wealth. Beyond the immediate security of owning your home, real estate is an investment that has the ability to work for you. As you pay down your mortgage and your home appreciates in value, your wealth increases. If you ever decide to sell or rent out your property, you have the potential to earn substantial returns. Real estate is an effective way to diversify your assets and build long-term wealth that will help support your financial independence.

5. Increasing Income

Have you cut out bad debt from your life, are starting to budget properly, and have made some contributions to your investing accounts, but are still left unsatisfied with your rate of progress or are feeling pinched for money? 

Unfortunately you are in the same boat as many young Canadians who may feel like their finances are just lagging behind where they want them to be. This is where the 5th pillar, increasing income, comes into play.

You may think, "Okay, so, it's pretty clear that more money helps, right?." But seriously, this is a point a lot of people overlook far too often. Extra income is the most powerful way to get the ball rolling when it comes to building wealth and should be a main priority for you. In Canada, increasing your income means providing more value to society, but there are many different ways to do it.

Consider getting a second job, gig-work, starting a side business, or obtaining more certifications/higher level degrees to achieve a promotion at work or a more lucrative position. This extra income should first be put into debt payments so that they can be cleared as soon as possible. When you are debt free, put this extra income into a TFSA/FHSA so that your net worth can grow at a substantially faster rate, allowing you to be financially independent sooner than you initially thought possible.

Final Thoughts

Building wealth in Canada isn’t about luck, it’s about strategy. By mastering these five pillars, you’re not just chasing money, you’re taking control of your future. Start today, stay consistent, and your wealth journey will reward you more than you ever imagined. Check out our free tools and articles for in-depth breakdowns on the most important aspects of building a strong financial future in Canada.