6 Tips to Achieve Financial Independence in Canada

6 Tips to Achieve Financial Independence in Canada

According to Statistics Canada’s 2021 report, approximately 30.5 percent of Canadian households are financially resilient enough to withstand a sudden financial setback. However, being financially resilient is very different from being financially independent.

Today I’m going to explain what it means to be truly financially independent and share some helpful tips on how to potentially achieve it.

WHAT DOES IT MEAN TO BE FINANCIALLY INDEPENDENT?

Financial freedom can mean different things to different people. When most people think of the term financial independence, they imagine a life of financial freedom without having to worry about how they’re going to pay their bills. This is a relatively true statement, but a true definition provides a bit more clarity.

Financial independence is when an individual has accumulated enough wealth or has a passive income stream capable of covering all of their living expenses for the rest of their natural life without needing a paycheck or salary.

Basically, it’s the same as being able to retire without having to work again.

A privileged few are born into financial independence through automatic streams of income, investments and assets bestowed upon them through inheritance. However, most financially independent Canadians can only succeed with hard work, planning and consistency.

TIPS TO ACHIEVE FINANCIAL INDEPENDENCE

Wouldn’t it be nice if he never had to work again?

While this may sound like a dream to many, it is entirely possible. To achieve this you will need:

  • Make smart financial decisions

  • Have clear goals

  • Create a plan for success

1. Increase your savings rate

Your savings rate is the percentage of your total after-tax income that you save. Audit your current spending and see where you might be spending too much money. Focus on the three big expenses of shelter, transportation and food to see if there is one major area where you can cut back. By saving more money, you increase your savings rate.

2. Start investing early

Investing your money is one of the most common ways to achieve financial independence. Investing probably won’t make you rich overnight, and all investments involve risk on your part. Popular investments for Canadians include exchange traded funds (ETFs), stocks, mutual funds and real estate. The sooner you start, the better, thanks to the magic of compounding returns.

There are many ways to get started, depending on how involved you want to be. You can start by using a robo-advisor or consult a financial advisor if you have less knowledge or want to invest less time. Another option is to learn how to invest yourself and buy investments from a discount broker.

3. Maximize your tax-advantaged accounts

Canada’s Tax-Free Savings Account (TFSA) program is an incredible resource that allows Canadians to put money into a tax-free account. TFSA accounts are best used as investment accounts, and none of the earnings in the account are taxable as long as your total savings are within your account’s contribution limit.

Also maximize the value of popular tax-advantaged accounts available to Canadians, such as the Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP).

4. Increase your income

Rather than saving money, look at ways to increase how much you can earn. Find different ways to increase your income, such as:

  • Dividend income from investments such as ETFs or stocks

  • Freelance services on the side

  • Income from rental of residential properties

  • Starting a business

  • Negotiating higher wages in your current position

  • Finding higher paying companies to work for

5. Live within your means

If you spend all the money you earn, it will be difficult to achieve financial independence. Living less can be one way to spend less. For example, if you get a promotion at work and a raise, try to keep your expenses at the same level instead of immediately increasing your living expenses. Delayed gratification value will mean achieving financial independence goals sooner.

6. Find a like-minded partner or spouse

While not absolutely necessary, having a partner with the same financial independence goals as you can go a long way toward achieving your goals quickly. You can essentially double your salary and cut your expenses in half if you find the right partner who is willing to work with you on your financial independence.

HOW LONG DOES IT TAKE TO ACHIEVE TRUE FINANCIAL INDEPENDENCE?

Achieving financial independence usually doesn’t happen overnight. Unless you win the lottery or inherit a fortune, you’ll probably have to work for it. The time it takes depends on where you are starting from, what your personal goals are, and how much you are willing to invest.

There are some extreme examples of people achieving financial independence in their 20s and 30s. However, it will be a struggle for most Canadians, and most will retire and achieve financial independence in their 50s and 60s anyway.

With rising inflation and rising costs of housing, gas and food, it will become even more difficult to achieve early financial independence in the future. But with hard work and careful planning, anything is possible.

Christopher Liew is a CFA charter holder and former financial advisor. He writes personal finance tips for thousands of everyday Canadian readers on his Wealth Awesome website.

Do you have a question, tip or idea about personal finance? Please email us at [email protected]

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