Money Club for Young Adults
Building Wealth - A Real World Example
There is theory and then there is the real world. Theory is important. It allows us to build a frameworks that help us understand how the world works. But theory is only part of the picture. We live in the real world. We need to apply what we have learned (theory) to the real world. What we learn when we do this will allow us to update and improve our framework.
Example 1: Mary takes action
Mary is 25 years old and recently graduated from university. She has a good job. Mary decided her financial future was very important to her. She decided to implement the plan outlined on this web site. Yes, there is a bit of work to get your financial infrastructure set up. But once you are done, things get much easier afterwards.
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Summary of Mary’s starting point:
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Gross employment income = $55,000 / year
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Total taxes = $11,400 (federal, provincial, CPP/EI premiums)
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After tax employment income = $43,600 / year
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What Mary did:
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Step 1: Pick a long term financial partner.
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Mary picked RBC. She was using a credit union but decided RBC was a better fit - RBC is a quality bank that has all the services and products that she needs not only today but also what will be needed in the future. It was important to Mary to keep her financial affairs as simple as possible.
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Step 2: Open a chequing account.
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Mary did this at RBC.
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Step 3: Set a savings amount - Pay yourself first.
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Mary decided to save 16% of her after tax income = $7,000
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Step 4: Decide which type of investing account to open.
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Full service or self-directed?
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Mary decided to open a self-directed account with RBC - she would handle all of her own investments.
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Which tax free account: TFSA, FHSA, RRSP or RESP?
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Mary decided to open a TFSA.​
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Step 5: Set up automatic transfer of savings.
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Mary’s employer auto-deposits her pay into her RBC bank account every 2 weeks. She set up an automatic transfer from her bank account to her self-directed investing account. Every 2 weeks, as soon as her pay is deposited, $270 is automatically transferred into her investing account.
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Step 6: Pick a broad based ETF/index fund to invest in.
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Mary is investing for the long term. As a result, market volatility does not bother her. She decided to invest 100% in stocks and picked XEQT.TO
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Step 7: Buy the chosen investment.
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Each quarter buy ETF/index fund with cash in account.
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Mary understands there is a $10 fee to buy a stock or ETF. To minimize this fee, she lets her automatic deposits build in her self directed investing account. Every three months she buys XEQT.TO She sets a reminder in her phone to do this on March 31, June 30, Sept 30 and Dec 31 (or the next day financial markets are open).​
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What is the result 35 years later, when Mary is 60?
To answer this question, we need to make two more assumptions:
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Savings amount will increase by 2% per year. Mary’s employment income will likely increase by much more than this.
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Rate of return on investments will average 8% per year. For a diversified global all stock portfolio like XEQT.TO this is likely a reasonable assumption.
Mary will have $1.61 million in her TFSA at age 60.
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Income stream #1: Annual contributions = $350,000
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Income stream #2: Return on investments = $1.26 million
Importantly, investment gains of $1.26 million are all tax free. And all funds withdrawn from the TFSA have no impact on reported income.
If Mary’s life partner also did the same thing, then the couple at age 60 would have $3.2 million in two TFSA’s.
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In addition to TFSA, Mary also can utilize FHSA, RRSP and RESP vehicles to grow her wealth even more.
Example 2: Mary's parents lend a helping hand
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Mary decided to use TFSA as her wealth building vehicle. The contribution limit for TFSA for 2024 was $7,000. ​For her TFSA, Mary had been generating room since she turned 18 years old. Mary had $41,500 in unused contribution room.
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What if Mary’s parents help out a little at the beginning?
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What if Mary's parents gave her a gift of $41,500 when she was 25 years old? That would have made her starting amount $48,500 ($41,500 + $7,000). Assuming everything else stayed the same, what will be the new result 35 years later?
Mary will have $2.2 million in her TFSA at age 60.
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Income stream #1: Annual contributions = $350,000
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Parent contribution at the beginning = $41,500
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Income stream #2: Return on investments = $1.8 million
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The parent's contribution of $41,500 at the beginning of year one would have generated additional tax free investment gains of $540,000 over 35 years. What an amazing gift!
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From an estate planning perspective, this is a great way for parents to begin to transfer wealth to the next generation. It is very tax efficient. And it can be life changing (in terms of growth). See our parent page.
The Math for Mary's Example #1
The Math for Mary's Example #2
