15 things to know about Personal Finance Canada

Personal Finance Canada topics

Budgeting

The first step to getting control of your finances is to build a budget. To do this, start by reviewing your income and expenses from your bank statements for the last six months. Break them down into revenue and expenses, and look at the actual inflows in your bank account. Group them into sources of income such as a job or salary, investment income, real estate/rental income and many others. Look at all of your expenses going out of your bank for your home, food and restaurants, shopping, and all other costs.

This will be the starting point of your budget for revenue and expenses. Look at the details of each category and find ways to increase income and reduce costs realistically. Now you have a budget that you can hold yourself accountable to.

Calculate your net worth

Your net worth is simply Assets less Liabilities. To calculate net worth, you need to summarize all of your assets and liabilities. Assets will include your cash, vehicles you own, real estate and investment accounts. Your liabilities will be any credit card debt, student loans, mortgages or amounts owing to anyone else. Once you have the list of assets and liabilities, you can calculate your net worth as assets – liabilities.

Building sources of income

Most people have one source of income – a full-time job. That’s great, but what will you do if you get laid off? Build multiple streams of income by buying assets like stocks & real estate. Ideally, you will have seven sources of revenue.

If you want to learn more about building income streams, check out my post on how to make money online in Canada and the best business you can start today in Canada

Investing – Stocks

For the most part, any financial plan should include investments in stocks. By investing in stocks, you are purchasing a share of a company and sharing in the returns either through growth in the value of the stock or dividends from the company to shareholders. While many investors will try to pick individual stocks, almost all investors & hedge fund managers underperform versus the stock market average. If you want to do it yourself, I suggest investing in a well-managed ETF that gives you exposure to many companies, such as Vanguard’s ETFs. This will diversify your investment and bring you closer to achieving the stock market’s average return.

Investing – Real Estate

Investing in real estate means buying a physical asset like a house, multifamily, or commercial property. By owning just one rental property, you can generate multiple income streams such as rental revenue, appreciation and depreciation. The barrier to entry can be high for real estate investments as you generally need 20% down on a property. However, there are other ways to invest in real estate, such as private lending, syndications and joint ventures.

Investing – Syndications (Real Estate)

A syndication is formed when a group of investors invest in a project together.  This is a common way to purchase a multi family property – one partner will operate the property and raise money from investors for the down payment and capital requirements.  By investing in a syndication, you can own real estate for a lower cost than buying the property yourself.  If you want to be completely hands-off and collect a return, syndications can be an excellent real estate investment.

Investing – Private Lending

Private lending is when a person or business loans money to someone for a set rate of return (similar to a bank lending money). Private lending can earn you anywhere from an 8% annual return in the first position to a 15% annual return through unsecured promissory notes.  Be sure to consider your risk tolerance and make the decision that best suits your investment needs.

Alternative investments

Alternative investments are investments in cryptocurrency, collectibles, real estate investing, or start-up companies.  These alternative investments should make up a portion of your total investments, but you should balance each of these alternatives based on your risk tolerance. I’ve summarized the best crypto exchanges in Canada to help you start investing today.

Building your credit score

If you want to invest in real estate or own a home in general, you need to start building your credit. It would be best if you started building your credit score as high as possible by paying all of your debts on time and trying to lower your credit utilization to less than 30% of your total credit available. Click here if you want to learn more about how to build your credit score

Leveraging credit cards

Credit cards allow you to make purchases on credit conveniently. They can be instrumental if you pay them off on time in full and do not incur interest charges.  By getting a credit card and paying it off monthly, you are building your credit score. Additionally, many credit card companies offer low to no annual fees and come with big signing bonuses.

 Click here for the best cash back credit cards in Canada or here for the best cards for all scenarios

Click here for the best student credit cards in Canada

Click here for the best Mastercard Credit Cards in Canada

Minimizing Income Tax Liability

Regardless of how you earn your income, you will need to pay income tax to the Canada Revenue Agency. Active income is taxed at the highest tax bracket, while investment income & capital gains are generally taxed more favourably than active income. In addition, you can also leverage Tax Free Savings Accounts and Registered Retirement Savings Plans to reduce or defer your tax liability.

Income earned from an employer will automatically have income tax deducted from each pay cheque. When you earn additional income on the side, no one takes the tax liability off for you. I recommend setting aside the tax liability from additional funds outside of your primary income. If your marginal tax rate is 30%, I would keep 70% of additional income and set aside 30% for your tax liability.

Regardless, you will still have to file income tax returns annually. I have reviewed the best tax software in Canada to help make filing your taxes as painless as possible.