Milestones for Your Financial Journey

Introduction

Concrete financial milestones can serve as checkpoints on your path to financial stability. From paying off student loans to leaving a financial legacy for the next generation or a charity, each milestone represents a significant achievement along your financial journey. In this blog post, I will suggest twelve common financial milestones for Canadian households, each marking a significant point along the path toward securing your financial future.

 

 

1.    Paying Off Student Loans

For many Canadians, student loans represent a significant financial burden. A key milestone is paying off these loans, freeing up resources for other financial goals. By consistently paying down your student debt, you can improve your creditworthiness and achieve a greater degree of financial flexibility.

 

It should be noted that not all Canadians have had student loans. Aside from scholarships, bursaries, and generous parents, others may have entered into an apprenticeship in a skilled trade and been earning money right from the time they graduated from high school. Given the reported shortage of people in the trades, if enough young people in Canada see this as an attractive career option, paying off student loans may fade away as a milestone. Instead, the milestone might be completing an apprenticeship.

 

 

2. Maximizing RRSP Contributions

Contributing to a Registered Retirement Savings Plan (RRSP) is often one of the crucial steps toward building a secure retirement. Maximizing RRSP contributions allows you to take advantage of tax deductions and amplify the power of compounding returns over time because of the tax deferral on the income and growth of the assets while they are held in the account. Prioritizing RRSP savings can enhance your long-term financial security.

 

While it is quite a milestone if you reach the point when you can annually maximize your RRSP contribution room, there are situations when the RRSP is less than the ideal choice for investing for retirement. This is especially the case if you are in a lower income range while contributing to an RRSP. Eventually, the tax deductions and tax-advantaged compounding have to be paid back, because these tax advantages are only deferred until the accumulated assets begin to be withdrawn in retirement. It doesn’t matter whether the money you withdraw will come from contributions, interest income, dividends, or capital gains. When that money passes out of your RRSP, or more likely a Registered Retirement Income Fund (RRIF), it becomes fully taxable at your marginal tax rate. If that rate is higher than the tax rate you have been paying over the years while contributing, an RRSP may be less helpful than you might think. So, before you get excited about this milestone, consider the milestone immediately below.

 

 

3. Maximizing TFSA Contributions

The Tax-Free Savings Account (TFSA) is a flexible investment vehicle that offers tax-free growth on contributions. If you have the financial means to maximize TFSA contributions, you can accumulate wealth while maintaining flexibility. This flexibility is because of the tax-free nature of withdrawals from a TFSA. In addition, you don’t need to wait until retirement to withdraw from a TFSA. Technically, you don’t need to wait until retirement to withdraw from an RRSP either, but you are taxed on withdrawals and lose contribution room in your RRSP if you withdraw for reasons other than the Home Buyers’ Plan or the Lifelong Learning Plan.

 

If you only have room to contribute to one of the TFSA or the RRSP, your income can be a useful guide to which to prioritize. For example, in 2024, an Ontario resident earning taxable income in excess of $55,867 enters a combined Federal and Ontario marginal tax rate of 29.65%. At this point, the value of the RRSP tax deduction begins to make increasing sense. However, income below this level tends to favour the TFSA, and that is especially the case if taxable income is below $51,446, which is the level at which your marginal tax rate does not exceed 20.05%.

 

If you expect to retire with a low income, then the TFSA is definitely your preferred option since withdrawals from TFSAs have no impact on your eligibility to receive Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). This is an important point to consider as one of the strategies for low-income retiree households is to “meltdown” RRSPs before reaching age 65 to limit the clawback on GIS.

 

 

4. Achieving Enough Surplus Savings for Non-Registered Investments

Beyond registered accounts like RRSPs and TFSAs, having surplus savings to invest in non-registered accounts is a significant milestone. Non-registered investments offer flexibility and the potential for growth outside of tax-advantaged accounts. There is no limit to how much you can contribute nor is there an age at which you must cease making contributions. Generating enough surplus income to open a non-registered investment account reflects the potential to create significant long-term wealth.

 

 

5. Opening an RESP for a Child’s Education

With the rising cost of post-secondary education, opening a Registered Education Savings Plan (RESP) is often considered essential for parents. This milestone becomes particularly relevant with the birth of a first child. By contributing to an RESP, parents (and grandparents) can save for their child’s education tax-efficiently and take advantage of government grants like the Canada Education Savings Grant (CESG). If you are a low-income family your RESP may also qualify for the Canada Learning Bond (CLB). This can add up to $2,000 to the RESP per eligible child without requiring any contributions.

 

Within the RESP, there are some milestones to consider. First, the maximum that can be contributed to an RESP is $50,000 per eligible child. Second, the maximum CESG that a child can receive is $7,200. Since grants are paid into the account by the government at a rate of 20% (i.e., for each $100 contributed by parents, $20 is added by the government), a child will have maximized the grant once $36,000 has been contributed. This means that an additional $14,000 can be contributed to the RESP per child that can then grow tax-deferred until it is withdrawn.

 

 

6. Buying a First Home

Purchasing a first home is a major milestone that signifies financial stability. Perhaps more than signifying financial stability, it requires at least some degree of financial stability. There are formulas and rules that any would-be homeowner needs to pass to qualify for a mortgage. Is your credit report adequate? Do you have sufficient income to “service” your debt if you take on a mortgage? Can you pass the stress test?  By becoming homeowners, Canadians can build equity in what is likely to become their largest single asset.

 

It should be noted that not everyone can buy a home, nor is the building of equity through home ownership necessarily guaranteed. Homes can lose value. Mortgages can become unaffordable. In addition, it may not be economical to buy a home compared to renting. There are frictional costs associated with the buying and selling of a home and if you think your career may send you to different parts of the country, or even different countries around the world, it may not make sense to buy. Renting has its own issues, of course, including the potential for rental increases, limited control over changes to the property, eviction due to a sale or other reasons, and/or poor maintenance by the landlord. Ben Felix, Portfolio Manager and Head of Research at PWL Capital, has some helpful videos on YouTube that may help you with decision-making regarding the rent vs. buy debate.

 

7. Paying Off the Mortgage

Buying a home is a milestone in itself, but I think it could be said that paying off the mortgage you took out to buy that home, represents an even more meaningful financial milestone. It is the culmination of years of hard work, disciplined financial management, and indeed potentially significant financial sacrifice. Having done so, you gain significant financial freedom. Monthly payments of two, three, or even four thousand dollars are gone. On the other hand, paying off your mortgage means more of your capital is tied up in your home, capital that could potentially have been used to generate a higher return elsewhere. This last sentence may sound a little far-fetched given the increases in home prices in recent years in many major markets, and the high rates on mortgages relative to where they were just a few years ago, but historically, these have been important factors to consider, and may still be in certain communities.

 

On a personal note, I know that my wife and I felt a sense of relief that this particular financial responsibility was in our rearview mirror, so I’m biased in favour of a disciplined paydown strategy. I note as well that you cannot write off interest on the mortgage of a principal residence like you can on a property you rent out.

 

8. Starting a First Job

Entering the workforce and earning a steady income is a significant milestone for Canadians. Starting your first job may or may not set you on your career path but it is a stepping stone that provides valuable experience and skill development, not to mention income. Even if it is not your ideal job, especially for young adults entering the workforce, it can be beneficial in helping you clarify your abilities and where your innate strengths and interests lie.

 

9. Establishing an Emergency Fund*

With income from a new job or if you have not set one up before, one of the first things to prioritize is to build an emergency fund. While not as exciting as buying a new car or replacing the hand-me-down furniture you had been using while a student, an emergency fund is of tremendous value. You are setting aside money to cover unexpected expenses and financial setbacks. Establishing this financial safety net provides you with the wherewithal to manage an unanticipated expense or job loss. With that resource at your disposal, you can gain the peace of mind that someone “living paycheque to paycheque” will not experience.

 

How much should you have in your emergency fund? If you do not have anyone financially dependent on you, if you do not have a mortgage, and if you have a steady income, setting aside three months’ worth of spending is an adequate goal. If, however, you have people who depend on you financially, i.e., a spouse or children, if you have a mortgage, and/or your income is seasonal or otherwise variable due to, e.g., self-employment or commission income, then reserving six months of expenses is appropriate, and perhaps even more. This is not a milestone you will be able to achieve immediately, but I encourage anyone to set this milestone as a high priority.

 

*Other names you can choose are, e.g., “contingency fund” or “reserve fund.” The important thing is to have some money set aside that can smooth a potentially bumpy financial road.

 

10. Retiring Comfortably and Maintaining Financial Independence

Retirement as a stage of life is relatively new in human history, but as our lifespans have been extending over the last decades, retirement has assumed greater importance. Some people may be retired longer than they were employed if health and financial resources allow.  To some, retirement marks the culmination of a lifetime of work and saving. If you are among those Canadians planning to retire shortly, or perhaps already retired, this may be considered the ultimate milestone, the mark of success in your working career.

 

Nothing about this milestone suggests it needs to be achieved at a particular age. You may wish to retire early because there is something you want to do that cannot be achieved while continuing in your current career. Others may retire because they no longer have the energy to meet the physical and/or psychological demands of the job. Still others have been essentially forced into retirement because of a restructuring by their employer. Even if you want to work, it’s not always easy to find a new position when you are in your 50s or 60s. Although health may force you to retire early, retirement itself may have positive or negative effects on your health. Positively, health may improve from better habits around eating, exercise, and sleep; on the other hand, retirement can lead to deteriorating health due to reduced mental stimulation and social interaction. Whether wholly positive or negative, retirement is a significant milestone.

 

 

11. Paying for Adult Children’s Major Life Events

Economists and financial professionals often highlight the expense of raising children. When children reach adulthood, however, the expenses do not necessarily stop. Just as you may have experienced your own milestones when you got married or bought your first home, as parents you may find yourselves spending significant amounts to help pay for your children’s weddings or helping support their home purchase. Contributing financially to their milestones becomes a kind of milestone for you, too, and expresses your support for your children.

 

While parents have been helping their adult children since “forever,” it is not necessarily the case that this is a milestone that must be reached. Some parents do not have the financial wherewithal to meet all the desires of their children. For example, providing a down payment for a home purchase in Vancouver may simply be out of reach. Instead, there may be other ways that you can help your children make their financial way in the world. You may have already helped them by providing financial support so that they could complete their post-secondary education debt-free. Instead of a down payment, you could help your children contribute to a First Home Savings Account (FHSA) and/or a TFSA. While adult children often feel some social pressure to move out on their own, there is nothing wrong with supporting your children by having them live with you at home so that they can save more money. Indeed, that may be the expected pattern for many adult children, depending on their particular cultural heritage.

 

 

12. Estate Planning and Ensuring Financial Security for Future Generations

Estate planning is a critical milestone, the final and unavoidable milestone, one might say, that ensures the orderly distribution of your assets to future generations. This includes creating a will, granting power of attorney to trusted persons, and implementing certain tax-efficient strategies so that your assets will pass to your beneficiaries with a minimum of legal and monetary friction. While this milestone occurs at the end of life, generally assumed to be in the 80s or 90s or later, it is something that can and should be planned for many years earlier because, while death is certain, its timing is generally out of our control. A final consideration in estate planning is that choosing to ignore the task because it is uncomfortable to consider or you just never seemed to find the time to get around to it, is a poor choice. Do you really want your last milestone to compound the grief at your death with legal and tax complications and uncertainty about any inheritance? Do not let that be your legacy.

 

 

Concluding Thoughts

These twelve financial milestones represent pivotal moments in your financial journey. To varying degrees, each milestone requires deliberation, dedication, discipline, and careful planning. By setting clear goals and consistently working towards them, you can achieve greater financial contentment and build a more satisfying future for yourself and your family.

 

 

This is the 243rd blog post for Russ Writes, first published on 2024-04-15

 

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions