Financial Literacy

Many people want to accumulate wealth throughout their lives. Some succeed, some fail. Luck plays a role, but many factors are within your control. The financial education you pursue will help you avoid mistakes and achieve an adequate investment return for the risk you can and want to take.

Everyone starts somewhere. Until you have enough positive cash flow to accumulate assets, your priority should be growing your income and/or reducing your expenses. Most people increase their income by getting a better-paying job or starting a side hustle. Most reduce their expenses by controlling discretionary spending and managing debt responsibly.

As your cash flow allows you to set money aside, financial planning becomes increasingly important to ensure you reach your goals. There's a point where losses from inflation and missed investment opportunities exceed any new savings you add, creating an illusion of progress while your wealth stagnates in real terms.

As you approach this stage, I highly recommend you educate yourself financially and make a plan. Is it retirement? A trip a couple of years from now? Your kids' education? An emergency fund? Defining your goal lets you optimize your investments and reach it faster, with less effort and more certainty.

Some resources I've found extremely valuable, in order of how easy they are to digest for a beginner are:

Alternatively, most banks offer financial advisors who can help you. However, ensure their incentives align with yours; otherwise, they may recommend a higher-cost version of simpler options like an  Asset Allocation Fund , a  Target Date Fund , or a fixed-income security like a  Money Market Fund .

One factor many overlook is the impact of taxes on your returns. A small difference in annual taxes compounds significantly over decades. Being conscious of the tax efficiency of your investments, including which accounts to use and what types of investments fit where, can add up to substantial gains. This is especially true in low-tax-bracket accounts or jurisdictions with favorable treatment for long-term investments.

Below I try to put some numbers to the different investment avenues that you may participate in. Their time horizons, risks and returns.

If you leave your money in a checking account, inflation erodes your purchasing power. In Canada, the Consumer Price Index rose from 125.8 to 160.6 over 10 years, a 27.6% loss. While future inflation may vary, central banks aim to maintain 2-3% annually, meaning you'll steadily lose purchasing power. Keep only the cash you'll spend within a month in your checking account.

A mediocre savings account, one paying significantly below the risk-free rate, costs you through inflation plus the gap between what you earn and what you could earn. In Canada, the risk-free return is approximated by the  Canadian Overnight Repo Rate . Over the last three years alone, using a mediocre account instead costs around 9.5% (before accounting for inflation, costs, and taxes). Use a savings account only for money you'll need within a couple of months. For better returns closer to the risk-free rate, consider a  Money Market Fund , though it differs slightly from a traditional savings account.

With a longer time horizon or higher risk tolerance, a diversified fund investing in stocks and bonds can compound significantly. A 3% annualized return after inflation, costs, and taxes is realistic. Eventually, you can withdraw returns without depleting the principal, which is how pension funds and university endowments work. In Canada, an  Asset Allocation Fund  offers a low-cost, straightforward approach.

I've outlined some of your options above. The best advice I can offer is to treat your finances with the same care as other important areas of your life. Define your objectives and eliminate opportunity costs accordingly. Do this if you want to accumulate wealth rather than watch it erode.