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Practical guide

2025-04-1114 minutes

tldr;

Here are the 10 steps to follow to create a solid financial plan.

  1. Create a budget
  2. Max out your group retirement plan
  3. Pay off high-interest debt
  4. Have a 3-month emergency fund
  5. (optional) Max out your FHSA
  6. Max out your TFSA/RRSP
  7. (optional) Increase your emergency fund to 6 months
  8. (optional) Pay off your mortgage
  9. Invest in a non-registered account
  10. Determine which ETFs to invest in

These 10 steps are, in reality, goals to achieve. It's not a rigid guide, just a good starting point.

learn more

Some of these steps have not been discussed in the other articles. I will take this opportunity to talk about them before moving on to the examples.

Max out your group retirement plan

If your employer contributes to your retirement plan, you absolutely must join it. It's simply extra money being offered to you; you shouldn't miss out on that.

Pay off high-interest debt

Before you start investing, you need to get rid of your high-interest debt. What we mean by high-interest debt is generally credit card or car loan debt. As a rule of thumb, we consider any debt from 6% interest to be a high-interest debt.

There are 3 strategies for repaying debt1; it's up to you to see what suits you best:

  1. Prioritize the debt with the highest interest rate
  2. Prioritize the smallest debt
  3. Consolidate your debts

Prioritize the debt with the highest interest rate

After paying the minimum on each debt, you repay the debt with the highest interest rate. This strategy is optimal for paying the least amount of interest.

Prioritize the smallest debt

After paying the minimum on each debt, you repay the smallest debt. This strategy helps create momentum and a desire to pay off your debts faster.

Consolidate your debts

Consolidating your debts involves taking out a loan to repay all your debts and then repaying that loan. This strategy can potentially reduce the interest you pay if the loan's interest rate is lower than the combined interest rate of your existing debts. Consolidating your debts also simplifies your payments since there is only one debt to repay.

The emergency fund

An emergency fund is a financial cushion that provides psychological security. It's money that should be easily accessible in case of an emergency. For this reason, we do not want to invest our emergency fund in high-risk investments. If the emergency fund money is invested, it should be in risk-free or almost risk-free investments.

Generally, it is recommended to have an emergency fund of 3 to 6 months of expenses. Basically, if you are in trouble and no longer have income, you should be able to live on your emergency fund for 3 to 6 months.

Pay off your mortgage

Deciding to pay off your mortgage faster is a personal choice. For some people, having this debt is a daily burden. In theory, it is more profitable to invest your money in the stock market than to pay off your mortgage faster. In practice, it's another story. Since it's a personal decision, I prefer to let you think about it yourself. In this guide, paying off your mortgage comes after maxing out all these accounts.

Personally, my spouse and I wanted to pay off the mortgage aggressively, in 10 years. After some calculations and discussions, we decided to pay off the mortgage in 16 years. A less aggressive goal, but one that allows us to maintain a healthy balance between our personal long-term investments and our peace of mind of having a mortgage paid off faster.

Invest in a non-registered account

When we reach this step, it means there is no contribution room left in any of the tax-advantaged accounts: FHSA, RRSP, and TFSA. Only ~4% of the active population maximizes their TFSA contributions2. It is difficult to find figures for the RRSP, but I would not be surprised if only 0.5% of the active population maximizes everything.

Automation

Once the plan is in place, I consider the best thing to do is to automate it. Personally, I use Wealthsimple, but no matter the platform, the principle remains the same.

Wealthsimple allows me to automate my paychecks so that everything happens without my intervention. This way, I don't need to think about it, and I very rarely need to make manual transactions. Currently, here's what happens automatically with each paycheck:

  1. My paycheck goes into my account: Cash - Expenses
  2. 50% is automatically transferred to a joint account: Cash - House
  3. 6% is automatically transferred to my RRSP and invested in VEQT
  4. 14% is automatically transferred to my TFSA and invested in VEQT

The rest is at my discretion. For example, right now, I'm working on increasing my emergency fund to 6 months. So, once in a while, I transfer some money to my Cash - Emergency account.

Practical cases

To illustrate the practical guide, let's lookt at two concrete examples. These two situations will be analyzed from an individual point of view using the 50/30/20 budget as a basic goal: 50% for needs, 30% for wants, 20% for savings. I will include some calculations to be a little more precise, but the key is to understand the principles.

First case: income of $32,000

A gross income of $32,000 per year is equivalent to a net income of approximately $24,0003. For the example, let's add a credit card debt of $2,500 at 20%. We will analyze this situation to see how to get out of it.

Total
Gross income 32,000
Net income 24,000
Debt 2,500
1. Create a budget

For the analysis, the 50/30/20 budget will be the goal to achieve:

Monthly Annual
Income
Gross ~2,666 32,000
Net 2,000 24,000
Budget
Needs 1,000 12,000
Wants 600 7,200
Savings 400 4,800

With a grocery bill of $300 per month5, according to the 50/30/20 budget, $700 remains for transportation and rent including insurance, internet, etc. This is completely unrealistic. From there, a first solution would be to have a roommate. But Even with a roommate, 4½ apartments at $1,400 are rare.

We understand that the budget will need to be adjusted to increase the needs portion. Since we want to prioritize savings, we have no choice but to reduce the wants portion. Fewer restaurants and outings. To simplify the thinking, let's combine the needs and wants portions into a single portion, living:

Monthly Annual
Income
Gross ~2,666 32,000
Net 2,000 24,000
Budget
Living 1,600 19,200
Savings 400 4,800

With a roommate, a budget of $1,600 per month should be enough to cover basic needs and still be able to enjoy a few outings per month. $400 per month remains for debts and savings.

Note

I am deliberately avoiding the super boring solution: increasing the income. Although this should be a medium/long-term goal, I prefer a pragmatic analysis.

2. Max out your group retirement plan

There is no group retirement plan in this practical case.

3. Pay off high-interest debt

With the budget in place, the next step is to attack the debt. It will take 7 months to repay this debt using the remaining $400 from the budget.

4. Have a 3-month emergency fund

After 7 months, the next focus is to create a 3-month emergency fund. The living portion of the budget represents $1,600. For the example, let's imagine that $1,300 per month is enough to cover basic needs. The emergency fund will therefore need to be $3,900. In about 10 months, it will be full.

5. (optional) Max out your FHSA

Buying a property is excluded from this practical case.

6. Max out your TFSA/RRSP

For our practical case, the available contribution rooms are:

  1. RRSP: $5,760
  2. TFSA: $7,000

Since the gross income is in the lowest tax bracket, the tax advantages of the RRSP are much less attractive. The planned monthly savings of $400 will go entirely into the TFSA.

Annually, $4,800 will be invested in the TFSA.

7. (optional) Increase your emergency fund to 6 months

For greater peace of mind, we will increase our existing emergency fund by $50 per month. To achieve this, we need to reduce our long-term TFSA investment to $350, so we go from $4,800 per year to $4,200.

8. (optional) Pay off your mortgage

Not applicable

9. Invest in a non-registered account

Not applicable

10. Determine which ETFs to invest in

The emergency fund will be invested in ZST, a (virtually) risk-free investment.

For our practical case, let's imagine a low-risk profile and a desire to save for retirement. The retirement savings will therefore be entirely invested in VBAL.

Summary

To complete this practical case, let's summarize the steps needed to achieve the goals with the $400 available each month.

  1. Repayment of the $2,500 debt
  2. Creation of an emergency fund (TFSA) of $3,900 invested in ZST
  3. Until the emergency fund reaches 6 months ($7,800):
    1. $50 added to the emergency fund, still in ZST
    2. $350 in long-term investments (TFSA) in VBAL
  4. Finally, $400 in long-term investments in VBAL

In 30 years, assuming a 3% return for ZST and a 5% return for VBAL, the TFSA in our practical case will be composed of approximately:

Investment Invested Capital Value in 30 years
Emergency fund ZST 8,100 18,500
Long term VBAL 135,000 291,500
Total 143,100 310,000

Second case: income of $74,000

A gross income of $74,000 per year is equivalent to a net income of approximately $50,0003. For the example, let's add a $13,500 loan at 7% over 5 years for a car bought for $25,000. The employer, in the private sector, contributes to a group retirement plan. Finally, our fictional person eventually wants to buy a property.

We will analyze this situation to have a solid financial plan.

Total
Gross income 74,000
Net income 50,000
Debt 13,500
1. Create a budget

For the analysis, the 50/30/20 budget will be the goal to achieve:

Monthly Annual
Income
Gross ~6,166 74,000
Net ~4,166 50,000
Budget
Needs 2,083 25,000
Wants 1,250 15,000
Savings 833 10,000

The reality is different. Monthly, using market averages, the needs category totals $2,550, which is $467 more per month. The expenses are:

  • $1,8004 for rent, all expenses included
  • $3505 for groceries
  • $450 for the car, including the loan ($276), gas, and insurance

Again, the 50/30/20 budget does not reflect reality. The budget needs to be adjusted to increase the needs portion. Since we want to prioritize savings, we have no choice but to reduce the wants portion. The reality of the situation is a 61/19/20 budget:

Monthly Annual
Income
Gross ~6,166 74,000
Net ~4,166 50,000
Budget
Needs 2,550 30,600
Wants 783 9,400
Savings 833 10,000

Note

For this practical case, I have deliberately ignored the roommate solution.

2. Max out your group retirement plan

The employer, in this situation, matches contributions up to a maximum of 4%. To take advantage of this, we will contribute 4%, or $2,960 per year.

3. Pay off high-interest debt

Knowing that the needs category of the budget already includes the monthly car loan payments, we can add the total savings to reach a monthly repayment of $1,100. At this rate, it would take 13 months for the car to be completely paid off.

Idea

It would also be possible to sell the vehicle and buy a more affordable car or use public transportation.

4. Have a 3-month emergency fund

We have calculated a needs budget of $2,550 per month. The 3-month emergency fund must be $7,650. Using the savings of $833, it will take 9 months to reach this goal.

For the example, we decide to prioritize a one-month emergency fund before accelerating debt repayment. The savings from the first 3 months will go to the emergency fund, the next 13 months to repay the debt, and finally, 6 more months will be needed to fill the emergency fund.

Note

For those who noticed, the emergency fund includes the monthly debt payments. It's a detail; there will be a little more money than necessary in the emergency fund.

5. (optional) Max out your FHSA

Given the desire to buy a property, investing in the FHSA is a priority. With a gross income of $74,000, the marginal tax rate is approximately 40%. Investing the maximum, or $8,000, implies a tax return of $3,200.

In this situation, the car debt is too large to be repaid quickly, and the total annual interest is approximately $870. We will therefore prioritize investing in the FHSA and inject the tax return of $3,200 into the emergency fund and debt repayment. The available annual savings will therefore be $5,200. The calculations:

Planned annual savings: $10,000

FHSA: $8,000
Tax return:
8,000 * 0.4
$3,200

Available savings after FHSA:
10,000 - FHSA + tax return
10,000 - 8,000 + 3,200
$5,200

To follow this plan, the first $2,550 will go to the one-month emergency fund, and the rest to repay the debt. At the end of the 2nd year, the car debt will be paid off, which will free up the monthly repayment of $267. At the end of the 3rd year, the available savings will be $8,400 (car_payments * 12 + 5200). $5,100 will be used to complete the 3-month emergency fund, and $3,300 will remain for investment.

6. Max out your TFSA/RRSP

For our practical case, let's imagine that 5 years have passed. The FHSA is full. The available contribution rooms are:

  1. RRSP: $13,000
  2. TFSA: $7,000

Given that the gross income is not in the lowest tax bracket, the tax advantages of the RRSP become obvious. We will therefore prioritize the RRSP and then invest the rest in the TFSA. In our example, we already contribute to the group retirement plan at a rate of 4%, and our employer also contributes 4% for a total of ~$5,900. An annual space of ~$7,100 remains for the RRSP, which we will invest ourselves. This investment of $7,100 will generate a tax return of ~$2,850, which we will invest in a TFSA. In summary:

Planned annual savings: $10,000

Personal RRSP: $7,100
Tax return:
7,100 * 0.4
~$2,850

Available savings for TFSA:
10,000 - RRSP + tax return
10,000 - 7,100 + 2,850
$5,750

Annually, $7,100 will be invested in a personal RRSP and $5,750 in a TFSA. Since we are unable to max out the TFSA, it seems obvious that the emergency fund should also be invested in a TFSA.

Note

Instead of managing a personal RRSP, you could decide to increase your contributions to the group retirement plan. Or, do a hybrid, decide to manage $5,000 yourself and the rest in the group retirement plan.

7. (optional) Increase your emergency fund to 6 months

Using the $5,750 planned for TFSA investments, it will take about 1.5 years to reach a 6-month emergency fund.

8. (optional) Pay off your mortgage

Not applicable

9. Invest in a non-registered account

Not applicable

10. Determine which ETFs to invest in

The FHSA money will be invested in ZST, a (virtually) risk-free investment.

The emergency fund will be invested in ZST, a (virtually) risk-free investment.

For our practical case, let's imagine a medium-risk profile and a desire to save for retirement. The retirement savings, TFSA and RRSP, will therefore be fully invested in VGRO.

Summary

In this practical case, there are 3 different financial periods. The first lasts 3 years; where contributions are made to an FHSA, the emergency fund, and the car debt. The second lasts 2 years; this is the period during which the absolute priority is the FHSA. Finally, the last period, life. It is important to understand that each period warrants its own consideration. Reality is certainly closer to having a plan for the year and revisiting it at the end of the year.

Let's summarize the steps of this plan:

  1. (Always) 4% of gross income (~$3,000) in the group RRSP
  2. Until the $13,500 loan is repaid
    1. FHSA: $8,000 in ZST
    2. With the tax return from the FHSA and the rest of the savings
      1. TFSA: One-month emergency fund, $2,550, in ZST
      2. Loan repayment
  3. Until the emergency fund reaches 3 months, $7,650
    1. FHSA: $8,000 in ZST
    2. With the tax return from the FHSA and the rest of the savings
      1. TFSA: Emergency fund in ZST
  4. Until the FHSA is maxed out
    1. FHSA: $8,000 in ZST
    2. With the tax return from the FHSA and the rest of the savings
      1. TFSA: Emergency fund in ZST
  5. Until the emergency fund reaches 6 months, $15,300
    1. RRSP: $7,100 in VGRO
    2. TFSA: $5,750 in ZST
  6. Finally, long-term investments
    1. RRSP: $7,100 in VGRO
    2. TFSA: $5,750 in VGRO

In 30 years, assuming a 3% return for ZST, 6% for VGRO, and 5% for the group RRSP, the accounts in our practical case will be composed of approximately:

Investment Invested Capital Value in 30 years
Emergency fund ZST 15,300 35,000
Long term (TFSA) VGRO 138,000 292,000
Long term (RRSP) VGRO 181,000 406,500
Long term (Group RRSP) ? 88,800 393,000
Total 423,100 1,126,500

  1. Debt repayment: ScotiaBank ↩

  2. TFSA Participation: Government of Canada ↩

  3. Average rent price in Montreal: Centris ↩

  4. Average grocery price: Dalhousie University ↩↩