Start Early: Smart Money Moves for the Next Generation of Investors

Our ‘NexGen’ event was hosted by our next generation of Nexus Wealth Managers and Planners, all of whom did an excellent job answering questions and engaging the audience. This blog highlights some of the topics we discussed and offers suggested reading for those who want a deeper dive!

At Nexus, we believe that it’s never too early to invest and plan. Why? Because early action can lead to long-term financial flexibility. As you begin your financial journey, here are three essential principles to commit to memory:

1. Spend less than you earn: Living within your means is key to financial stability.
2. Invest early: Make time your ally to capitalize on the power of compounding.
3. Pay attention to income tax: Knowing how tax impacts you can help you keep more of what you earn.

Many people delay investing because they feel they don’t have enough to start. The reality is, you don’t need a large sum to begin – consistency matters far more than size. Even small, regular contributions into a savings or investment account can grow substantially over time. The key is to build the habit now so that when your income increases, you’re already in the rhythm of saving and investing.

Budgeting Basics: The 50/30/20 Rule

Living within your means = spending less than your take-home pay, according to Wealthing Like Rabbits. The path to success here is creating a realistic budget and sticking to it. Budgeting helps you control where you spend your money. The 50/30/20 rule is a simple and effective budgeting guideline that helps manage where to allocate your income:

• 50%: The Essentials. This portion of your income goes towards essential or fixed expenses; things like rent or mortgage payments, transportation, groceries, and utilities (electricity, internet, heating).
• 30%: The Non-Essentials. Spend this amount on dining out, travel or entertainment.
• 20%: Savings. Start with your emergency fund and then invest in accounts like TFSAs, FHSAs, or RRSPs.

Tip: Automate savings and “pay yourself first”, suggests The Wealthy Barber, so you don’t forget or overspend in other areas.

Warning: Credit cards can be your enemy, with their ultra-high interest rates (20% on average). Collect travel points by using a credit card for purchases but pay off the full amount each month.

One of the most common budgeting mistakes is underestimating irregular expenses. Annual costs like insurance premiums, holiday gifts, or car maintenance can catch you off guard if they aren’t part of your budget plan. A smart approach is to set aside a small amount each month into a separate “future expenses” fund so these costs don’t derail your savings goals when they arrive.

The Power of Time and Compounding

Start investing early – even small amounts – as this can yield significant returns over time thanks to the effect of compounding. If you save $500 per month at age 25 and earn 7% per year you will have about $1,312,000 by the time you are 65. Delay savings until age 35 and you will only have $610,000 in savings. That’s a meaningful gap! Start early and stick to it.

You may be thinking, “Well, that’s easy for you to say!” Yes, investing can feel overwhelming. So, here are some first steps to get started:

1. Setting your goals for your savings: What are you investing for and when will you need the money?
2. Choose the right investment account: Tax-Free Savings Account (TFSA), First Homebuyer’s Savings Account (FHSA), Registered Retirement Savings Plan (RRSP), or a non-registered savings account.
3. Pick your investments: The investments should align with your goals and risk tolerance. Consider a mix of stocks, bonds and cash.

Compounding works best when you give it decades to operate, but it also benefits from minimizing unnecessary withdrawals. Dipping into your investments for short-term wants can drastically reduce long-term gains, as you’re not just losing the money withdrawn, but also all the potential growth it would have generated. Protect your investment accounts by treating them as untouchable until you’ve reached your planned goal.

Don’t Forget Tax Strategy

Income tax will be your biggest expense over the course of your lifetime. That’s why it’s important to use tax deductions and credits wisely. To do this effectively, you need to understand what tax bracket you’re in now, and what tax bracket you’re likely to be in in the future. Canada has a graduated tax system, which means the more you earn, the more you pay in tax. The highest tax bracket in Ontario is 53.53% and kicks in at about $250,000 in gross income. Taking advantage of certain tax-preferred accounts will help your savings grow faster; when your investments grow tax-free or tax-deferred, you keep more of your returns working for you. Understanding how each of the below accounts works and what they are for is important:

• TFSAs let investments grow and be withdrawn tax-free, but contributions are not tax deductible.
• RRSPs are used for retirement savings; contributions are tax-deductible, and growth is tax-deferred until withdrawal.
• FHSAs help you save for your first home; investments grow tax-free, and contributions are tax deductible.

Tip: Delay claiming the deduction for RRSPs and FHSAs in your low-income earning years and save the tax deduction for when you’re in a higher income tax bracket. Many people don’t realize you can do this, because most tax software automatically applies the deduction once you enter your contribution amounts. On the tax form where RRSP contributions are reported, you can simply enter $0 as the deduction amount to claim (allowing you to carry it forward to a future year).

A good tax strategy isn’t something you revisit only at year-end – it’s a year-round process. By reviewing your contributions, deductions, and income regularly, you can adjust your plan before it’s too late to benefit. Small moves, like timing capital gains or charitable donations strategically, can result in significant tax savings over the long run.

Whether you’re just starting out or looking to sharpen your strategy, now is a good time to take control of your financial future – it’s never too early. Connect with your Nexus Wealth Manager or check out one of these recommended books to keep learning!

Recommended Reading

The Wealthy Barber by David Chilton

The Psychology of Money by Morgan Housel

The Little Book That Beats the Market by Joel Greenblatt

Wealthing Like Rabbits by Robert Brown