The Fifth Step To Saving A Million Dollars

The Fifth Step To Saving A Million Dollars

The Fifth Step To Saving A Million Dollars

In the previous four steps I had covered a few basic topics ranging from pursuing a career with income potential to minimizing consumer debts to harnessing the money growth factors to invest long-term in the financial market. By following the first four steps, it’s sufficient for the average person to develop a good grasp of his/her own finance and save a healthy amount of money by the time he/she retires. Of course, if one wants to get further ahead than the average person, there is no other way but to go the extra mile to improve one’s investment knowledge and finance. The truth is: wealth takes time and effort to built by those who made the commitment to manage their finances and plan for the future. If you are committed to building your wealth, this is the step to expand and broaden your financial horizon. It’s time to take a closer look at real estate and leverage.


A Word Of Caution

Before I go into further details, I would like to provide a few words of caution (this is to protect you and me). Too often, when people hear of an investment idea and it was brilliantly presented by the presenter, they start to think that it’s logical, easy to execute and they dive in. Big mistake. My advice is to take everything with a grain of salt and take your time to digest the information. Start researching for similar information sources to verify the concept and ask yourself, “Does this new idea fit into my long-term financial plan? Do I fully understand the risks? Can I realistic implement this new idea? How will it affect my finances if it doesn’t work out as I thought it would?” There are a lot more questions that you should ask, but those are the basic questions to get you started. Once you’ve honestly answered those questions, you’re ready to proceed.

Home Ownership

Home Ownership

Based on the last census survey conducted by Statistics Canada in 2011 (it’s a little dated, but these survey costs money and the government only do it about once every five years. The 2016 census information is not fully released yet.), 69% of Canadian households, or 9.2 million out of 13.2 million, owned their home. Surprisingly, according to Business Insiders, our neighbor south of the border, also had a very similar homeownership percentage at 66.7%. To me, this number means that two out of three Canadian and Americans invest in real estate in the form of a primary residence. While some people do not view their principal home as a significant investment, but the truth is, it can be and you can use your principal residence as leverage for building wealth.

Leverage Basics

Leverage Basics

Based on the Canada Mortgage and Housing Corporation, the minimum down payment for a property is at least 5% of the value of the property if it’s below $500,000. If the value of the property is higher, you’ll have to have more than 5%. So let’s assume that you have a $20,000 down payment and you want to buy a property for $400,000. So your equity in the property is 5% (=$20,000/$400,000) and mortgage loan will be 95% (=$380,000/$400,000). Your leverage ratio (loan/equity) is 19 times (=$380,000/$20,000). If you have a down payment of 20% ($80,000), your leverage ratio is 4 times (=$320,000/$80,000). As you can see, the lower your equity in the property the higher the leverage ratio. Hence, anytime when you have less than 20% of the equity in your property, you are considered to be in the high leverage ratio group and are required to buy mortgage insurance. The higher your leverage ratio is, the more risk you are taking, so use leverage carefully and with prudence.

Leveraging Your Home Equity

Leveraging Your Home Equity To Invest

Assuming that 5 years ago, you put down the 20% down payment on a house that cost $400,000 and you took out a $320,000 mortgage. As of now, let’s say that the value of your house had increased by 40% to $560,000 (this number is definitely not outrageous if it’s located around the big cities in Canada) and you have paid down your mortgage to about $275,000. Hence, your leverage ratio goes from 4 times then to only 0.965 (=$275,000/$285,000) times now. What you can do is bump up that leverage ratio back to 4 (=$448,000/$112,000) times by refinancing your mortgage to $448,000 (80% of the value of $560,000). This means you’ll be borrowing an extra $173,000 (=$448,000 – $275,000). At this point, you still own your house, you have an extra $173,000 to invest and the interest that you paid for the $173,000 is tax deductible.

Real Estate Investments

Real Estate Investments

With this extra $173,000, what should you do with it? The first option is to invest the money in the real estate market by purchasing an income property. Based on my how to buy an investment property: step-by-step guide, the rule of thumb is that your investment value should be no less than 25% of the investment property. By reversing the math, your investment property should not cost you more than $692,000 (=$173,000/0.25). If you haven’t noticed already, your interest in the 25% in equity is tax deductible and the interest on the 75% mortgage loan will also be tax deductible too. Hence, a 100% on the interest of this investment property is tax deductible. Is this awesome or what?

Financial Market Investments

Financial Market Investments

If you already own a principal residence, do not have a large exposure in the stock market and you want to diversify your assets, the second option is to take the $173,000 to invest in the financial market. If you are not comfortable to pick your own stocks, then putting them into index ETF as mentioned in step four of this series will be sufficient. However, if cash flow is important to you, then you can consider building a dividend portfolio similar to the ones that I modeled in my “how I get paid when borrowing money from the bank” post. Depending on your personal income tax rate, the interest rate on the loan and the combined dividend rate of your dividend stock portfolio, your chances of achieving positive cash flow for this investment is quite good given today’s low-interest rates environment.

Diversify Your Assets

Diversify Your Assets

The third option is to do a combination of both. With this strategy, you are actually increasing your income sources in three ways: dividend income, capital gain income from stocks when you sell, and rental income for your rental property. Based on Thomas J. Stanley’s best-selling book, “The Millionaire Next Door” millionaires have on average seven sources of income. Hence, if you add these three sources to your main employment income, you’ll have four – more than halfway there, my aspiring millionaire friend.

Invest In A Business

Invest In A Business

The fourth option is to invest in a business. This can take many forms and the risks are different for each option. For example, you can invest in a new business or buy shares of an existing business. This will give you an extra income source. You can also buy a franchise of a successful business chain like McDonald’s or Tim Hortons. You can be the main operator or hire a manager to operate it for you. Though this is a feasible solution, I don’t have any information on how to guide you in this en devour as I don’t operate a business (in the traditional sense). Hence, it’s not suitable for me to recommend this option to build your wealth. So this option is out.


My Two Cents

To build a million dollars in savings is not easy, but it’s not that hard either. If you are willing to take the initial step by saving diligently and invest wisely, then slowly expand your financial knowledge, you’ll be setting yourself up for long-term success. Successful wealth builders learn new and innovative ways to add wealth-building assets to their investment portfolio to increase their income sources. You can do it too if you commit yourself, take the time and effort to plan and invest with a long-term horizon.


In The Final Step To Saving A Million Dollars, I’ll provide you with insights into how I saved my million dollars.


Leo T. Ly, Canadian Personal Finance Blogger/Enthusiast and a Realtor Living in the Markam, Ontario, CanadaAbout Leo
I am a Canadian personal finance blogger/enthusiast and a Realtor living in Markham, Ontario, Canada. I built a net worth of a million dollars over a ten year period. I did it by being a disciplined saver, taking advantage of income tax rules and borrowing money to invest rather than for consumption. I am often excited to take advantage of free money from employers and governments in addition to building more passive income sources. After accumulating my first million dollars, I am now embarking on a second journey towards achieving financial independence. On this journey, I will strive to increase my net worth to two million dollars and retire by the age of 48 - Freedom 48. Come along and follow my journey on Facebook, Twitter, Pinterest or Google Plus.

There are 64 opinions expressed on this post.

    1. @Mhow, it’s great that you are starting to think more about your own finances. I would definitely suggest that you follow through with this thought and become a disciplined saver. In a couple of years, you’ll be surprise to see that your money will grow faster when you’re saving more money.

  1. You have given me a lot to think about investments. Admittedly, this is something always thought I could get by without. But I’m definitely bookmarking this post for reference as I do more than just saving cash.

    1. @Joan, saving money is one thing, but if you are not making the right decisions and putting your money in a vehicle so that it can grow overtime, you won’t be benefiting from the awesome compounding. If you are afraid to invest or lack the knowledge, you can always consult people who are more knowledgeable. Don’t be afraid to ask questions.

    1. @JM, being an employee, there is a limit to how much money you can earn in a year. By the odd chance, if you are lucky or skillful enough to work for a successful startup early, then you’ll probably have more chances to share the company’s success. However, most of us are not that lucky, so we must learn how to make more money with what we earn through employment.

  2. This is a wonderful article. Thanks for sharing. I totally agree with your view saving diligently and invest wisely, then slowly expand your financial knowledge. Its very true and foremost step for aspiring millionaire. Hope to see lot more in future articles.

    1. @Stacey, by saving diligently, you have already won half of the battle. The other half of the battle to invest wisely into vehicles that you know and understand the risk. It takes some time to learn, but over time, you’ll get better at it once you gained more experience and knowledge.

    1. @Jane, everyone gotta start somewhere, but the important thing is to take the first step. Welcome to the million dollar journey and I hope to hear more of your story in the future if you are willing to share with us.

  3. There is a lot of good advice here. I think it is definitely important to diversify and invest and have as many streams of income as you can.

    1. @Julie, based on what I read, the more streams of income that you have, the less reliant that you are on your employment income. Once you achieve about 5 or 6 streams, you’ll be very close to reaching financial freedom and will no longer have to worry about your employment income.

  4. I’ll definitely remember these tips for when I finally get enough capital to get the ball rolling! Thanks for shining a light on investment and money management — something that really escapes me sometimes.

    1. @Angel, time is your greatest friend, not the amount of capital. Even if you have just $25 a month, you can still start investing. The sooner you start, the faster you’ll develop your saving habits and mindset. Not to mention, the more time your money has to grow.

    1. @BLee, I am flattered that this post is good enough to used a reference and I would encourage to take action and start to invest. Take baby steps first and then take bigger strides when you have gained more knowledge and experience.

    1. @Ashley, the city that I live in, the real estate market is definitely crazy as a million dollar can’t buy you much. People are loading themselves with a mountain of debt just to be able to afford a decent home.

  5. As always Leo, great post. Cash out refinance to invest in other investments is a very smart thing to do – it is something suggested by many real estate books: first put 20% down on your property, then when it appreciates, you cash out back to 20% and buy another property!

    I hope to be a millionaire in about 6-8 years. I’m trying to figure out which investments will take me there, but for now, I’m not too worried as I’m only 24.
    Erik @ The Mastermind Within recently posted… Who Says Houses Aren’t Good Investments – Erik’s Story 2My Profile

    1. @Erik, at the age of 24, I think that you are way ahead of me when I was at your age. By reading your blog, I know that you are making great progress towards building a strong financial future. I have no doubt that becoming a millionaire in 6-8 years is definitely achievable for you. I would definitely be rooting for you and will follow your journey.

    1. @Sara, the easiest way to invest in property and to motivate you to get started is to plan for the purchase of your principle home. I am a proud homeowner and I cannot tell you how motivating it is until you have experience it yourself. It’s very gratifying to know that you have a place to call your own home and you’re the king/queen of your castle. Also talk to friends or family members that own a home, they should be able to give you some great insights about owning a home.

    1. @Natalie, I am happy to hear that you find this post easy to understand. I know that sometimes money topic are pretty dry, especially topics about debt. That’s why I like to write about investments as it’s more motivating. Hopefully, I am also motivating you to save too.

    1. @Emily, It’s okay to be cautious when you are investing and ask lots of questions. For me, when I don’t have enough capital to fund an investment, I find a partner that I can trust and have the same investment philosophy as myself to invest with me. This option had worked quite well for me when I partner with my friend to purchase a rental property. Maybe you can try to find a partner to share the investment, the workload and the wealth when you make money :).

    1. @Aqalili, I am delighted to hear that this post resonate with you and it had motivated you to start investing. Best of luck on your journey to saving a million dollar. Drop by some time and your story.

    1. @Miera, thank you for sharing my post and as I have repeatedly tell my readers that it’s never to soon or too little to invest. The important thing is to get started and start early.

    1. @Klea, thank you for the complement. Although I may sound like an advisor, but I don’t think that I am qualified to provide financial advice. I’d like to think that I am just showing my readers the doors and opportunities behind those doors. It’s up to the readers to decide which doors they want to go through.

    1. @Zayani, I think that learning how to manage your money and having basic financial knowledge should be universal. To often, I see that people are spending their money today and trying to save tomorrow. However, great savers and money managers save today and spend their money tomorrow.

  6. I seriously can’t wait to read how you made all you first million!!!

    I definitely think that if a presentation is too slick that there is something wrong. I actually like it when someone explains why you shouldn’t invest in the company. It puts me at ease knowing that they aren’t trying to pull the wool over my eyes 🙂
    Mustard Seed Money recently posted… Top Reasons To Have A WillMy Profile

    1. @MSM, in my opinion, the best advisors out there are not ones that give you the tips on what to buy – they advise you on what not to buy. They practice risk management, they protect your money and your interest. If you ever encounter those hotshots who guarantee that you’ll make money if you buy into a certain funds, run.

  7. It’s great that you’re taking something as complicated as major financing and simplifying it to make it less intimidating without talking down to anyone. You have a good balance of that, which I appreciated, as I’m perfectly intelligent but know very little about investment. I’m learning slowly, and every so slowly building my streams of income (I loved that you mentioned that!), including a still-very-small dividend portfolio.

    It’s not a lot yet, but knowing that I’m building a strong foundation feels good.
    Author Brandi Kennedy recently posted… Top Ten Tuesday: Ten Surefire Ways To Conquer StressMy Profile

    1. @Brandi, you’ve hit the nail on the head. The key is to start investing early, continuously learn as you go and build a strong foundation. When you see the results of your hard work, you’ll develop more motivation to save and grow your money over time. It’s a great feeling when you see your money grow bit by bit.

  8. I like the idea of cash out financing to invest. As you said at the beginning of your post, it’s important to run the numbers for yourself to make sure it makes sense for you. If you have a mortgage at 3.5% and can build a dividend income portfolio earning around 3.5%, you’re essentially paying for the investment. Taxes will play a factor but you’ll receive tax advantaged rates on the dividend income and earn a deduction on the mortgage interest, so it could come out pretty close.

    Some good food for thought here. Thanks for sharing!
    Go Finance Yourself! recently posted… Tax Time: Do You Have a Business or an Expensive Hobby?My Profile

    1. @GFY, with interested being so low for the last eight years, it creates a lot of investment opportunities for individuals that are willing to learn and borrow to invest rather than consumption. I must admit that this strategy had served myself very well and I have capitalism to thank.

  9. We’re in Aus, so I am sure some of the laws are different, but with similar principals. Its always good to diversify and know what you’re getting into in my opinion.

    1. @Laura, investment ideas and money saving concepts are pretty much universal. The two things that you mentioned, diversification and investing in what you know can be applied for any investor anywhere in the world. Of course, depending on your country’s tax law, different source of gain give you different benefits. So it’s also prudent to have working knowledge of your country’s tax laws.

    1. @Michenn, I am glad that this post is helpful to you. I think that your wallet will be thanking you too as you are taking the initiative to take the time and nurture it. In time, I think you will be able to grow your wallet healthily.

  10. Through this blog, I am learning more and more about investing. Such a great help for someone like me who hates numbers 🙂

    1. @Everest, as with any populous city with little development land, housing prices will astronomical for the average citizen to afford. So, if you save diligently and invest smartly, you’ll be the one to benefit from the crazy price increases.

  11. Great post, I am a huge fan of saving money. We have been putting into investments since we graduated from highschool. Since we move around a lot we can’t rely on the government giving us a very good pension. We must take care of ourselves when we are older. Plus they keep moving the goal post!

    1. @WanderLustVegans, I too don’t rely on government pensions as I have no control over how they handle or investment my money. Hence I prefer to do my own investment and keep the money in my account so I have control over it. It’s great that you start investing at a young age. Keep going you’ll be on your way to saving a million real soon.

  12. thanks for making such complicated topic to look simpler and easier to understand 🙂 I will definetely try to save more money (after I repay my study loanSSSSS) and earn a million dollars HAHAHA

    1. @Joysofyz, you’re on the right track for sure as your are taking the initiative to pay down your debt. It’s the same as saving from an net worth point of view. When your pay of your debt, your net worth goes up, which is the same when you increase your saving.

  13. I saved this to one of Pinterest boards to read again later as it’s not something you read and be done with. The information is great!! I hope to one day be financially sound. It is my ultimate goal. Reading posts like this keep me motivated and help give me resources I would have otherwise overlooked. Thank you!

    1. @Jazz, I feel flattered that this post is good enough to be your your Pin board. Hopefully, you’ll be able to start saving soon and grow your savings. Don’t forget to drop by after a while to share your story :).

  14. Yes, we need to save / or choose the right investment. Malaysia money keep shrinking nowadays. Without saving, I can imagine how my future will be.

  15. Great post and kinda hit a soft spot. I’m a huge fan of dave ramsey – being debt free and paying off the house. We have alot of equity in our house but since I’ve created my site I have been looking more and more into passive income. After saying no a couple years ago to some family investment which they have been doing very good at. They offered it to us again after seeing our site. Basically a guaranteed 12% roi for 10 yrs and then option to renew. We are currently in the process of figuring out the numbers as we have to refinance mortgage a yr earlier and pay the fees. BUT with our current rate at 2.8 seems like a no brainer. All signs seem to point to do it with this post being another =)
    Passivecanadianincome recently posted… Life InsuranceMy Profile

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