Hear me now! Your TFSA should be for investing. Don’t use it as a savings account for your emergency fund or as a sinking fun for stuff.
In 2024, the contribution room for the TFSA will go up to $7,000. Please don’t tell me that you can’t afford to save $7,000. What can you afford to save? Whatever that amount is, that’s the amount I want you to contribute. Then I want you to squeeze your budget a wee bit more and add in a little extra. The more that’s invested, the happier you’ll be.
Let’s say you can afford to save $1,000 per year. That’s a little less than $20 per week. If you invest that $1,000 each year in your saving account, you might earn 3% each year on your money. After 30 years, you’ll have saved $30,000. At a return of 3% per year, this nifty little Future Value calculator says that you’ll have $49,002.68 in the bank. In other words, you’ll have gained $19,002.68 over 3 decades. This is a bad return on investment.
You could do way better.
If you invest that same $1,000 each year into the stock market and earn an average return of 8% over that time frame, you’ll have $122,345.87. Over the same 30 years, you’ll gain $92,2345.87 – more than 3 times what you invested.
Do you see why you should use your TFSA to hold the investments that are going to give you a bigger return over a long period of time? You’ll have way more money in your kitty at the end of your working life and that money will not be taxed once you start withdrawing it to fund your retirement.
Play around with the values in the calculator. If you can squirrel away $2000 every year – or $40/wk – so much the better. Don’t worry that you can only invest smaller amounts right now. Over time, you’ll be able to invest more. Also, your investments will be generating dividends and capital gains. Re-invest those and think of them as contributions to your future. Compounding is slow at first but it starts to get very sexy and very interesting once a few years have passed.
Do not take money out of your TFSA unless it is the direst of emergencies. You should have a separate emergency fund. Keep that money in the bank. You’re not trying to invest your emergency fund. It has to be there when you need it so accept the 3% return that your bank is offering you. The money that’s in your TFSA should be invested in a broadly-diversified, equity-based exchange traded fund. Or you can invest in a broadly-diversified, equity based index fund. These types of ETFs and index funds invest your money in the stock market.
Notice how I said that your investments in the stock market will likely earn an average of 8% over a 3-decade time span? It’s an average because the stock market is volatile. Some years, the stock market will be down but other years it will be up. However, over 3 decades, the stock market will definitely be higher than it is today.
So invest in the stock market and leave it alone. Set up an automatic transfer so that you’re investing from every paycheque. Once you’ve done that, you go about your merry way and let time in the market work its magic on your money.