In 2009 when the Canadian federal government introduced the Tax Free Savings Account there was very little fanfare simply because the allowed contribution limit was a paltry $5000. Fast forward to 2016 and the total contribution room has now grown to $46, 500. Now I’m not sure what country you live in, but $46, 500 is not a paltry sum. That little puppy’s got some bark now!
You’d have to think that by now that Canadians would be taking advantage of the easiest legal tax loophole given to them to make money without paying taxes. Well you know what???? Canadians are crazy! The majority of Canadians don’t even know what a TFSA is and the ones that do are using it like a high interest savings account. That’s completely absurd and if anything I’d hate to fall short of calling Canadians morons. Maybe they’ve been watching too much Donald Trump lately and taken his comments to heart.
Long Term Growth
Despite the naming of the TFSA, it is not a savings account. To use the TFSA correctly, young professionals and workers alike should be using the TFSA as a long term investment account. When I write “long term” I don’t mean until the end of the month. A long term investment plan is about putting your money away for 10 or more years and letting it grow. The power that comes from investing is the compounding effect that one can get through years of patience.
I would admit that investing is riskier than putting your money into a GIC, but the fact is without risk there is no reward. Taking a long term view on your investments ultimately reduces the risk. It’s worth repeating over and over again. Over a 10 year period you will never find a time frame where a balanced portfolio will give you a negative return. Go ahead I challenge you.
You’re Full of …
You’re probably reading this and wondering why I can be so brash or maybe I’m a douchebag and you should stop reading this right now. It’s simple. I’ve tried it and I’ve succeeded at it. Despite the notion that people think I’m crazy, or that I am demented for letting the Wall Street bullies play me like a fool, I’ve stuck with a tried and tested, balanced investment portfolio in my TFSA.
My portfolio’s got it all. Cheap index ETFs, high yielding fixed income producing assets and whatnot. This is stuff the bank doesn’t want to tell you about. It’s the things your mom tells you is more dangerous than a drunk driver. And the doomers will say that everything I bought today will go to zero before the year is up.
So I pit myself against the normal Joe in Canada and where did I end up? Unlike most TFSA holders who are making a paltry 1% on their high interest savings account I’ve been averaging a hefty 9.2% since its inception. You read that right! Over the last 7 years of investing my portfolio has risen to just over $67, 000. I didn’t gamble, I didn’t pick lucky stocks. I’m here to buy, hold and re-balance. Had I gone the super safe route with a fancy high interest savings account I’d be rolling in the tune of $48, 000. Yep that’s a minus $19,000 difference.
The fact that my portfolio continues to dish out dividends and capital gains along the way is an added bonus. Even with a conservative yield of 6%, at my current valuations, I’d be getting a cool $4,000 a year. Tax free! Since this is all tax free, that’s the equivalent of around $5,700 in pretax dollars. If you’re thinking to yourself, “man that’s like a tenth of my salary”. You’re absolutely right. The money that you can generate from saving your money and investing is powerful. Even by not doing anything, my TFSA is generating the income to a tenth of the average Canadian salary.
Your Life Sucks
Everyone says it’s impossible to top up a TFSA, but I say people should stop throwing money into their RRSPs just to take a refund so they can buy more gear. You don’t need a new iPhone Plus every year. That’s a quarter of the way. That $6 Starbucks specialty coffee every day? Yeah that’s another quarter of the way there. How about that 6GB cell phone plan you pay $100 a month for? Yeah, chalk that up to another extra $500. Don’t even get me started on buying luxury cars, purses, shoes…
If you want to make it happen, you can make it happen. It doesn’t mean you have to live miserly, but the fact is, once you get the ball rolling you will get the last laugh. In less than 7 years I’m fully capable of generating enough income to pay off a few months rent and it only gets better from here. That’s freeing up capital that can be put elsewhere: Trips, dinners, outings and luxuries without having to live and worry about whether my next paycheck will pay off my credit card. If you get caught up in consumerism, it’s only your financial independence to lose.
It’s amazing some of the things that you can do that that doesn’t cost an arm and a leg, but will still keep you happy. It’s also possible to balance your spending versus your savings so that you don’t live like a hermit. The fact remains you have to want to invest, not just save.
You want to know what’s even better about the TFSA? The extra contribution room you get at the beginning of the year. Unlike RRSPs that are restricted to how much you make, everyone gets their fair share in the TFSA. The fact that I’m adding money to my TFSA is even better. This way I can rebalance my TFSA on a yearly basis to match my goals without having to sell anything. So rather than trying to time the market, or figure out what to sell, I just keep adding money when I get the chance. The key thing you have to remember is that you still need to re-balance your portfolio to keep it working efficiently.
I feel like if financial independence was a video game, this would be the key to success. It’s not about hoarding cash. It’s about investing right. The unfortunate thing is that probably 90% of Canadians don’t know this. They’re doing the herd mentality thing. We’ve all been brainwashed to think like the 99% rather than think like the 1%. Seriously am I living in the Matrix or is everyone else?