TFSA Tips for Young Investors
Because the TFSA is available to any Canadian over 18, it makes sense for young people to open a TFSA as soon as they are allowed.
The key is to start early. Due to the power of compounding interest, the earlier you start the more money you’ll have in the long run.
Go to the bank (take your parents if you like) and set up a TFSA with a monthly contribution plan (you can start as low as $25 a month). Or, if you have some internet research skills or on the advice of your parents, set up a self-directed TFSA with that same per-month contribution schedule. The key is to get in the habit of contributing on a regular basis so you maximize your investing years.
Get your parents in on the action
One of the often-overlooked benefits is the fact that you are allowed to give money to anybody to put in their TFSA. So if you are a parent who’s already maxed-out your own personal TFSA (and your spouse’s), but you have eligible children, there’s nothing to stop you from giving money to put in their accounts! Otherwise their TFSAs could sit empty for years, you may as well use it!
Technically the money inside those TFSAs is your childrens’, but if you have a family agreement whereby you share the accumulated wealth, this is a way for you to invest even more tax-free money beyond your own TFSA!
A common problem is getting used to the idea that a TFSA is not the same as a savings account with 1-2% interest per year. At that point you aren’t using the TFSA as it was meant to, and you really no better off after you account for inflation. You need to get more aggressive and use your early start to boost your savings!
Because you have the power of youth, you can afford to think long-term which means ignoring “safe” fixed income funds. Go for growth funds and ETFs, and maybe throw in a couple of stocks that pay good dividends. You’re young, so if your investments hit a bump in the road you are far-better placed to ride it out since you have years of future investing room to work with.
One of the common issues amongst young people is delaying gratification in an age of instant everything. Unfortunately, a TFSA is the exact epitome of delayed gratification. You rarely see huge benefits in the short term. So setting up a TFSA, knowing that you won’t really see a benefit for many years down the road, can be a big turnoff.
Many people are also living way beyond their means: incurring lots of credit card debt and drawing on their line of credit. In today’s consumer world, everyone needs the latest smartphone, the nicest car, and the most exciting entertainment. In this kind of environment it’s almost impossible to have the self-control to restrain yourself and actually save up some money.
Another issue is the fact that because the TFSA is tax-free, you may be tempted to dip into it for trivial reasons since there are no tax consequences. It’s meant as a long-term investment tool, not a savings account, so you need to resist the temptation to use it as such.
Another thing you’ll encounter is the fact you probably have some sort of financial debt. Maybe you have a huge student loan. Maybe you’ve got a credit card to pay off. Perhaps you just graduated, haven’t gotten a well-paying job yet, and paying the rent on time is hard. These things can be tough, and in truth you want to pay down your personal debt before you start putting serious money away into a TFSA.
If you know what the money inside your TFSA is going to be for, you’re more likely to get in the habit of investing:
- Do you want to someday buy a house?
- Are you planning on having children?
- Are you planning on setting up an RRSP as well?
If you can answer questions like these you are much more likely to be a successful investor, compared to those who put money inside a TFSA without a plan for it…those are the ones who withdraw it for trivial reasons!