Using Your TFSA Wrong Is Costing You Offensive Amounts Of Money
In 2008 the Canadian government did something genuinely great. They gave us the TFSA.
But then… they absolutely butchered the name.
Calling it the Tax Free Savings Account is like calling a Ferrari a ‘commuter vehicle’. While it IS technically still a vehicle, calling it that is deeply misleading when it comes to understanding the value as well as the power under the hood.
Despite the fact that the word ‘savings account’ is literally in the name, the TFSA is actually an investing account. And a damned powerful one at that. (It’s the Ferrari of investing accounts.) Using it like a glorified high-interest savings account is like buying a top-of-the-line laptop and using it as a paperweight because you never learned how to turn it on. It's👏 a👏 huge👏 freeking👏 waste👏 of 👏money👏.
Let me show you what I mean:
Imagine someone saves $500 per month into their TFSA from age 25 to 65. That’s $6,000 per year.
Over 40 years, they personally contribute $240,000.
And if that money just sits there as ‘savings’?
They retire with… $240,000.
Is that enough to fund 25-30 years of retirement? We all know the answer is no for most people.
Now, let’s change one thing in the above scenario:
Same person. Same $500 per month into the TFSA. Same 40 years.
But this time, instead of letting the money sit there as cash ‘savings’, they invest their $500 monthly in low-cost index funds within the TFSA.
Let’s assume those index funds return 10% annually on average over those 40 years.
At age 65 this person doesn’t have $240,000.
They have roughly $2.6 million.
They only contributed $240,000 themselves. The other 91% of their money came from growth, because this is what happens when you stick with a plan and let compounding do its job for decades.
You can absolutely do this in other investing accounts as well, but here’s what makes the TFSA so powerful (remember, the Ferrari of investing accounts?):
The money you earn through investment growth in the TFSA is tax free.
The money you withdraw from your TFSA is also tax free.
There is no other account in Canada that lets you build wealth like that, and then take it out again without the government taking a cut. None. Nishta. Zero.
This is a wealth building tool that baby boomers would have killed for during their working years. Yet most young Canadians are using it like a fancy piggy bank because no one taught us how it worked. If your TFSA is sitting in cash because ‘it’s a savings account’, you’re losing an offensive amount of money to both the lost opportunity cost of investing, and to the devaluing effects of inflation.
I wish I could rent every billboard across Canada and plaster this message across it: Don’t waste the investing power of your TFSA. But until I have enough money to do that, I'll rely on you to help me spread the word. Share this message with everyone you know. The TFSA is like a real-life cheat code to multiply your money. Make sure you’re using it properly.
Becoming work-optional one day isn’t just about how aggressively you save, it’s also about whether you allow your money to grow.
See you next week,
Cory