Millennials: 3 Mistakes to Avoid in Your TFSA

Millennials need to learn the ways to manage their TFSAs and avoid costly mistakes. It doesn’t matter whether the investment is a blue-chip stock like Toronto Dominion Bank (TSX:TD)(NYSE:TD) or a high-flying weed stock like Aurora Cannabis (TSX:ACB)(NYSE:ACB).

| More on:
Top view of mixed race business team sitting at the table at loft office and working. Woman manager brings the document

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Millennials are in an interesting time of their lives. People born in the early 80s to the late 90s are the so-called millennials. They can be anywhere from 22 to 37 years old.  It’s a new chapter in their existence, because school is about to finish, careers are starting, and families are growing.

But what should be growing alongside these millennials are their investment accounts. And there’s no better way to start saving for the future or the retirement years than through the TFSA. The facility is extremely flexible. You are allowed to put in as many different types of interest-bearing or dividend-earning investments.

That being said, here are three of the biggest mistakes millennials make when investing in their TFSAs.

Mistake #1: Not paying off your high-interest debt first

Only 20% of Canadians in the 26-37 age brackets are debt-free. The liabilities include higher rate debts such as credit card balances, student loans, and other indebtedness, but not mortgages.

If you have high-interest debts, you have to pay them off before contributing to a TFSA. For example, an outstanding credit card balance that charges 15% interest rate needs to be settled first. Otherwise, buying a stock in your TFSA will defeat the very purpose for which the account was opened.

By not paying off debts, you will be prevented from realizing higher returns over and above the 15% interest rate. You’re better off without the credit card debt when growing the TFSA.

Mistake #2: Starting too late

It is always better to start investing early. With the magic of compounding returns, a few years can make a huge difference. Here’s an example of the power of the time value of money:

Had you invested $10,000 in a blue-chip stock like Toronto Dominion Bank (TSX:TD)(NYSE:TD) 10 years ago in 2009 and reinvested all dividends into more shares, your investment would be worth around $40,500 today. If you’d invested earlier or 20 years ago in 1999, the investment would be worth a mind-blowing $144,916 at the present.

What is really interesting is that both these time periods had similar average annual returns of between 14% and 15% for TD. The only major difference is the time frame within which the purchase or investment was made. Take note of the material difference in the absolute amount.

Mistake #3: Buying hype

It is very tempting to buy a hyped-up stock, especially if everyone from your neighbours to the barista at Starbucks is buzzing about it. But chances are, and if everyone is consumed by the talk, you’re probably too late to invest and would be buying at the top.

On October 15, 2018, at the height of the marijuana hype and right before legalization, Aurora Cannabis (TSX:ACB)(NYSE:ACB) was trading at $15.07. Fewer than two months later, the stock was trading between $6 and $7. All other major cannabis players suffered the same fate.

Since then, the stock has recovered and is trading at $9.64. The company has reported strong sales growth based on its latest earnings report with production costs diminishing.

Don’t believe or be influenced by the hype. The best strategy is to start early and pay off all outstanding debts. That will place you on the right path to a very wealthy TFSA.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor cliew has no position in any of the stocks mentioned. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Starbucks. Fool contributor Christopher Liew has no position in any of the stocks mentioned. Starbucks is a recommendation of Stock Advisor Canada.

More on Bank Stocks

Man holding magnifying glass over a document
Bank Stocks

TD Bank Stock Looks Severely Undervalued Going Into the 2nd Half of 2022

TD Bank (TSX:TD)(NYSE:TD) stock has been under pressure amid the TSX Index correction but may be among the best bounce-back…

Read more »

Coworkers standing near a wall
Bank Stocks

Policy Rate: 2 More Hikes After July 2022 to Reach Neutral Level

The Bank of Canada might need three more rate hikes beginning in July 2022 to reach neutral levels.

Read more »

You Should Know This
Bank Stocks

75-Basis-Point Rate Hike? Here’s What it Means for Stocks

Aggressive rate increases dampen investors’ sentiment and send share prices tumbling, because the hikes can impact corporate earnings or profits.

Read more »

You Should Know This
Bank Stocks

TD Bank Stock Faces Challenge From U.S. Senate!

Toronto-Dominion Bank's (TSX:TD)(NYSE:TD) latest deal is being blocked by the U.S. Senate.

Read more »

question marks written reminders tickets
Bank Stocks

Is TD Bank (TSX:TD) or Royal Bank (TSX:RY) Stock a Buy?

Canadian banks appear oversold. Is this the right time to buy TD or Royal Bank stock?

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

2 Top TSX Financial Stocks to Buy for a Retirement Fund During the Market Correction

These top TSX financial stocks now look oversold for a self-directed TFSA or RRSP portfolio.

Read more »

Growth from coins
Dividend Stocks

Dividends Aren’t Guaranteed, Yet 3 TSX Stocks Keep Raising Payouts

No company will guarantee dividend payments, but three TSX Dividend Aristocrats will not break their dividend-growth streaks.

Read more »

Technology
Bank Stocks

Should You Buy TD Bank (TSX:TD) Stock Now?

TD stock looks oversold. Is this the right time to buy?

Read more »