Everyone wants to get $1 million in their TFSA. From there, it wouldn’t be too difficult to generate a passive-income stream of $50,000 per year or more. The question for most savers is: How do I get there?
While many TFSA investors focus on picking the right stocks, there’s a much easier method of attaining great wealth. The problem is that most people ignore this method because it seems too simple. Don’t fall for complex strategies and get-rich-quick promises — simply automate your savings.
The secret is out
When I analyzed the number one mistake Canadian investors keep making, I was surprised by the results. They weren’t choosing the wrong stocks or betting on the wrong asset allocation — they just weren’t saving enough. A Royal Bank of Canada study confirmed that the vast majority of Canadians that want to retire with $1 million end up hundreds of thousands of dollars short of their goal. The problem wasn’t investing skill or patience — it was consistency.
Nobel laureate Daniel Kahneman has spent a lifetime chronicling the biases of human beings. Our minds, he discovered, aren’t well suited for long-term investment horizons. Nearly all of us value short-term gains over long-term results. We like to think otherwise, but the data shows that it’s simply not the case. We place more value on what happens this year than what happens decades down the road. This is the fundamental problem for savers: we’re not willing to sacrifice today for tomorrow.
Many people try to overcome this dilemma through sheer force and will, but it’s often not enough. The best way to consistently save is to take advantage of your brain’s opt-in and opt-out biases. Here’s an example: when electricity customers were asked to opt-in to higher rates in exchange for renewable energy, the vast majority refused. But when electricity users were automatically opted-in, and were required to actively opt-out, the vast majority chose to stick with renewable energy, even though the cost was higher.
How do you apply this cognitive bias to investing for the long haul? Simply don’t rely on yourself to opt-in to savings on a regular basis — make your investments opt-out. Most brokers and mutual fund companies today allow you to create automatic deposit schedules. You can, for example, have $250 withdrawn from your bank account every month and placed into your investing account. You can even use direct deposit to automatically transfer a portion of your paycheck into your investment account without needing to pass through your bank account first. You can make the dollar amount and withdrawal frequency basically anything you want, so it can fully adapt to your timing and denomination needs.
If you automate your savings, you now have to actively opt-out each month in order to stop the investment schedule. Science shows us that you’re not very likely to do this. If you relied on your tenacity to opt-in each month, science shows us that you’ll miss a frequent number of investment cycles.
And there’s the secret to getting $1 million in your TFSA: don’t trust yourself! Instead, trust the science and automate your savings. It will still take years for your monthly investment dollars to grow into $1 million, but it’s the most proven method of doing so.
Additionally, having a monthly investment schedule lets you take advantage of dollar-cost averaging. That way, you’re regularly putting fresh capital to work, a valuable advantage when markets fall and prices are cheap. Dollar-cost averaging is a particularly useful tool for volatile growth stocks like Canada Goose Holdings and Green Organic Dutchman Holdings, but it’s also an advantage for income stocks like Toronto-Dominion Bank and Enbridge.
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The Motley Fool owns shares of Enbridge. Ryan Vanzo has no position in any stocks mentioned. Enbridge is a recommendation of Stock Advisor Canada.