With the decade coming to a close, it is time to reflect on the past 10 years and the changes introduced by the government to help Canadians save money. The Harper-led Conservative Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009 to encourage more savings. In the decade it has been around, the TFSA has become a popular vehicle for many Canadians.
It comes as no surprise that the TFSA is increasingly popular among Canadians looking to save money. The account is user friendly, simple to understand, and circumvents a lot of the complexities of the other plans. As convenient and easy as it is to use, most Canadians are making a crucial TFSA mistake that is keeping them from making the most of it.
I am going to discuss the substantial TFSA mistake that you should avoid making as we enter the new decade.
Using the TFSA as a savings account
Ipsos conducted a survey earlier this year in spring as the TFSA turned a decade old. The study found out that a remarkable portion of Canadian families using TFSAs are wasting it away purely as a savings account. 42% of Canadians are holding a substantial amount of cash in their TFSAs.
Why is holding cash in your TFSA a bad thing? The major drawback of using the contribution room in your TFSA by holding cash is that you cannot take advantage of tax-free compounding. The TFSA is a tax-sheltered account. If you invest wealth in your account and you earn an income, you can reinvest your earnings to boost your overall wealth.
With a regular account type, you have to hand over a part of your income as tax to the government. If you use your TFSA as a high-interest savings account, you stand to earn less than you potentially can. If you are making less, you are also losing the potential of significant compounding.
What is the solution?
You can see your overall wealth grow considerably faster if you utilize the contribution room in your TFSA through investing in assets with better returns. Investing in reliable dividend-paying stocks like Telus (TSX:T)(NYSE:TU), for instance, can help you earn more money in a similar period.
Telus is one of the biggest service providers in Canada’s telecommunication industry. The company’s services include an entire suite of wireless, voice data, managed information technology, cloud-based services, and much more. It is a safe company to invest in, with a reliable track record of paying its shareholders dividends every quarter.
The $30.35 billion market capitalization company is the third-largest company in Canada’s telecom sector. In 2019 alone, Telus’s share price has grown by almost 12% to be at $50.47 at writing. The company pays dividends at a 4.62% yield.
I think it is better to look at your TFSA as an investment vehicle instead of purely as a savings account. Investing in dividend-paying stocks like Telus can help you to increase your overall wealth through capital gains on the share price. Dividend payments by the company every quarter will give you an additional income in cash that you can reinvest in more Telus stock to further boost the growth of your wealth.
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Fool contributor Adam Othman has no position in any of the stocks mentioned.