Want to be rich? It’s actually quite simple: just don’t confuse simple with easy.
The steps below will give you a great shot at accumulating vast sums of wealth, but you’ll need to put in the work to make it happen. Most important, you’ll need three key ingredients: knowledge, diligence, and time.
Know your choices
Before we get to the secret weapon of retirement planning, you must first understand where you’ll be getting rich. While you can invest your money in a conventional investment account, most experts recommend a Tax-Free Savings Account (TFSA) or RRSP. These vehicles shield your taxes during growth, allowing you to compound capital faster.
There are other tax benefits too. RRSPs use pre-tax dollars, so for every $1 you contribute, $1 is deducted from your taxable income. These accounts reduce your tax burden today. TFSAs are the inverse as they use post-tax dollars. That’s money you’ve already paid taxes on. Your future withdrawals, however, are tax free.
Which option should you choose? If you want to get rich quickly, opt for a TFSA.
When it’s time to retire, whatever you have in your TFSA is essentially how much you can take out. RRSPs, on the other hand, will get a large chunk deducted for taxes. The upfront tax savings offset this hit, but in reality, what this dynamic often does is force RRSP investors to under-invest.
Having a TFSA or RRSP with $1 million invested seems joyful, but when it comes time to retire, too few Canadians have factored in the eventual tax hit for the RRSP. With a TFSA, you eliminate this uncertainty altogether by taking the tax hit before investing.
Want to do your future self a favour? Invest with a TFSA.
Your next step is to take action. Don’t have a TFSA? Open one today. From there, it’s time to establish recurring deposits. This is one of the most overlooked steps in all of investing. The vast majority of investors simply open an investment account and move directly to stock-picking.
We all know that humans are fallible. We have the peculiar ability to act against our self-interest. Saving for future is one of the most difficult habits for humans to commit to, which is why you shouldn’t trust yourself at all. Instead, trust an algorithm.
Most investment firms allow you to set up recurring deposits. This will regularly transfer a pre-set amount of money to your investment account. For example, you can have $500 withdrawn from your bank account each month. Once deposited, you can invest these funds as you please.
Even if you only start at $50 a month, get these automatic contributions established immediately. They eliminate your ability to skip investment cycles, and it’s not difficult to bump the dollar amount higher in the future.
Live your life
Here’s the secret weapon for retirement investing: time. Surprised? You shouldn’t be.
Albert Einstein reportedly called compound interest the most powerful force in the universe. That’s because it can turn measly sums of money into vast riches.
Let’s assume you earn a 10% annual return and invest $250 each month in your TFSA. After 10 years, you’ll have $55,000, even though your total contributions only equalled $30,000.
After 20 years, you’ll have $190,000 despite cash contributions of just $60,000. After 30 years you’ll have an astounding $550,000 portfolio, generated from $90,000 in contributions.
Notice that the money is growing faster and faster? Such is the power of compound interest. After 40 years, or $120,000 in contributions, your portfolio will be worth nearly $1.5 million!
With a TFSA, you get to keep all that money. With automatic contributions, the only thing you need to do is wait. High-performing stocks are important, but recurring deposits in a tax-free account should always be the first steps.
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 Ryan Vanzo has no position in any stocks mentioned.