Want to get rich? Invest with a TFSA. These accounts permanently shield your capital from taxes, cutting years off your potential retirement date.
One of the most popular goals for TFSA investors is to reach the $1 million mark. Not everyone will get there. In fact, most won’t. But there are a few tricks that can greatly increase your chances of success.
The following methods aren’t rocket science. They’re so simple that many Canadians ignore them altogether. Yet year after year, millions of people generate vast sums of wealth by applying these straightforward strategies.
Crunch the numbers
How close are you to reaching $1 million in your TFSA? What do you need to do to close the gap? If you don’t know the answers to these questions, especially the second one, you’re flying blind.
When it comes to investing, only a few variables matter: contributions, returns, and time.
The first thing you need to familiarize yourself with is a future value calculator. There are a ton of these available online. All they do is figure out how much your money will be worth in the future.
Let’s say you have $10,000 saved and you want to retire in 30 years. Assuming a 8% rate of return, your initial capital will eventually grow to $100,000. That’s a far cry from $1 million.
Thankfully, future value calculators can help you figure out what to do.
Like we said, the only factors that matter are contributions, returns, and time. Let’s say you start contributing $200 per month to your TFSA, in addition to your starting capital of $10,000. In 30 years, assuming an 8% rate of return, you’ll now have nearly $400,000. That’s a huge leap.
What if you find better stocks, and your annual returns increase to 10%? Now your money increases to $600,000! And if you add five more years to your time horizon? Boom. Now you’re at $1 million.
While this exact situation likely won’t apply to you, using a future value calculator makes it easy to play with the numbers. Before you blindly begin contributing or investing, be sure to know exactly what you need to do, and how to track your progress.
Rethink your math
Future value calculators also make it easier to think in terms of future money. There’s a big difference between what $1 is worth today, and what it could be worth in 30 years.
For example, let’s say you have an opportunity to save $100 today. In reality, you have the ability to save $1,750. How is that possible?
If you invest $100 for 30 years at a 10% interest rate, it’ll grow to $1,750. Again, you can run the numbers for your specific situation using a future value calculator.
Thinking in terms of future money makes saving a lot easier. Instead of saving a few hundred dollars today, you can think of it as getting several thousand dollars down the line.
Maintain a long view
Contributions and returns all benefit from time.
Compound interest allows your money to grow more rapidly as the years pass. As with our earlier example, adding a few extra years to your time horizon can sometimes double your ultimate return. That’s why it’s important to start as early as possible to maximize your investing duration.
Those with long-term approaches are also more successful investors. They’re less concerned with short-term volatility, and can instead focus on consistent contributions. Companies that take the long view are also more successful. Looking for short-term bargains can be profitable, but finding investments that can deliver wealth through age 50 and beyond should be a top priority.
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.