Your TFSA can be a wealth-building machine. Seriously. You can go from a few hundred dollars to millions over time.
That’s not to say this is easy. It’s not. The vast majority of savers fail to reach the $1 million mark.
If you want to be a TFSA millionaire, you only need to know one trick. It’s going to seem obvious. In fact, it’ll seem stupidly simple. But guess what? Most people will still fail to follow this trick.
Here’s the trick
Most people skip the saving part to focus on investing. That’s also important. It’s so important that the next section of this article specifically highlights the best TFSA stock picks right now.
But before you skip to that section, let’s cover something boring: contributions.
The term contributions isn’t nearly as exciting as the word investing. Yet nearly every successful investor has mastered the art of contributing to their portfolio. The math really adds up.
This year, the annual contribution limit for a TFSA is $6,000. It helps to break it down into smaller chunks, like $500 per month, or $125 per week. That seems much more manageable.
What if you started with absolutely nothing, but contributed $125 per week to your account? If you earned 10% annual returns, you’d reach $1 million in just 30 years. That’s all it takes.
For comparison, what if you simply invested $6,000 this year, and then solely relied on investment returns? It would take you nearly 55 years to reach $1 million! That’s far too long for most human lifespans.
Of course, most people don’t want to wait 30 years, either. But keep in mind that the example above assumes you start with nothing. It also assumes that you only make 10% annual returns.
If you want to reach $1 million in your TFSA in as few as 10 years, keep reading. Just remember that there is no substitution for regular contributions.
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Top TFSA stocks
Now comes to fun part: stock picking. This is where most retirement savers mess up. They end up choosing low-growth dividend stocks like Enbridge (TSX:ENB)(NYSE:ENB) instead of high-growth tech stocks like Shopify (TSX:SHOP)(NYSE:SHOP).
To be sure, Enbridge has proven a fantastic long-term investment. Shares have posted double-digit annual returns since 1995. The company is a reliable long-term compounder.
There’s only one problem: Enbridge’s business is capital intensive. If you want to grow your TFSA as fast as possible, avoid businesses like this.
Enbridge is a pipeline operator. To make more money, it has to build more pipelines. That costs billions of dollars, not to mention years of planning and construction. This naturally puts a limit on annual growth.
Compare Enbridge to Shopify, which is considered capital light.
Shopify is an e-commerce company. Its product is digital. For it to grow, customers simply need to click a few buttons on their internet browser. Growth is rapid and essentially free.
If you want to get to $1 million in your TFSA as fast as possible, there are two basic building blocks. First, contribute as much and as often as you can. Second, find capital-light businesses like Shopify.
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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.
Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Enbridge, Shopify, and Shopify. Fool contributor Ryan Vanzo has no position in any stocks mentioned.