Did you know that you can turn your TFSA into a pretty lucrative income stream starting with relatively little money?
Thanks to the TFSA’s tax-free nature, you don’t have to invest as much in it compared to a regular brokerage account to end up with a decent return. Taxes are taken out of all investments you hold in taxable accounts; TFSAs don’t face this problem. As a result, you can end up with a sizable TFSA balance even if you start with a relatively small sum of money. In this article, I will explore how to turn your TFSA into a gold mine starting with as little as $10,000.
Step one: Set a budget for regular contributions
First things first: you need to have money to invest in a TFSA. That might sound obvious, but you’d be surprised with how many people try to start TFSAs thinking that just opening one is all there is to it. Perhaps, they expect their bank to take a little out of your cheque each month and put it in the TFSA. Sometimes banks will allow you to do that, but on the other hand, it can result in you running out of money if you’re low on funds. Best to save money and contribute what you know you can regularly.
If you have a spare $10,000 lying around right now, you can just deposit it. Otherwise, you’ll need to come up with a savings plan. If you save $200 per week, you’ll end up with $10,400 in a year. That’s a pretty decent income supplement. In the next section, we’ll explore what to invest it in.
Step two: Identify assets to purchase
Once you’ve started contributing money to a TFSA, you need to decide what to invest the money in. The savings plan outlined above reaches $10,400 in about a year, but you shouldn’t wait until you’ve reached your savings goal to start investing. It’s better to invest in small lots over time instead of lump sums all at once.
As for the types of assets you could invest in: exchange traded funds and dividend stocks are usually pretty good. ETFs are true set it and forget it investments that diversify your risk and require very little research. Dividend stocks pay passive income that can pay you for life.
Consider CN Railway (TSX:CNR), for example. It’s a Canadian dividend stock with a 2% dividend yield and a 27-year track record of dividend increases. It has only one competitor in Canada, and only a handful in the United States.
CN Railway has a lot of things going for it. It has a relatively modest valuation (not dirt cheap but not nosebleed expensive); it has a 34% profit margin; it has grown at an acceptable pace historically. Given that CNR is a vital component of North America’s energy infrastructure, its staying power is likely to be good. Overall, it’s one worth researching.
Step three: Wait
Once you’ve got your TFSA funded and have picked some good investments, there’s nothing left to do but wait. In many ways, this is the hardest part of the process. It’s tempting to mess with a good thing with stocks, by day trading or just being too active. If you can avoid that temptation, you should do well.
