Are you looking to transform your financial future starting with as little as $7,000?
It might sound like a tall order, but it can be done. Specifically, it can be done with the help of a tax-free savings account (TFSA). A TFSA is a tax-sheltered vehicle that lets you grow and compound your investments tax-free. Unlike the RRSP, which lets you grow but not withdraw your funds tax-free, the TFSA lets you do both. So it offers considerable tax-saving power.
How much money you can actually invest in a TFSA depends partially on your age. If you were 18 or older in 2009, you can deposit $102,000 less used contribution room. If you turned 18 at a later date, you have less contribution room than that. Regardless, anybody who is 18 or older right now can deposit at least $7,000 to a TFSA. So, let’s explore a $7,000 TFSA method that can transform your financial future.
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Step 1: Make your contributions
The first step to compounding your wealth at the highest rates possible is to make TFSA contributions. You might think, “Oh, if I don’t have a TFSA yet I can just go and invest in a taxable account, that’s no big deal.” It’s not so simple.
You see, in taxable accounts, your “returns” are not really your returns. They have taxes taken off of them – quarterly in the case of dividend stocks, and upon sale with all stocks. Taxes not only reduce your income in the current year, they also slow down the rate of long-term compounding.
What does this mean? That it will take a much longer time to transform your financial future in a taxable account than in a TFSA. You may have heard of the “rule of seven,” which says that it takes approximately seven (precisely 7.2) years to double your money compounding at 10%. That’s true if you’re compounding in a TFSA, but if you’re compounding in a taxable account, your 10% can turn into 7% or even less. That really slows down the pace at which you progress toward a bright financial future.
Step 2: Pick the right stocks
After you’ve got your contributions made, you need to pick the right stocks. Generally, stable defensive stocks are the best for beginners.
Take Fortis Inc (TSX:FTS), for example. It’s a Canadian utility company that has 51 years of dividend increases under its belt. As a utility, it is unusually recession-resistant (people would rather sell their cars than go cold in the winter). It is pretty profitable. It has an above-average 3.6% dividend yield. Finally, it has compounded at more than 10% annualized over the long term. If Fortis’ future looks at all like its past, an investor could make quite a bit of money in it starting with just $7,000 invested.
The bottom line on your financial future
The bottom line on investing for a bright financial future is that it doesn’t have to be hard. With high-quality dividend stocks like Fortis and a tax-free savings account, you’ll get where you want to be in time.
