Do you have a small tax-free savings account (TFSA) balance – let’s say $10,000 –that you want to grow into a large sum?
If so, you need a game plan for how you’ll get to your goal. Growing a TFSA involves contributing regularly, picking good investments, and reinvesting your income. Some aspects of the process are harder than others. In this article, I will reveal a simple three-step process you can use to reliably grow a $10,000 TFSA into $100,000. First, let’s look at the math to determine how long it would take to turn $10,000 into $100,000, assuming no additional contributions.
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Returns needed to turn $10,000 into $100,000
Turning $10,000 into $100,000 is a 900% return – that is a $90,000 gain on a $10,000 position. Assuming you are compounding at 10% – the long-term average for the Canadian markets – you can achieve this in about 24-and-a-half years.
The math behind that is 1.1 to the power of 24.5, which is roughly 10. 10 multiplied by 10,000 is 100,000. That’s the ending amount we’re after.
So, compounding at 10%, you can turn $10,000 into $100,000 in 24-and-a-half years. With that out of the way, here’s a simple three-step process to actually make it happen.
Step 1: Contribute regularly
The simplest way to grow your TFSA is to make regular contributions. Doing this will get you from $10,000 to $100,000 sooner or later, even if you don’t invest at all! The really powerful aspect of it, though, is investing each contribution you make. That can get you from a $10,000 starting balance to $100,000 in far fewer than 24-and-a-half years.
Step 2: Invest appropriately
Once you have your contribution schedule down, you need to pick the right assets to invest in. Generally speaking, low-cost index funds work best. Such funds lower your risk without reducing your expected return, making them the best risk-return tradeoff for newbie investors.
A good example of a low-cost index fund is the iShares S&P/TSX 60 Index Fund (TSX:XIU). It’s a broad market Canadian index fund that holds 60 large-cap TSX stocks. Its 60-stock portfolio is adequately diversified. The ETF represents many different sectors. Its management fee – 0.15% – is pretty low. Finally, as the most popular Canadian index fund, XIU is liquid and widely traded, giving it a low bid-ask spread. Overall, it’s a worthy ETF to hold for long-term TFSA compounding.
Step 3: Reinvest
Once you’ve got your TFSA portfolio established, all that’s left to do is keep contributing and re-invest your proceeds. If you invest exclusively in non-dividend stocks, re-investment is not something that you have to actively think about, as such stocks do not produce cash except when you sell. If you hold dividend stocks or bonds, you should reinvest your dividends back into your portfolio. This can be done automatically, through your broker or sometimes through the issuing company. If you reinvest through an issuing company’s plan, you can often purchase your shares at a discount.
So, make sure to reinvest your dividends. It will help you get from $10,000 to $100,000 faster!
