There’s no question that the Tax-Free Savings Account (TFSA) is one of the most powerful tools Canadian investors have at their disposal.
Since it was introduced in 2009, the TFSA has allowed Canadians to grow wealth tax-free, whether through capital gains, dividends, or interest income. That means every dollar of growth inside the account is yours to keep, no matter how much your investments compound over time.
While the annual contribution limits might seem modest, the real magic comes from consistently contributing and letting your investments compound.
By steadily contributing as much as possible every year and letting your investments grow without taxes eating into returns, it’s entirely possible to build a TFSA worth seven figures. In fact, there are already many Canadians who’ve achieved millionaire status in their TFSAs by simply staying consistent and sticking to a disciplined strategy.
Here are six of the most important lessons to learn from TFSA millionaires.
Source: Getty Images
The millionaire mindset: consistency and patience
The first secret is simple, but it’s also one of the most important. In order to give yourself the best chance possible to grow your money, you need to start early and contribute consistently.
Investors who become millionaires understand the power of compounding and how crucial it is to give their money the longest possible runway to grow.
That’s why the best investors never try and wait for the perfect time to invest or try to guess where the market will go. Instead, they begin as soon as they can, making regular contributions that add up over time.
In fact, one of the most famous investing quotes of all time says, “Time in the market beats timing the market,”. So, even if you can’t hit the maximum contribution limit right away, staying consistent ensures you build wealth steadily.
Now with that in mind, the second secret is to maximize your TFSA contribution room whenever possible. The tax-free nature of the account is too valuable to waste. Millionaires view their TFSA as prime real estate for their money, making it a priority to fill each year’s room before putting cash into other taxable accounts.
The third secret and one of the hardest to follow is to stay invested through volatility. The market is volatile. That’s what creates buying opportunities. But the main difference between average investors and TFSA millionaires is that the latter don’t panic-sell. They keep their money working, trusting that time in the market beats timing the market and use those opportunities to buy more shares at bargain basement prices.
Finally, TFSA millionaires rarely withdraw funds unless absolutely necessary. Every time you pull money out, you slow the compounding effect and lose the chance for that capital to keep growing tax-free.
How TFSA millionaires actually invest
The four secrets above are crucial to establishing the right mindset before you even put your money to work. However, as important as having the right mindset is, you also need to buy high-quality stocks.
Therefore, the strategies you use inside your TFSA matter just as much. That’s why secret number five goes hand in hand with secret number four. It’s essential to consistently reinvest your dividends.
In order to take full advantage of the power of compounding, TFSA millionaires put their profits back to work by buying more shares. Over time, this creates a powerful snowball effect as reinvested dividends generate even more dividends, which continue to compound tax-free.
And while owning high-quality dividend stocks can be ideal for exactly that reason, another key secret is to also focus on high-quality growth stocks.
While dividend payers are important, millionaires also know that long-term wealth often comes from companies that consistently grow sales, earnings, and market share. Holding these types of businesses in a TFSA can lead to exponential compounding, especially when combined with dividend reinvestments.
For example, Dollarama has grown investors’ money by 548% over the last decade, a compound annual growth rate of 20.5%. So, although high-quality dividend stocks are important both for their reliability and passive income generation, high-quality growth stocks can especially power your portfolio’s growth over the long haul.
Therefore, if you’re saving cash and contributing to a TFSA, it’s essential to have the right mindset and focus on finding the right mix of high-quality dividend and growth stocks to buy and hold for the long haul.
