Have you ever thought about becoming one of those millionaires who started with practically nothing? It might seem like a pipedream to consider right now, but once you get how the best Canadian retirement accounts like the Tax-Free Savings Account (TFSA) work and how to get the most out of them, the goal seems less impossible to achieve.
The TFSA is one of the best things to happen to Canadians who want to build wealth. Each dollar you invest in the account is after having paid taxes on it. This means any returns from investments held in the account will grow completely tax-free. This means no taxes on interest, capital gains, and dividends generated by assets in your TFSA.
The best way to get the most out of the tax-sheltered status of the account is to look at investing with a long investment horizon.
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It takes a lot of time, patience, and understanding
One of the easiest mistakes to make about wealth-building is that saving more money is the most important goal. Rather than focusing on simply saving, you should consider giving yourself as much time to let your money compound for as long as possible. You see, the longer your money is put to work in the market, the more powerful the effect of compounding will be for your wealth growth.
Someone investing consistently for 50 years will need to save a lot less each month compared to someone who saves for 60 years and tries catching up later. This is because compounding already grows the initial capital you invested. Beyond that, it also grows the returns on the returns you are already getting. Each year, there is a greater amount to grow. You can keep investing each month to further boost the returns to accelerate your wealth growth.
Saving more each month will definitely help, but not as much as starting earlier and being disciplined enough to remain invested for the long run.
So, how much should you save each month?
There’s never a one-size-fits-all solution for how much to save to become a TFSA millionaire. Everyone starts at a different age, has unique requirements, and has different earnings. Suppose you invest for 35 years, earning an average annual return of around 5% for that time. During this period, you also save roughly $1,000 per month (translating to $12,000 per year). This will get you to a portfolio value of around $1,085,000.
Now, someone with a 30-year timeline earning average returns of around 5% will need to save roughly $1,360 per month, around $16,600 a year, to get to a similar portfolio value. The key takeaway here is that it is about the amount you’re saving each month and the amount of time you have. The earlier you start, the more flexibility and potential you have.
Foolish takeaway
High-quality stocks can make a world of difference for investors seeking investments that can offer the kind of long-term returns to support their financial goals. Dividend stocks like Enbridge Inc. (TSX: ENB) can be excellent tools to use for this purpose.
Enbridge is a $159.9 billion market-cap giant in the North American energy infrastructure and utilities industry. The company’s energy transportation infrastructure moves around 30% of the energy products produced in Canada and the US, and around a fifth of the natural gas consumed by Americans. It is a business vital to the regional economy’s energy needs, and it offers essential services through its utility segment. This stock has a dividend-growth streak spanning several decades and the kind of economic moat to weather short-term market volatility. It can be an excellent buy-and-forget holding to consider, especially with its attractive 5.2% annualized dividend yield.
