Your TFSA (Tax-Free Savings Account) may very well be one of the strongest tools to compound your wealth. Undoubtedly, when you take taxes out of the equation, compounding over the course of decades could have the potential to make all the difference once you’re ready to hit the retirement button.
Of course, it can be tougher to make annual contributions (it’s currently pinned at $7,000 again), especially given the costs of living only seem to keep rising. While the prices of some goods are moving lower, inflation is still a problem, especially for those who keep getting weekly sticker shock at the grocery store.
Food hasn’t just stayed expensive, but prices on certain goods have shot up by way too much in such a short timespan. It really does feel like those digital e-ink price labels are moving higher by the day. And while you’ll be able to make up for lost time with your TFSA in the years you just can’t make the full contribution, I think that the bigger problem lies with TFSA investors who aren’t using the account to invest.
Sure, it’s technically called a tax-free savings account, but if you’re not investing in stocks, real estate investment trusts (REITs), exchange-traded funds (ETFs), bonds, Guaranteed Investment Certificates, precious metals, or anything that shows more promise on the returns front than just cash, you might be the only one who’s holding your TFSA back from moving into the fast lane on the wealth-compounding highway.
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Having some cash is wise, but is the TFSA the best place to park it?
Of course, you should have some cash, preferably outside of a TFSA for your emergency fund (the rule of thumb is six months’ worth of expenses, I believe), but if you’re a young investor and see yourself holding for more than a decade, I’d say that any asset class that isn’t stocks (or maybe even REITs if you want a bigger shot of income) or precious metals might be less than optimal.
For those who are solely in cash or cash equivalents, I’d argue that inching your way into the equity waters is a smart move, even if the headlines surrounding all-time highs in the TSX Index, tech worries, and valuation jitters continue to dominate.
Timing the market is tempting, but not ideal
At the end of the day, timing the market is going to get you mixed results. Of course, you could be lucky, and stocks could implode tomorrow, granting an opportunity to snag more merchandise for less. But let’s be real; it’s not easy to buy dips.
And if you’ve invested through a bear market or market meltdown (think the COVID crash of 2020), you’ll understand how difficult it can be to actually pick anything up when each day seems to bring bigger bargains. All of a sudden, stocks rocket higher and yesterday’s bargains are snatched up due to some unforeseen event (perhaps emergency rate cuts) or perhaps nothing at all amid oversold conditions.
That’s why waiting around for those opportunities might not be a guarantee of getting a good bang for your buck, especially if inflation continues to take its toll.
Bottom line
In any case, if you’re not investing (preferably in stocks or equity ETFs), you might not be getting the most out of the TFSA. It can be as easy as buying a low-cost Canadian equity index ETF such as Vanguard FTSE Canada All Cap Index ETF (TSX:VCN).
The TFSA is a powerful account, but only if you use it to invest in wonderful businesses over the long term. As for hoarding cash, I think that’s just a waste of a powerful compounding vehicle that has so much more to offer than just a passive store of dry powder!
