The Tax-Free Savings Account (TFSA) is an amazing tool young Canadians can use to build wealth. The TFSA is the most flexible and easy-to-use registered account in Canada. Its simple. Contribute, invest, earn income (capital gains, interest, or dividends), re-invest, do nothing, or withdraw – all completely tax-free!
When you don’t pay tax on your investment income inside a TFSA, you can save as much as 20% more income than if you invested outside of a TFSA. When that extra 20% is compounded over years and decades, it can equate to some substantial savings.
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What’s the average TFSA balance at age 30
Fortunately, when you are in your 30s, you still have decades to let your TFSA capital compound and grow. That 20% of extra savings today can be hundreds of thousands of dollars several decades from now.
Unfortunately, many Canadians in their 30s are simply overlooking the TFSA. For Canadians between 30 and 34, the average fair market value of their TFSA is only $13,822. Canadians who were born in 1996 (or who are exactly 30 years old) can contribute a grand total of $76,500 to their TFSA today.
Given that $13,822 is an average, it simply means many young Canadians are not maximizing their TFSA capacity. No doubt, the 30s can be a tough time to save and invest (especially if you are thinking about starting a family or buying a home). However, it is an important time to think about saving. Remember, time is still on your side to build considerable investment wealth over the next 20 or 30 years.
Even if it isn’t much, just start saving and investing regularly
If $76,500 is a tough number to comprehend, then just start with the annual $7,000 TFSA contribution limit. Break that into monthly contribution installments of $583. Then every month devote some time to investing that installment. Starting a smart, methodical saving and investing habit now will really pay off in 20 years’ time.
Certainly, indexes and exchange traded funds (ETFs) are a great place to start. Anything is better than a menial savings interest rate. Here at the Fool, we think picking stocks is a great way to build generational wealth over time.
A steady income play for your TFSA
If you are inclined towards income-producing investments in your TFSA, Pembina Pipeline (TSX: PPL) is an attractive stock to look at. At $62 per share, it has a 4.6% dividend yield.
With a market cap of $36 billion, Pembina is a major infrastructure provider to the energy sector. Over 85% of its income is contracted and that more than covers its dividend.
It just announced plans to grow earnings by 5–7% per year to 2030. For a low-risk, high yielding stock, it is hard to find a better stock.
A young growth company to buy when you are young
If you want something with more risk, but also higher growth, you could consider a small cap stock like VitalHub (TSX: VHI). This $438 million company provides software for specialized healthcare settings. It has a high stream of recurring revenues, a strong balance sheet, and attractive double-digit growth prospects.
This stock has been affected by concerns about AI disruption. It is down 27% this year. You can add it to your TFSA at a reasonably attractive valuation today. If this company can continue to execute its growth plan, there could be considerable upside for the patient investor.
