The $25,000 TFSA Move That Could Pay Your Bills Every Month

Dollar cost averaging into the Vanguard FTSE Canada All-Cap ETF (TSX:VCN) will likely produce better results than lump sum investing.

Key Points
  • It's possible (but not easy) to cover all of your living expenses with just a tax-free savings account.
  • With $109,000 worth of contribution room having accumulated since 2009, and the annual contribution room bump increasing a little each year, it will likely be possible for you to invest hundreds of thousands more into your TFSA over your lifetime.
  • With quality index funds held long term, those hundreds of thousands could turn into millions.

Did you know that it’s possible to cover your monthly bills using a TFSA alone?

While the official TFSA contribution limit is just $109,000 – too little to pay all of your bills for long – you can grow your TFSA over time.

There are numerous documented cases of Canadians achieving $1 million plus TFSA balances. With prudence and disciplined saving, you could become one of them.

If you’re starting with just $25,000, you might fret that you simply have far too small a balance to have a shot at ever paying all your bills with your TFSA alone. If you’re already retired with $25,000 in your TFSA, that might be the case. If, on the other hand, you are under 40, you may eventually be able to grow your TFSA to the point that it’s paying all your bills. In this article, I describe the strategy that can help you do that.

shopper checks her receipt

Source: Getty Images

Dollar cost averaging

Dollar cost averaging (DCA) is the best way to turn a humble $25,000 TFSA into something substantial.

The way DCA works is, you contribute a little bit to your TFSA each paycheque. Let’s say, $500. If you get paid bi-weekly, that’s $1,000 worth of contributions per month, or $12,000 per year. Over two decades, you could contribute $120,000 by DCA-ing like this.

Of course, you’ll eventually run into the problem of contribution limits. The limit in most years is less than $7,500. But if you were 18 or older in 2009, have resided unceasingly in Canada, and have contributed only $25,000 to date, then you should be able to pull off what I just described. In the scenario described, you’d have $84,000 in contribution room available with $70,000 more being added over 10 years, assuming the annual contribution room bump remains at $7,000.

An illustration of how dollar cost averaging works – and why it’s effective

Let’s imagine that you are a diligent TFSA investor holding a diversified index fund portfolio. Let’s further imagine that you’re considering an investment in the Vanguard FTSE Canada All-Cap ETF (TSX: VCN). VCN has a 0.06% management expense ratio, exposure to a wide variety of different industries, and 215 stocks – a considerable amount of diversification. It’s exactly the type of fund that prudent investors tend to invest in.

Now, if you just invest $25,000 into VCN all in one lump-sum, then you could potentially see all your existing savings lost in a market crash.

If, on the other hand, you avoid investing in funds altogether, because you’re scared of a market crash you think is coming, then you risk having your $25,000 go nowhere.

Sounds dire, right?

It does sound that way, but luckily, the DCA method is here to save the day for you. If you invest a little bit from every paycheque you bring in, then you’ll eventually end up with the average price during your holding period, as your average cost. Given the long-term tendency of stocks to deliver positive, even high returns, this should get you a good result with a fund like VCN.

Of course, nothing is foolproof. The markets could stay down over the medium term, increasing the time it takes for the DCA strategy to pay off. But over the long term, it has a high probability of working.

Fool contributor Andrew Button has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy..

More on Dividend Stocks

woman looks at iPhone
Dividend Stocks

RESP or RRSP? Where Should Your Next Contribution Go?

RESP grants can make the first education contribution attractive, but retirement savings shouldn't disappear while parents fund their children.

Read more »

A family watches tv using Roku at home.
Dividend Stocks

Why I Keep Passing on Telus and BCE for This Dividend Stock Instead

Rogers may not offer the highest telecom dividend yield, but its improving cash flow, lower capital spending, and valuable sports…

Read more »

top TSX stocks to buy
Dividend Stocks

Dividend Investors: 2 Discounted TSX Stocks to Consider Now

These Canadian dividend stars might be getting oversold.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Your Cash Is Sitting There Doing Nothing: This Dividend Stock Won’t Let It

Idle cash loses purchasing power to inflation. Capital Power stock offers investors a 4.6% yield, dividend hikes, and capital gains…

Read more »

data analyze research
Dividend Stocks

What Could $5,000 in Canadian Dividend Stocks Actually Pay You?

A $5,000 investment split between these two Canadian stocks could generate roughly $222.50 in dividend income while keeping investors exposed…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Think You Know Your TFSA? These Questions Could Surprise You

The TFSA looks simple until withdrawals, investment losses, and contribution-room rules start creating expensive surprises.

Read more »

top TSX stocks to buy
Dividend Stocks

The Dividend Snowball That Starts With Just 1 Share

One Canadian National share can begin a dividend snowball. See how reinvesting Canadian National Railway dividends can steadily build income…

Read more »

boy in bowtie and glasses gives positive thumbs up
Dividend Stocks

2 Slam-Dunk Dividend Stocks to Buy Now

These two dividend stocks offer investors a blend of reliable income, strong businesses, and attractive long-term growth opportunities.

Read more »