This Is the TFSA Habit Millionaires Have (and Most of Us Don’t)

This single, TFSA habit that can build long-term wealth. Here’s how it can be applied to any portfolio to help your portfolio grow.

| More on:
Key Points
  • Consistent automated contributions to a TFSA allow tax-free growth and can lead to significant long-term wealth, making it possible for investors to reach a seven-figure portfolio with regular investments.
  • Utilizing broad-market ETFs, like iShares Core S&P/TSX Capped Composite Index ETF and BMO S&P 500 Index ETF, simplifies investment decisions and provides exposure to diverse markets without researching individual stocks.
  • Regular small contributions, including bonuses or tax refunds, when sustained over decades, compound with reinvested dividends, illustrating how routine investments can achieve substantial growth over time.

The TFSA is one of the best long-term wealth-building accounts available to Canadian investors. And building a seven-figure portfolio over decades isn’t just a dream; investors can do it provided they adopt the right TFSA habit.

That might sound simple, but it’s actually where investors get stuck. Following headlines, tinkering with a portfolio, or just waiting for that perfect moment. Meanwhile, money in a TFSA that could be compounding continues to sit on the sidelines.

So then, what’s that TFSA habit that will help reach that seven-figure status?

Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

The TFSA habit to adopt

Inside a TFSA, contributions and dividends grow tax-free. Withdrawals from the account are also tax-free. But investors only benefit when they consistently add money to their TFSA and invest it.

And that’s why automated contributions are so important. Rather than wait for the right moment, investors can automate the process and contribute regularly. Even a small amount invested every month can add up over a longer period of time.

By way of example, let’s consider someone who invests $100 every two weeks. That’s $2,600 per year before reinvestments and dividends start to factor in. If in the second year our investor decides to increase that contribution to $150 every two weeks, there’s now $3,900 added, or $6,500 in total.

And that’s before compounding has a say. With additional increases, that simple TFSA habit can get an account into six-digit territory or even higher.

The next question is, what investments should you align that TFSA with?

Use broad ETFs and keep it simple

One of the best ways to keep that long-term investing habit going is to make the portfolio easy to understand. Broad-market ETFs can help meet that goal, while also making the investment decision easier.

That’s where the iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) comes into focus. The ETF offers exposure to a broad cross-section of the Canadian market. That includes popular sectors such as financials, energy, utilities and industrials.

The main appeal here is that investors don’t need to pick the right bank or energy stock. The fund covers some of the biggest names on the Canadian market.

In terms of performance, over the past year the ETF has delivered an impressive return of 29%, and over a longer five-year period those gains extend to 76%.

Investors should also note that the ETF also pays a quarterly distribution, which as of the time of writing carries a yield of 2%.

For all the appeal of XIC, the fund is focused on the Canadian market. Investors looking to diversify and add some U.S. exposure should also consider the BMO S&P 500 Index ETF (TSX: ZSP). This S&P 500 ETF provides access to some of the largest companies in the U.S.

That includes major sectors such as technology, healthcare, financials, consumer goods, and industrials.

And like XIC, the BMO S&P 500 Index ETF offers impressive growth and a distribution. As of the time of writing, the fund has returned approximately 20% over the trailing 12 months and offers a yield of 0.80%.

Together, both ETFs provide a simple starting point for investors without needing to constantly research individual stocks.

Small TFSA contributions grow over time

A few hundred invested into a TFSA may not seem like much, at least initially. Over a decade or two, investors can turn those contributions, growth, and reinvested distributions into a very different result.

Another important point is routine. Investors can build on that paycheque-to-paycheque habit with a raise, bonus, or tax refund. This can be a powerful multiplier over a longer period of time.

Millionaire TFSA investors aren’t better at predicting the market. They’ve mastered the TFSA habit of contributing money over long periods of time and letting it compound.

In short, contribute, keep the investments simple, and give the portfolio time to grow.

Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

AI investing could have upward trajectory
Stocks for Beginners

AI’s Biggest Bottleneck Isn’t Chips: These TSX Stocks Could Power the Next Boom

AI chips are impressive, but the real investing opportunity may be the power and fuel infrastructure needed to run data…

Read more »

man touches brain to show a good idea
Stocks for Beginners

What the Everyday Canadian Investor Needs to Know About the Summit

Canada’s $100-trillion-investor summit may sound abstract, but it points to one practical theme ordinary investors can follow: electricity infrastructure.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Stocks for Beginners

Canada’s Defence Push Could Unlock $500 Billion: Here’s the TSX Stock I’d Buy

Defence spending is shifting toward space, data, and surveillance, and MDA Space is already landing real contracts in those areas.

Read more »

nuclear power plant
Energy Stocks

Canada Wants to Become an Energy Superpower: Here’s the Stock I’d Buy Today

Carney’s “energy superpower” plan leans heavily on nuclear power, and Cameco sits right where more reactors meet more uranium demand.

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Canada’s Aerospace Boom Could Be Just Getting Started: Here’s the Stock I’d Buy

Canada’s aerospace hub in Montreal could benefit from surging global defence budgets, and CAE may be a key way to…

Read more »

Map of Canada showing connectivity
Energy Stocks

Canada Wants to Be an Energy Superpower: Here’s the 4.1% Dividend Stock I’d Buy

Canada wants to act like an energy superpower, and TC Energy already owns much of the pipeline “plumbing” needed to…

Read more »

Start line on the highway
Dividend Stocks

Canada Has $500 Billion of Major Projects in the Pipeline: Here’s the Stock I’d Buy

Canada’s plan to speed up approvals for mega-projects could make WSP a key winner long before construction even starts.

Read more »

truck transport on highway
Stocks for Beginners

2 TSX Stocks to Buy With $5,000 Right Now

If you are looking for top quality TSX stocks to add on pullbacks, here are two stocks I'd happily buy…

Read more »