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?
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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.
