While a million dollars isn’t enough to project one into the upper rungs of society like it once did, it’s still a heck of a lot of money.
Becoming a millionaire seems out of reach to many millennials just starting out their financial journey. In a world where rent, tuition, and other necessary expenses are going through the roof, just how can someone get ahead?
Fortunately, there’s help. A Tax-Free Savings Account (TFSA) is by far the best wealth-building vehicle for young people today. It allows investments to grow indefinitely without owing a nickel in taxes. Compare that to the other popular retirement savings plan, the RRSP, which is only tax-free until it’s time to withdraw. Then the government gets their share.
It turns out it isn’t really that hard for a young person today to accumulate a cool million in their TFSA by the time they hit a traditional retirement age — or even before. Here’s how you can ensure a similar fate.
Save aggressively I understand saving is hard, which means you might have to make some sacrifices for your future self. Limit your meals out or drinks with friends. Split a cheap apartment with roommates rather than living on your own. Take the bus instead of owning a car. Bring down the cost of school by applying for every scholarship out there.
Remember, the big expenses matter much more than the smaller ones. Focus on big wins rather than giving up the occasional indulgence.
Invest early Saving today is incredibly important. The sooner you put your money to work, the sooner it’ll start growing.
Say you start with just $5,500, which is the yearly limit you can put in your TFSA. You invest it once at age 20, earn an 8% annual return, and don’t look at your TFSA again until 65. That original $5,500 would be worth a little more than $175,000 when you’re ready to retire.
Compare that to a $20,000 investment made at age 40. After 25 years the investment has still grown significantly. At an 8% total return, it’ll be up to just under $137,000. That’s still a good result, but it lags the original investment despite a much bigger start.
Pick great companies Putting your capital to work in some of Canada’s best companies is by far the easiest way to become a TFSA millionaire. It’s a lot easier to get rich when your money is growing at a double-digit clip.
Bank of Montreal (TSX:BMO)(NYSE:BMO) is a perfect example. Despite the stock getting hammered by the 2008-09 financial crisis, shares are still up 140% over the last 10 years. And remember, the company paid a generous growing dividend the whole time. This pushes the total return to close to 200%.
The future looks bright for BMO, too. The company’s U.S. operations are doing well, and its Canadian bank does nothing but deliver steady profits. I also like its expansion into the ETF market, which will obviously play a big part of wealth management going forward.
Genworth MI Canada (TSX:MIC) is another great stock to own over the long term. The company provides mortgage default insurance, a mandatory charge paid by the borrower on certain mortgages. It protects the lender in case the borrower can’t pay.
This has traditionally been an excellent business. Borrowers pay anywhere from 2% to 4% (sometimes higher) of the value of the mortgage and Genworth pays out a fraction of that in claims. In the meantime the company can then invest those premiums. Those gains go straight to the company’s bottom line.
Genworth pays a delightful 4.4% dividend today, meaning investors need just 3.6% in annual capital gains for the investment to post a total return of 8%.
Start today The time to start investing is today. It becomes much harder to become a TFSA millionaire if you put off starting for even a few years.
I’m confident anyone can do it. Sure, it takes sacrifice and commitment, but it can be done. Your future self will thank you.
Fool contributor Nelson Smith has no position in any stocks mentioned.