This should go without saying, but I’m going to say it anyway. After all, this post does need an intro.

If you’re not investing in TFSAs, you’re missing out. My TFSA is more maxed than Carrie Bradshaw’s credit card, and yours should be too. TFSAs offer advantages like the ability to withdraw money whenever you want without taking a tax hit, and the flexibility to add cash back into them after you take it out.

Even though I’m still a huge fan of RRSPs, and think if given the choice, most people should contribute to them first, there’s still plenty of room for someone to invest in their TFSA too.

When somebody asks me whether they should invest in their TFSA or RRSP first, I like to say it doesn’t really matter. Just pick one and save.

Many diligent savers have one big goal–to end up as a TFSA millionaire. This might seem like a pretty lofty goal. Interest rates are lower than my IQ. Stocks (at least here in Canada, anyway) have gone basically nowhere in the last decade. Bonds have done relatively well, but there’s no way that bull market is continuing for the next decade. And so on.

This uncertain environment has caused many savers to just throw up their hands and keep their cash parked at the bank, collecting a measly 1% yield. That’s not so bad for an emergency fund, but it’s a terrible return for a TFSA. At that rate, the only way you’ll be rich is if you get frozen for 1,000 years.

A Futurama joke? Don’t mind if I do.

Bank Teller: Okay, you had a balance of $0.93.

Fry: All right…

Teller: And at an average of 2.25% interest over a period of 1,000 years, that comes to 4.3 billion dollars.

Anyhoo, let’s figure out how you can become a TFSA millionaire.

The math

It turns out it isn’t that hard to the TFSA to seven figures. Let’s run some hypotheticals, bitches.

That never gets old.

Scenario #1

  • Borrower is 25 years old
  • Has $5,000 to put towards this year’s contribution
  • Has $5,000 annually to invest for the next 30 years
  • How much money will they end up with at 55 earning 6%, 8%, and 10% annually?

First, 6%:

tfsa-6

Look at that, kids. You’re already halfway to being a TFSA millionaire, and all it took was an investment of $155,000. Not bad.

Next, 8%:

tfsa-8

An extra 2% really makes a difference. That’s the beauty of compound interest. Just 2% more annually gets you like 33% more at the end of a lifetime of investing.

Finally, 10%:

tfsa-10

Would you look at that? We’re basically there, and all it took was investing five large a year for 31 years and earning 10%.

Look. It takes a lot of work to consistently invest over the course of a few decades. And you have to make sure you don’t do anything stupid like raid the cash for a nose job or glitter or whatever it is you kids buy these days.  Consistency is the key, as well as getting decent returns.

Best case scenario

Next, we’ll build a slightly more aggressive scenario.

  • Borrower is 25 years old
  • Puts away $5,500 for the next 40 years, until traditional retirement age
  • Has already saved $41,000, the maximum contribution room
  • Same return scenarios, 6%, 8%, 10%

6% return

tfsa-max6

Well, that was easy. It turns out giving the investment an extra ten years to grow really does wonders.

8% return

tfsa-maxed-8

Hey rich old guy! Can I have a loan?

10% return

tfsa-maxed-10

(angels sing)

So it turns out it’s really not that hard to become a TFSA millionaire. All you need to do is max the thing out day one, continue to max it out, wait for a while, don’t do anything stupid, and you’re golden. I guess all that is easier said than done, but it just goes to show it’s certainly achievable.

What to invest in

You already know what to invest in. Just put your cash in a few ETFs with low fees, hold on to them for a while, and you’re in business.

I don’t think it’s going to be that easy going forward.

It’s not so much that passive investing sucks. It sure beats mutual funds (except maybe these kick-ass ones), and with the average person not knowing the difference between an income and a victim impact statement, most have no business investing in individual stocks.

But at the same time, we’ve still got to be smart about what we invest in. Both Canadian and U.S. stock markets are expensive, and it’s likely both will barely keep pace with inflation over the next decade.

So what’s a wannabe millionaire to do? There are plenty of options. You could put your money to work in Poland, Turkey, or other cheap European stock markets. Energy is still a very inexpensive sector. Canada’s REIT sector is still relatively attractive. Or you could buy Aimia shares like I have in my TFSA.

Even if you max out your TFSA going forward, you’re still going to need a decent return to get that bad boy to $1 million. It’s certainly possible to do so investing in the way that’s become standard. I just don’t think that’s going to be the ideal solution over the medium-term. Local stocks are just too overvalued.

Conclusion

It turns out it’s not going to be that hard to become a TFSA millionaire, especially if you save a lot. It’ll take patience, a halfways decent return, and making sure you don’t take out money at an inopportune time, but it’s very possible. The only issue is inflation might make that windfall look less impressive when the time comes.

Tell everyone, yo!