The Tax-Free Savings Account (TFSA) is one of the best ways for Canadian investors to create enough passive income to help reach their long-term goals. While those goals are and should be different for everyone, having a goal around $1 million could certainly be a strong one if you’re aiming for retirement in the next few years.
With that in mind, today, we’re going to look at how investors could build a million-dollar TFSA by investing in a solid exchange-traded fund (ETF). All you need is $500 to put towards it on a monthly basis. So, let’s get into it.
1. Get the basics
The TFSA is a powerful investment tool available to Canadians, allowing for tax-free growth and withdrawals. ETFs are investment funds traded on stock exchanges, much like stocks. They hold a diversified portfolio of assets, which can include stocks, bonds, or other securities.
Vanguard FTSE Canada All Cap Index ETF (TSX:VCN) is a popular choice, providing broad exposure to the Canadian market, which makes it a suitable candidate for long-term growth. VCN has historically provided a robust compound annual growth rate (CAGR) as well. Over the last decade, Canadian equities have generally shown strong performance, and VCN captures a broad spectrum of the Canadian market, which reduces risk compared to sector-specific ETFs.
What’s more, the Canadian market has a solid future outlook, with a stable financial sector, strong natural resources, and growing technology and industrial sectors. VCN’s broad exposure to the Canadian market positions it well for future growth.
2. Consistency
Now, you’ll want to open a TFSA with a reputable financial institution or brokerage. Ensure that the provider offers a wide range of investment options, including ETFs like VCN. Compare fees and services to find the best fit for your needs.
From there, commit to investing $500 per month into your TFSA. Consistency is key, as regular contributions harness the power of compounding over time. Automating these contributions can help ensure that you stick to your investment plan without fail.
3. Buy and reinvest
Within your TFSA, purchase shares of the VCN ETF. Vanguard FTSE Canada All Cap Index ETF offers broad exposure to Canadian equities, including large-, mid-, and small-cap stocks. This diversification helps mitigate risk while positioning your portfolio for steady growth.
One of the significant advantages of ETFs like VCN is their dividend income. Ensure that any dividends received are automatically reinvested to purchase additional shares of the ETF. This reinvestment strategy accelerates the compounding effect, significantly enhancing your long-term returns.
4. Take advantage of increases
While staying at $500 is a strong choice, try to increase it when possible. Each year, the Canadian government increases the TFSA contribution limit. Ensure you maximize your contributions annually to take full advantage of the tax-free growth. If your financial situation allows, consider making lump-sum contributions to use any unused contribution room from previous years.
Investing for the long term requires patience and discipline. The stock market can be volatile in the short term, but maintaining a long-term perspective is crucial. Avoid making impulsive decisions based on market fluctuations. Trust in the power of compounding and the historical performance of diversified investments like VCN.
Bottom line
Using this method, with a CAGR of around 7% and including dividends, investors can put that $500 towards VCN ETF on a monthly basis. While it will take patience, it should take about 35 years to reach $1 million. Start early, contribute often, and you’ll retire in style.
