Since I’m going back to school in September, I have started to reminisce about the good ol’ times of my undergraduate degree, when I had absolutely nothing to worry about except to get good grades, work at my care-free retail part-time job, and party on the weekends to try and score free drinks from boys. I had a pretty balanced student lifestyle, I was active in the school clubs and committees, I worked, I studied, got some scholarships, and I partied. It was a pretty fulfilling undergrad.
I regret that I partied so much and wasted all that money I worked so hard to make. But hey, you’re young only once, right? However, there is something else I regret.
I wish I had started investing earlier. I met a guy in college who was passionately involved with stock picking and trading (can you say HELLO what a turn on??) and his passion rubbed off on me. He would do this instead of working a part-time job earning $9.50 an hour like I did, and he paid his way through university with his investments. Inspired, I bought one or two stocks through my mom’s BMO Investorline brokerage, because at the time I didn’t have a brokerage account. Thinking back, it was my first lesson in investing, don’t take hot stock tips from friends and acquaintances, especially if you don’t understand what you’re buying! If they would have had a hands-off investing option back then like one of the new Canadian robo advisors, I would have been all over that!
But I digress. The old days of expensive brokerage accounts and commissions have vanished. Things have changed, fast forward to 2011 and young Canadians these days are so lucky- they have the option of contributing to a TFSA.
In case you haven’t heard, a TFSA is a Tax Free Savings Account introduced by the government a few years back. In a nutshell, you have to be 19 years and older to contribute to one and you can contribute $5000 per year of your after tax income. You can withdraw the money any time but must wait until the next calender year to put that money back (only if it exceeds your combined contribution limit) or else you’ll be dinged with over-contribution charges. If I were 19 now and a student, I would invest in a TFSA rather than an RRSP, that’s for sure. I would also enjoy my beautiful youthful looks too HA!
As a student, you may think you’re at a disadvantage because you ARE a student and are relatively income-less, but you have time on your side. Time my friend, is a very beautiful thing.
Here are the TFSA options:
TFSA as a Savings Account
Many (I think most) people are using their TFSA room for a high interest savings account or emergency fund of some sort. This is a good idea, though in my opinion, $15,000 (which is the contribution room amount everyone has since the TFSA started) is quite a lot for an emergency fund! These are savings accounts that give you back interest of 1.2% to 2% (at today’s current rates). You might think this is a good idea because its tax free, but at 1.2 to 2% you’re not even beating out inflation, which is usually around 2-3%.
To be blatantly honest – using a TFSA as a savings account is NOT investing. I guess it’s slightly better than putting money underneath your bed, but the rate of return on the interest is pretty negligible, especially if have small amounts in your TFSA. You’re way better off opening a TFSA with robo advisor like Wealthsimple or a discount brokerage like Questrade. If you’re absolutely set on using your TFSA as a simple savings account, I recommend using a Canadian online bank in order to make sure that you get the best interest rate available. Places like Tangerine don’t have any storefront costs and consequently, they can pass those labour savings on to you as the final consumer.
TFSA as a GIC account
A GIC is a Guaranteed Income Certificate, whereby you put money in and it’s locked in. The interest income is paid to you after you finish the term (it can be 1 year or two years or even five years). It’s a safe bet as the original amount you contribute is protected, but usually the rates of returns are so nominal (like 1.5 to 2%) that they don’t beat inflation either. It’s even worse than the High Interest Savings Accounts because you can’t access your money readily.
Mutual Fund TFSA
For a mutual fund based TFSA you can have pre-authorized monthly contributions and put powerful dollar cost averaging on your side. This means that you neglect market timing (which takes the stress out of investing, though some people actually enjoy market timing and can get better returns if they employ value investing tactics). My favourite is the TD E-series fund. They are index funds with low Management Expense Ratios (they charge as low as 0.5% for some funds) really help you keep more of your money. ING Direct also has their own Streetwise funds. It also has a low MER of 1%. If you would rather have some help, there are many financial advisors, mutual fund advisors who can help you, though you have to be cognizant that some of the MER’s can be as high as 3.2%. For example, Investors Group is one of them.
However, if you wish to access your money in a sooner rather than later, investing with your TFSA may not be for you, because that $10,000 you put in your TFSA might be very realistically be only $7500. It’s hard to time the market and it really depends on your risk tolerance.
TFSA as a Trading Account
This is where I have my TFSA. I have yet to transfer my non-registered investing account to my TFSA, though I plan to do this to max out my TFSA contribution room. If they had this back when I was in school, I would probably pounce all over it. I would probably only use a discount brokerage for the TFSA trading account, because if you went with a big bank brokerage account, you would be charged $25-$29 each time you make a trade. That can really really eat away at the money you have invested in your TFSA. I personally use Questrade. It costs me $5 to make a trade – and I can even buy ETFs for free! As a young investor, I would start with Exhange Traded Funds. They also have low MER’s (slightly lower than the TD E-series) but you do have to pay a commission each time you trade.
The good thing about using the TFSA as a trading account is that you don’t have to pay tax on your capital gains. However, you don’t get to use capital losses, either. It’s almost like a virtual world trading world (like they have for “pretend” stock portfolios where you can see how well you invest) where you don’t have to worry about capital gains or losses for your tax return. For that reason, I’m a big fan of the TFSA as a trading account because it’s sometimes difficult to be meticulous about your capital gains and losses, especially if you buy and sell stocks often.
HOWEVER, this is a big warning- if you think you might need this money in the near future, which is probably likely for young adults and students, investing your money can be very risky. You never know where the market might be when you need the money. You could have half of what you invested in the first place. Or vice versa. If you are willing to take that risk, then using your TFSA as an investment vehicle is for you.
Because the contribution room has been increasing (it’s now at $15,000) I think more and more people are probably thinking about switching or adding to their TFSA’s from a basic emergency fund.
Readers, of these four options, what do you have your TFSA in?