Yahoo Finance TFSA Investors: How to Catch Up and Hit Your Contribution Limit Every Year
Written by Amy Legate-Wolfe at The Motley Fool Canada
The Tax-Free Savings Account (TFSA) is an excellent way for Canadians to create savings that last. If you were 18 when the program first started in 2009, now you have $88,000 in contribution room that you can add to if you haven’t added a dime yet!
That can be exciting, true. But also daunting. You haven’t invested a dime, so how on earth are you going to catch up? And how would you manage to reach your contribution limit after that?
I’m not about to hand you $88,000 in cash and tell you to invest it. That’s just simply not a reasonable way to invest. However, I can certainly recommend some strategies to help you catch up. And what’s more, to help you increase your funds far beyond the base amount.
Don’t give yourself a raise
If you’ve been managing just fine with your current funds and suddenly get a raise from work, for example, the best advice I can give you is to not use it. Granted, if you have debts to pay, don’t let that new found cash go to waste. However, when it comes to your budget and how you’ve been managing for years, I would keep everything else the same.
Instead, use that extra cash like a bill payment towards your TFSA. Every pay cheque, transfer over the same amount just like a bill payment again and again. This can add up incredibly quickly for investors.
Use a debt approach
Now, of course, we all don’t receive a raise time and again. In this case, I would recommend doing what many Canadians in debt consider and that’s going over your budget. This is something everyone should do every three months or so, to see what you’re spending and where you’re wasting money.
It can be easy to say that you don’t have the funds to put towards your TFSA in this case. But let’s face it, you do. If you were suddenly in a huge amount of debt and needed to pay it off in a short period of time, you would find the money. Whether it took downgrading the fancy car you don’t need, selling items online, anything to bring that cash in.
I’m not saying you should sell your home and live in a one-bedroom apartment with four kids. But I would take a hard look at your budget and be honest with yourself about what can stay, what can go should an emergency come down the line. This will help you put that cash aside in your TFSA, to use in case of such an emergency in the future.
Let it grow
Once you’ve started a consistent strategy of investing in your TFSA, it’s time to turn that cash into more cash. This also can be done through every pay cheque, and frankly it should be! Drip feeding into investments has been proven to decrease volatility over time. But today, if you have a bit of cash you want to put somewhere, I would choose a Big Six Bank like Bank of Nova Scotia (TSX:BNS).
Scotiabank stock has provisions for loan losses during downturns such as this one to help it recover. It holds a 6.11% dividend yield as of writing, with shares down 17% in the last year from this downturn. That makes it a great deal to consider right now, as Canadian banks like Scotiabank have proven to recover in a short period of time.
For Scotiabank, this comes from investing in international locations in emerging markets such as Central and South America. It trades at just 9.1 times earnings, putting it in value territory as well.
Bottom line
If you’re looking to catch up and keep your funds rising, Canadian banks are some of the best places to look. And Scotiabank offers a strong choice trading in value territory and with a high dividend yield as well. So get defensive, and get consistent. Choose the method that works for you, and invest in your TFSA each and every pay cheque, starting right now.
The post TFSA Investors: How to Catch Up and Hit Your Contribution Limit Every Year appeared first on The Motley Fool Canada.
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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
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