Of the three main tax-advantaged programs: Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts, TFSAs are quickly becoming the investment program of choice for Canadians. Personally I have taken full advantage of all three programs, because it’s hard to beat investment returns inside a tax-free program.
The simplicity and flexibility of the TFSA makes it my personal favourite. In future articles I will discuss the other programs but in this, my first Grainews article, I’ll focus on the TFSA and why any entrepreneur, farmers included, might consider having one.
First, about me. I am a life-long agriculturalist and remain active in the industry. While building my career I became an active investor in both stocks and real estate. Real estate entails a lot of work, which is difficult when travelling extensively, so I gravitated towards the simplicity of stocks. I sure don’t miss the tenant and toilet days!
I recently penned a book, Stocks for Fun and Profit: Adventures of an Amateur Investor in an effort to help other like-minded amateur investors succeed at stock investing. While I don’t have a formal education in finance, I have graduated from the ultimate educational institution, The School of Hard Knocks! I hope to help others graduate from this school, with a lot fewer knocks than I experienced.
My first decade of stock investing was relatively unsuccessful. This prompted adoption of a different approach. Many give up on stock investing after a few bad experiences, yet the market has driven about 10 per cent annual returns for the last century, and similar returns are likely in the next century. I was not willing to give up on the markets’ great wealth creation ability. Over the past 25 years, I have earned an 11.7 per cent annual return in my RRSP. Other family accounts have long-term annual returns ranging from 9.3 to 17.4 per cent. And here’s the first little secret: rocket science was not used to derive these results.
The compounding effect of such returns is phenomenal. Twelve per cent annual returns doubles the money every six years. I share these personal results strictly for the purpose of illustrating what a straightforward approach can achieve. I refer to it as “success through simplicity.”
The current maximum annual TFSA contribution limit is $5,500 per year per person over 18. The total maximum limit is $57,500, if you were 18 in 2009 and have not yet contributed. If you can pinch yourself $5,500 per year (just $15.07/day) and contribute for 10 years, achieving market returns, you will build almost a $100,000 kitty, away from the farm. Why would any entrepreneur, business owner, farmer consider a TFSA? Here are a few possible reasons:
- All returns are earned tax-free (Yippee).
- Funds in a TFSA can be used for whatever personal choices you make, away from the farm business.
- It’s easy for a farm, like individuals, to find expenses. A structured plan to set aside a small amount of money each week or month helps a farm and farmer, live within their means. It is a good idea to live below the standard of living you can afford.
- Small businesses, like farms, don’t always turn out as planned. An investment cushion can give you peace of mind that you have the means to move on if necessary.
- If you really, really have to, in an emergency, you can withdraw all the funds from a TFSA tax-free, to support the business. When the calendar turns to a new year, you can re-deposit all those funds, plus whatever new contribution room is available. It’s a very flexible program.
My purpose isn’t to fully explain all the details of the relatively simple TFSA program. My purpose is to try to motivate savings and a straightforward investment approach to help readers capitalize on the tremendous wealth creation potential of the stock market. It is a terribly misunderstood entity and we’ll get into de-mystifying it in the next installment. But for now, I have a secret for you. Don’t tell anybody else, but it’s all about buying common shares in solid companies, and holding them for a long time. Many people in the market aren’t really investors at all. They are traders or speculators. If the market is approached with true investor intentions, effort is reduced while success is enhanced.