Toronto - Jul. 4, 2020: The average net saving for Canadian households, in 2018, was a mere $852. A separate report showed that 32% of Canadians have less than $10,000 in savings. Whilst these figures are actually better than most major economies in the world, it’s never been more important to have a large emergency fund.
You don’t have to be a doomsday prepper to realize that COVID-19 is posing a huge financial threat to all of us right now. In March, the Dow Jones saw its largest day point drop in its entire history, and businesses worldwide closed for the sake of social distancing. Key worker or not, no one is safe from layoffs during a crisis, and a crisis is a certainty for many economic experts.
At the very least, everyone should have 2+ months of expenses worth as an emergency fund. Of course, saving any more is futile if there’s debt to be paid, but an emergency fund should precede all.
What you need to know about TFSA
TFSA stands for tax-free savings account, which is specific to Canada. It sounds a little bit like a highstreet bank savings account where you’re given an embarrassing $0.12 of interest each month for funneling your salary in there. It’s actually nothing like such an account. Instead, it is more of a basket, where you can place an assortment of financial instruments within it. Everything from cash, to stocks, to ETFs.
This is basically just an incentive scheme from the Governments (introduced in 2009) to entice people to save. Bit ballsy, considering they were just coming out of a recession where spending would have stimulated the economy, but it’s clear the intent runs deeper than that. The idea is that the money you place into such a TFSA basket has already been taxed, so let’s not double tax you for taking things back out.
How the TFSA works and its advantages
The TFSA is very simple, and is often lauded for its easiness to withdraw money from. You can withdraw without penalty at any time (unlike the RRSP). The TFSA is essentially a tax-advantaged account. This is to help the public save so they can get on the property ladder, or just so they have a substantial fund should anything drastic happen — like COVID-19. It’s not so much the immediate tax breaks, but in fact the long-term ones, as the investment gains from the investments in the basket will not be taxable.
Investment options for the TFSA
To elaborate on the investments that can be held in the TFSA ‘basket’, the following is possible:
● Real estate
● Guaranteed Income Certificate
● Government and Corporate Bonds
● Mutual Funds
● Some others
Of course, it entirely depends on your goal. If you’re saving for a deposit on your first home, then investing in stocks and ETFs may not be wise. Whilst it completely depends on risk tolerance, this is generally thought to be because if you’re long-term investing in the market, you should be prepared to not touch your money for at least 8 to 10 years. This is because time in the market beats timing the market, and you don’t want a crash to mean that your house deposit money is halved for half a decade before rallying back up.
Again, risk, time and goals are what’s important here. Ultimately, the TFSA allows for a well-diversified investment portfolio that’s sheltered from tax — this is the headline here.
There are limits to the TFSA
When we say limits, we don’t mean disadvantages — we mean literal limits (here’s a TFSA limits and contribution guide). You can’t put more than a certain amount in each year, which is known as the contribution limit. This differs each year, but it currently stands as $6,000 in 2020. There is also a lifetime limit too, set at $69,500, though this could be extended in the future. If we assumed the yearly and lifetime limits to be the same (they won’t) then you would get around 11 years of maxing out contributions until the lifetime limit was hit.
It’s vitally important that if you’re going to use the TFSA, then you must keep up to date with the limits. It might also be worth checking out historical limits too, to get an idea. This is because if you over contribute, you’re charged 1% of the excess each month until it’s removed from the TFSA.
It’s vital to be maxing out this limit each year if you can. Not only because of the tax savings, but as an extra incentive to save during what might be a rollercoaster of 2020 (... well, even more of a rollercoaster, if that’s possible). Even if it's low-yielding, the TFSA makes it easy to withdraw money, sheltered from tax, and to maintain a diversified portfolio.