“Opting for this very safe strategy will probably make your child a good saver, but it won’t make him a millionaire,” says Dekanic. “He needs to adopt a more aggressive strategy and get his money working for him to boost his returns.”
The TFSA name is a bit of a misnomer and might better have been named a TFIA or Tax Free Investment Account. That’s how Dekanic believes it should be viewed. Parents who want to help their kids grow wealth must give them guidance. Start by doing what I did: take your child to the bank and open a self-directed TFSA. For most kids, opening investment accounts is intimidating, so having mom or dad there makes it smoother.
The key to success is motivating your child to invest for the long term. Show them how quickly money accumulates with regular $5,000 annual contributions. “Kids are like me—they get excited over getting rich,” says Bridget Casey, 26, a University of Alberta recruiter who started contributing to a TFSA four years ago. “Right now, I’m excited about my TFSA. I’ve learned if I save from an early age and stay out of debt, I’ll be really happy and wealthy in life. If I can do it, anyone can.”A self-directed TFSA gives your child the flexibility to hold stocks, bonds and exchange-traded funds. Low-fee mutual funds, including index funds, also work well for beginning investors because they minimize trading commissions. Focus on equities to power their money’s growth over time. “In their early 20s, kids with a long-term perspective can ignore fixed-income investments,” says Nancy Woods, associate portfolio manager with RBC Dominion Securities in Toronto. “They get better returns with solid growth stocks or blue-chip stocks that pay healthy dividends.”
Show your child the importance of establishing the habit of contributing regular set amounts—preferably monthly. The truth is young people don’t have much money but that shouldn’t hold you back. A structured savings program started at an early age guarantees success.
Take my daughter Laura, 21. She’s a full-time forensic accounting student at Seneca College and works part-time as a cashier at a local pharmacy. When I helped her open a TFSA three years ago, saving money was the last thing on her mind. To entice her, I promised to match every dollar she contributed, up to $2,500 a year. Believe me, it didn’t take long for Laura to realize a matching amount of free money for her TFSA is a wonderful thing.
But there’s no point maxing out TFSAs if you have consumer debt. Pay that off first, then look into TFSAs. “TFSAs work best when you’re debt-free,” says Jason Heath, a fee-only adviser with Objective Financial Partners in Toronto. “Young people living at home with no debt and few expenses who are also working part-time or full-time are at the perfect time in their lives to make their contributions count.”
It’s also important to encourage kids to learn about investing. “My son Tyler started contributing to his self-directed TFSA in 2010 when he was 18,” says Woods, the RBC portfolio manager. “I helped him open the account, and although he has a small part-time job and hasn’t been able to contribute the maximum of $5,000 a year, he’s contributed $1,400 to date and is anxious to open his statement every month.”
What’s important is he’s learning to invest his savings wisely to build wealth. “It’s very motivating for him. Today, his TFSA is worth $2,030. The small amounts of money shouldn’t hold kids back,” says Woods. “You can always buy one share of a stock to get started.”
How large can you expect a TFSA to grow if you begin as a teenager and stay invested 50 years or more? That depends on two key things: how much is contributed and how it’s invested. In the four examples we look at, we’ll assume a child—perhaps aided by gifts from parents or grandparents—contributes $5,000 a year beginning early in adulthood, ideally by 18.