The Decibel - Stress Test: Here’s what young Canadians are putting in their TFSAs

Episode Date: August 2, 2024

From Stress Test, The Globe’s personal finance podcast for Gen Z and millennials:We’re taking a peek into the TFSAs of regular Canadians to give you ideas of how to better use yours. In this episode, Rob chats with Aravind Sithamparapillai of Ironwood Wealth Management to break down TFSAs, FHSAs and RRSPs. Aravind is not an accredited planner. We’re also joined by two guests with very different investment strategies: a tech entrepreneur in the midst of launching his own business, and a millennial whose investment journey started somewhat unintentionally.

Hey, it's Manika. Today, we're bringing you an episode of another podcast from the globe, Stress Test. They're just wrapping up their ninth season, and here's one of their most recent episodes. You can find all episodes of Stress Test on their feed, wherever you listen to your podcasts. Hope you enjoy it, and we'll be back next week. You've saved some money, and now you want to invest. You decide on using a tax-free savings account. Then what? It's easy to park your money in a registered account like a TFSA

or a first home savings account, but it can be intimidating to take the next step, actually investing your cash, especially if you're worried you could lose some of your hard-earned savings. Welcome to Stress Test, a personal finance podcast for millennials and Gen Z. I'm Rob Carrick, personal finance columnist at The Globe and Mail. And I'm Roma Luzio, personal finance editor at The Globe. We know many new investors are looking for guidance about the best way to invest their money. Today, we're taking a peek into the TFSAs of regular Canadians to give you some ideas of what your peers are doing with their savings.

Now, don't get the wrong idea. We are not about to pick hot stocks or tell you how to make a quick score on the market, but we don't want you to leave your money sitting in your TFSA or your first home savings account or your RRSP when it could be growing. Up first, we'll speak with a financial planner about exactly what a TFSA is,

how best to use it, and when an FHSA or RRSP might make more sense. Joining us from Hamilton, Ontario is Aravind Sithamparapillai, associate with Ironwood Wealth Management Group. Aravind, I remember when TFSAs were introduced in the 2008 federal budget, and it was clear right from the get-go that these were going to be popular. Just reading the description made me think these are going to resonate, and they have. I think TFSAs are the best brand in personal finance. I do not hear any negativity about them whatsoever. People seem to love them. I want you to start us off by telling us what are TFSAs and why are they so popular amongst young people and the rest of the population? Yeah, I would love to. And I

agree. They are a great tool. And so the name or those letters TFSA stand for tax free savings account. Now, basically, the way it works is when you contribute money to a TFSA, so it's a registered account. So people who don't know about a TFSA, they might be familiar with say, an RRSP or an RESP. So the TFSA is a registered account like that. But the main difference is when you put money into the TFSA, you don't get any type of tax break. However, when it's in there and you are saving or investing and the money is growing, it's growing tax-free and then you can take it out at any time tax-free. You don't have to pay any tax on it whatsoever. And so that's what makes it very useful and flexible, especially for young people getting started with their savings, because there aren't any restrictions in taking the money

out if you need it. Evan, can you explain the difference between saving and investing and how TFSAs can work for both of those purposes? Totally. So when we think about saving, what most people will think of is, oh, I have some type of expense or something coming up in the next six months one year maybe i'm building up an emergency savings fund and the idea with that idea of saving is you want that money to be safe you don't want to see it go down in value and so you might open up a quote-unquote savings account at a bank or you might purchase a gic where you know that the interest rate is guaranteed, and you know that your money isn't going to go down. You can do that inside of this

TFSA. So I always use whenever we're talking about accounts like a TFSA, I say, imagine it's like a cup. And you can put all types of things in the cup. And in this case, you've got your TFSA, which is this cup or the account that actually holds your money. You're putting your money in there and then you're buying a GIC or investing in a high interest savings account. And that interest is tax free. So that's saving. Now you can do the same thing with investing. You can open up a TFSA at an investment institution, so a brokerage account, if you will. And you can purchase ETFs or mutual funds or individual stocks and bonds. The difference there is you know when you invest that your investments can go up or down. And so while you hope it goes up over the long term, it may go down in the short term. But the key is you hold it for long enough, if you've got a well-diversified portfolio, and it grows to three, four, five times the value, that's all tax-free as well. Arvind, for the short-term savings goals, let's say putting the money into my TSA for one to

five years, what are your thoughts on what type of investment or savings product I should use for that? Rob, I would break that out into maybe one to three and then three to five. You don't know where markets are going to go in any type of short-term time frame. So especially one to three years, you want that safe. So if you know for sure, as an example, hey, two years from now, I have to cut a tuition check because I just got accepted to a master's program. Sure, a two-year GFC might work perfectly for that defined outcome, defined time frame goal. Same thing, high interest savings accounts are a great

example. When we talk about three to five, the reason I say we can break that out a little differently is a full aggressive all stock portfolio, I wouldn't recommend for anything under 10 years. But if we're talking about a balanced portfolio, so a moderate or a low to moderate risk portfolio, or we're talking about someone who's saving month over month in their TFSA, and they're building up slowly over time, and they have the opportunity to dollar cost average. If you've got five years, that might be an opportunity to look at a low medium risk type portfolio. So something that will still go up or down. But again, if you've got five years, and you're saving on a regular basis, there may be the opportunity to let that growth carry for a while.

Aaron, how often do you come across people who open a TFSA with the best of intentions and never really do anything with it? A lot. And I say that because I think there's two types of best of intentions. I think there's people who open their TFSA and they start with $50 or $100 a month. And they tell themselves, hey, as my budget increases, I'm going to save more, build up that emergency fund, and then finally move on to investing. And then life usually hits them. The other that I see very, very often is people go to the bank

because they were told, hey, you can open up a TFSA at your bank. And then they end up with, especially if they think, hey, I am saving for a down payment for a house, but that house might be five to seven years in the future. And so they've been saving for three to five years in some low interest rate savings account. And then they come to me and I realize, hey, you're not quite at the point where you could buy a house and we could have been investing this money. And so there's that lost opportunity cost as well. What are some tips you can offer for investing in a TFSA? So first of all, I think it's important that you understand, anytime we're talking about

investing, it's important that you understand, do you know what you're doing? Do you understand the stock market? Do you understand enough to do it yourself? Are you reading reputable sources? Are you staying engaged? And are you using a globally diversified portfolio? Many people will open and they'll pick the one or two stocks that their friend told them about. And if that's your methodology, it's probably not going to work out so well for you. And that's the other downside to investing in a TFSA. Tax-free savings accounts have limited room. Every year, once you turn 18, the government will add more room year over year. But if you put money in and you lose money in your TFSA, you don't get

bonus room back. And so that's where it becomes really important to also think about how you're handling what you're investing in. Are you truly invested for the long term? Are you capable of withstanding losses and letting it ride out the markets going higher? Evan, this might be a good opportunity for you to remind us what the contribution limit is for TFSAs in 2024. So the 2024 contribution limit is, I believe, oh, confirmed, $7,000. And so you get, if you are 18, so the key here is if you're a kid or parents thinking about it for their children, you can't open a TFSA until you're 18. But if you turn 18 this year,

congratulations, you just got your first $7,000 of tax-free savings account room. And I think it's worth pointing out that if you don't use that room when you turn 18, 19, 20, 21, you can go back and backfill it, correct? Correct. And so what we actually see a lot of, especially for the millennial range clients, is many of them were in school or they had debt that they were paying off. And so when the TFSA came out back in 2008, they weren't filling it up with thousands of dollars. And so they're at a point now where there may be tens of thousands of dollars of

extra TFSA room available once they paid off their debt. Maybe they got that first high-paying job and they're thinking about, what can I do with this money? Now, Arvind, I want to circle back for a moment to the investing side of things. And the temptation I know that a lot of young people face about choosing hot stocks and really making a quick, excellent gain. In life, it's very hard to get to sort of make a lot of money quickly. We talk about side hustles in employment. We talk about cutting costs and spending so we have more money, but picking some winning stocks, and people do do it from time to time. So there is tangible success out there. How feasible is it for me to say, okay, I've got $7,000 a room in my TFS.

How about I find two or three hot stocks and I put it all on those in hopes I'll double them? Well, it definitely happens, right? All we have to do is turn to the news. And there's examples of GameStop, NVIDIA. If you bought Apple 10 years ago, look where you'd be today. So I would say that for us

to say it's impossible or it never happens is a lie because all people have to do is Google stocks that have gone up like a crazy amount. So I want to address that for all of you listeners thinking, is it possible? It's possible, but it is unlikely. It is incredibly unlikely because you have to be able to find that stock, pick it, invest in it before it's gone up. And the other thing that people fail to consider is it doesn't just go straight up. It goes up and then down. You might see 30, 40, 50% losses. And so that's assuming you even pick the right stock. But there's tons of research out there that shows that it's low, low single digit percentages of stocks that do that, that actually go on to produce these massive, massive multipliers on return. And so that's

why I always say it's possible. I won't tell you it's not possible, but it is incredibly unlikely and you are more likely to lose the money that you invest that way. I like that possible, but unlikely. I think that's a good framing for that. Now, Aravind, the federal government last year introduced the first home savings account, and it's got some of the attributes of a TFSA, some of the attributes of an RRSP. I wonder if you could go over that for us, but also tell us, is that stiff competition for the TFSA if you're a young person with a limited amount of money to invest? Yeah. So to start, let's talk about the RRSP for a quick second because the FHSA basically takes the best of both worlds.

So with an RRSP, when you put money in, and the example I always use is, let's say you make about $100,000. The government says you're going to owe roughly about $25,000 in taxes owing. Now, if you put $10,000 in an RRSP, when you go and file your taxes, what the government is saying is, hey, we're going to pretend this year that you only made $90,000, $100,000 minus $10,000. And you shouldn't have paid us $25,000 in taxes. You should have really only paid us about $22,000. So here's a tax refund if you paid too much in tax. And that's why everyone gets a tax refund from their RRSP. The kicker is that 10 grand, when you pull it out later, say a retirement or in the future, the government is standing there saying, hey, remember how we

gave you a tax break? Well, we would like to take tax off that RRSP withdrawal now. So tax break going in, taxed on the way out. The first home savings account gives you that same type of tax break going in, $8,000 a room per year for a total of five years from when you open it up. So you can put eight grand in and get a tax break. If you use it for a qualifying purchase of a home, which most people listening to this, it'll be your first time home that you're looking to buy, you actually get that money tax-free. So the government will not tax you on that money or on the growth inside the first home savings account. So Rob, I just want to make sure, any questions about that? Did I break it down well enough? I think you did a great job of

that. And let's also point out that you could put in $8,000 a year to a maximum of $40,000, which in today's housing market isn't a ton, but it's still a worthwhile endeavor, I think. But TFSA or FHSA, if I have aspirations of owning a home in the next 5, 10, 15 years? FHSA, hands down. And the reason is, so your timeframe was great, 5, 10, or 15 years. From the day you open an FHSA or from the year you open an FHSA, you have to use it within 15 years. If you don't use it within 15 years, then you either have to roll it into your RRSP or you have to dissolve it and take it as taxable income. So that timeframe is kind of important.

So someone who's 18 or 19, maybe they have dreams of working abroad, maybe not a use case for them. But for most people who are making good money in that 30-ish or 43% tax bracket here in Ontario, and they've got aspirations of owning a house, the FHSA makes a ton of sense. Because not only is it the $40,000 that you're contributing, but if we use that 30% tax bracket, remember, the government is saying, hey, we're going to give you% tax bracket, remember the government is saying, hey, we're going to give you a tax break or we're going to give you that tax deduction, which means 30% on 40K is an extra 12K in tax reduction or tax savings that you get back in your pocket that you can then turn around and invest in a TFSA if you wanted to. Arvind, when you don't make a lot of money, the idea of losing money on investments can be kind

of terrifying. How would you advise people that want to invest, they want to grow their money, but they're scared of losing money and they're kind of paralyzed by that? you about how easy it is or any of those pieces, because I have had clients who come to me and they kind of question that. The other piece is, you know, you can tailor the risk of the portfolio by having the right mix of stocks, bonds, and cash. And so everyone kind of thinks that it's one or the other. Like I have to have this aggressive portfolio that's super risky, that's going to go up or down a lot. But that's actually not true. You can have a portfolio that's 50% stock, 50% bonds. Or if you're in a position where most of your life savings are really, really important to you, then maybe you might be only starting out with 10% in stocks and the rest in cash. Is it going to grow the same? No. But we can also have that conversation. And that is a conversation I do have with many clients who are asking me.

I show them different ranges of risk. I show them what the long-term expected returns are, but also how those portfolio swings get bigger as you increase the risk. And that's where we work together and the clients can kind of pick something that fits within their comfort level when they think about the ups and downs. It's interesting you mentioned RRSP because one of the things I've noticed in the last 10, 15 years amongst boomers who are close to retirement or in retirement is they're very anti-RRSP. They don't like having to pay tax on the withdrawals and that makes the TFSA look all the better in comparison because the withdrawals are tax-free.

Can you tell us something positive about RRSP so people have good context in making the decision between a TFSA and an RRSP? Yeah, I love it. And that actually opens it up for something I was going to say, which is I think, so I'll open with where I think RRSPs are useful, even for millennials and Zoomers earlier in life, is once you get married and you have kids, because the RRSP contributes, again, we talked about that deduction, right? So the first one savings account applies as well. And your household income is tied to certain government tested benefits. So a lot of people

listening to this, if they have kids, probably qualify for the Canada Child Benefit. And the Canada Child Benefit is income tested, meaning how much household income you show determines how much money you receive. By contributing to an RRSP or anything that gives you a deduction, it lowers your household income, which actually increases your Canada child benefit. And so I discussed that as part of the conversation around what that highest tax rate or that marginal tax rate or where your tax savings will be when you contribute to an RRSP. And so what I will say about the boomers who complain about the RRSP is $10,000 in an RRSP and $10,000 in a TFSA are not the same thing because you didn't start that way. If you contributed 10 to an RRSP, you likely got a tax refund of two, three or $4,000 as well. Whereas if you put 10 in a TFSA, you didn't get that tax refund. And so you're forgetting about all of those extra dollars that you were given back earlier in your life when you contributed. And had you invested those dollars as well, or, and maybe you have, you just don't realize it because you're seeing

it on the backend, you are in a better position versus the TFSA, especially once you factor in those other government benefits. After the break, we'll hear from two people with very different investment strategies. So my name is Sebastian. I'm 27 years old and I live in Montreal. Sebastian started investing in 2018. He's always loved finance and his dad is an accountant. When I started in 2018, I started in TFSA because I knew from my father and from my own research that you could start putting money when you were 18 and you would accumulate a pretty decent amount each year. For me, it was a no-brainer to be able to make money without being taxed on it because it's

really a crazy advantage to be able to put a dollar, make a dollar and not be, you know, taxed on it. So my goal ever since I was 18 was to maximize my TFSA, sorry, as soon as possible. Working full time and living at home allows Sebastian to invest a large amount of his income. Since he started six years ago, he's altogether made about 15 to 20% on his investments. Yeah, so when I started, as I didn't have a lot of money and I was still at home, I decided to take a bigger risk because for me it was logic. If I lose $10,000, I'm young, I can make myself back. I'm at my parents. My strategy at the time was go big or go broke, basically. Which, looking back at it, at the time, I wasn't really aware of the downsides, let's say. So I took a lot more risk. At first, I was investing in companies

that I believed in. Before GameStop, I had some Lightspeed, some Nuve, some Canadian stocks, Suncor, which were great stocks at the time. And still, some of them are still great stocks. And I was able to make, I think it was during the COVID, so it was a really crazy period. I think in the first month, in one of my accounts, I made something like 100% just only stocks, which was crazy. He got the lowdown about stocks on places like Reddit.

At one point, I ended up on Wall Street Bets with, you know, the initial post of Roaring Kitty, where he was talking about GameStop. And at that point, it was December, I think, and it was still on the low. I think it was trading at $12. And I told myself, if it goes to $20, I'm going to go all in because it's going to be a real thing. And so that happened. I bought at 20, sold at 60. And then when it went back to 80, I jumped back in the ship and I said, all right, I'm going all in. I went to bed that night with 7,000. The next day, my account was up $10,000. I was at 18. And then I went to bed, stuck doubled. And I woke up with $43,000, which was pretty crazy. Yeah.

My parents, they were like, Sebastian, cash out right now. And I was like, let me handle this. I know where it's going. Finally, I didn't know where it was going because on the next morning, I lost like $15,000 in 15 minutes because the market like crashed. And then I exited my position at $26,000, which was, you know, a great, decent amount of money in a short time. That experience was a turning point for Sebastian. It really changed my philosophy. You know, I was looking at the stock every day for the week. It was such a tremendous amount

of stress that I was like, no, I made a really great, I was on the winning side of that bet, which is not always the case. And as you see right now, there's a lot of people losing money in those types of stocks right now because there's no fundamentals behind it. And so now I'm really more risk adverse because I just feel like in the long game, you don't need that big home run. Keep investing. Compound interests are going to do the job for you. feel like in the long game, you don't need that big home run, you know, keep investing,

compound interest are going to do the job for you. And you'll be glad in 10-15 years that you've, you know, invested a little bit of money every year and traded at a decent amount. Sebastian has recently diversified his portfolio with ETFs and bonds, but he still buys individual stocks that he believes in. I think having a little bit of everything is the key. But if you truly believe that a company will succeed, I wouldn't brush it off and ignore that because in the end, if you believe in the company and in the vision and the founders and the team, well, why not give it a shot? That said, he's made some bad bets in the past. He's lost money on several Canadian tech stocks and the cannabis industry, to name a few. few? It's still hard looking back to those like investment that you didn't, you know, exit at

the right moment or, you know, some companies that you thought was the deal and finally weren't. I'm not frustrated or I look back and I say it was great, but, you know, it's a long game. I'm still young. I'm still looking forward. This is experience under my belt. It's the kind of trades that one day you'll maybe have and you'll be able to time yourself better. As I said, right now, when I have, you know, some stocks 20, 30% gains, which is really great yield. I might take a little bit more profit now and exit earlier just to make sure I capitalize on that gain because my past experience proved me wrong. So no, I'm not sad or anything. I look back, this is experience and I hope I'll learn from them. My name is Jennifer. I'm 34 years old and I live in Wetasquin, Alberta.

Jennifer's investment journey started somewhat unintentionally. I guess my first kind of foray into investing was when I was working at the Apple store. It was kind of a retail job I was working at the Apple store, it was kind of a retail job. I was working it while I was in university. At that time, there was a program where we could purchase, you know, employee stock and just have it kind of auto invest for us. Set it and forget it type of situation. I didn't know too much about stocks at the time, but I just I knew enough that it sounded like a good idea. And if it was taken off before I saw my paycheck, I wouldn't even miss it. So I kind of just signed up for that. And to be honest with you, I didn't really pay too much attention to where it was going or how much I was getting. I kind of just let it do its thing.

In 2014, Jennifer owned about 2,700 of Apple stock. She'd prefer not to get into specifics about how much that stock is worth now. But let's just say that if you know, you know. It definitely way exceeded my expectations. I just I thought I would have, you know, a small amount of stock that I would, you thought I would have, you know, a small amount of stock that I would, you know, just have in case I wanted to buy another car or, you know, make another small purchase like that. So I kind of had it going the whole time that I was working there. It was over the course of a couple years, just over a couple years, two and a half years. And then when I left, I still didn't much know what was going on with it. I would,

you know, got a whole bunch of statements. I didn't really open them. I just, you know, I was doing its thing. It was auto investing, so I kind of just left it. And it was only, you know, probably in the last six or seven years or so that I kind of figured I should probably take a look and see what's going on with it. And that's when I realized that it had split a few times and grown a considerable amount. So after having that experience, I realized that it was probably a smart bet to kind of do a bit more research and pursue investing a little bit more rather than have my money sitting in a savings account or checking account doing nothing for me. So Jennifer has no plans to sell Apple anytime soon. She started investing in

earnest in 2022. Like from the time that TFSAs became an option, I was kind of aware of it on the periphery, but I hadn't delved into it too deep just because at the time I still had a considerable amount of student loans. I had a little bit of credit card debt. There was high interest debt that I preferred to pay off before I looked at savings. I know they say that you should be putting a little bit aside in savings even if you do have debt. But I kind of just wanted to kind of use the rollover method to put as much as I could towards my debt and pay that off first. So that's what I was doing. And it wasn't until really 2022 or so that I kind of got to a place where I because of kind of like the lack of a head start I had over the last 10 years when a lot of people might have been investing at that time.

And so 2022 is when I started looking into it and trying to decide what the best route would be for me to invest. And that's when I also came across, kind of looked more into the FHSA and compared the two. And that's when I kind of decided that the best fit for me right now was kind of trying to focus on maxing out my FHSA and any excess from that that I would just put into my TFSA. At that point in my life, I kind of knew that the direction I was headed in was in purchasing some sort of property. I was kind of tired of renting. I was tired of, you know, not being completely certain of having a place to live or having a fixed cost of my rent. That kind of gave me anxiety. So I was like, you know, I need a kind of a way to manage my expenses more, have them more in my control.

And so it was then that when I kind of started doing my research, I found out that if that is my goal of saving towards a property, the FHSA seems like a no-brainer just because all of the money that you put into there is completely tax free as long as you use it to purchase a home. Whereas with the TFSA, I'm still getting taxed on that money. And the only increment of that money that's tax-free is whatever I make once I've put in, whatever's invested and the dividends of that. And so it kind of just was a no-brainer for me because I knew what I wanted to use it for. And that was the most bang for my buck to do. Jennifer renegotiated her rent so she could put more money towards her investments.

She also started using a budgeting app to keep track of her expenses. And any money she cut, she invested instead. She uses Wealthsimple. I would say I'm kind of like a medium level risk because I'm not putting all of my money into stocks, definitely. But there is a small chunk of it I would like to put into stocks and the rest of it, I kind of would just put in my FHSA and TFSA right now are just being auto-invested by Wealthsimple's algorithm. But I did bump the risk up a little bit from what it was defaulted to just because I'm not looking at using my FHSA within the next six months or anything.

I have a little bit of time. And so that's paid off for me. She's been tempted to invest in other individual stocks, but she is aware of how risky that could be. For now, there's only one problem with having her investments so easily accessible on her phone. I know that you're not supposed to check your investments often, especially if they're kind of like a long game. I think I'm pretty good at setting my expectations that I'm okay doing that. So there definitely are times where I'll kind of wake up in the middle of the night and log on to Wealthsimple to get a little dopamine hit. Just as someone who's kind of had debt for long enough to know what it feels

like to not owe anyone else your money. It's just, it's just a nice feeling sometimes to just log on and check it. But I also have that I also have done that and seen it take a tank. So I've seen it kind of be less than what I expected it to be. But it's okay with me because I know that it's kind of like, it's a long game and it is just kind of what happens to be expected. Very few people are going to hit the jackpot on the stock market. And as you've heard, your investments can take big hits when you start stock picking. We hope this insight into how people are using their TFSAs gives you ideas of how to better use yours. Roma, what are your takeaways? One, do something with your TFSA.

You can get more than 4% returns on GICs right now. So if you're risk averse and don't need the cash in the next year, at the very least do that. Two, first home savings accounts are great if you want to buy a house. If you don't, the money can go into your RRSP. Three, if you're not sure about your housing or other life plans, don't worry about it. TFSAs are a good place to invest your money. Thank you for listening to Stress Test. This show was produced by Kyle Fulton, Emily Jackson, and Zahra Kazema.

Our executive producer is Alicia Sani. Thank you to Aravind, Sebastian, and Jennifer for joining us. Rob, that's a wrap for another season of Stress Test. Can you believe it? Nine seasons in the bag. I'm already thinking about episodes for season 10. What, that's a wrap for another season of Stress Test. Can you believe it? Nine seasons in the bag. I'm already thinking about episodes for season 10. What about you? Oh, yeah.

We've got a running list and we can't wait to hit the ground running in the fall. Thank you guys for listening. We hope you enjoy the rest of your summer. Until next time, find all your personal finance news at theglobalmail.com.