What’s the best TFSA investing strategy for a young professional?

By Heather Franklin on May 17, 2019
Estimated reading time: 3 minutes

Semina paid off $32,000 in student debt and now wants to grow savings for her future, but isn’t sure how to start.

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Q. I’m a 28-year-old speech-language pathologist making around $5,000 per month after tax. I have been aggressively saving for the past two years and was able to fully pay off my $32,000 student loan debt during that time as well. I currently have $10,000 in my TFSA* and I am not sure what to do with it. Looking into the future 10 to 15 years from now, I would like to work only 2 days a week so I have the opportunity to pursue my many passions. To prepare for that, I would like to begin investing but don’t know where to start. Any help would be appreciated. – Semina A. Congratulations, Semina, on extinguishing your student loan quickly—and for taking active steps to create the financial future you want. I encourage you to read as much as you can about personal finance (including on this site), as knowledge will allow you to make informed and effective money and investment decisions. Let’s start by talking about investment possibilities for your TFSA. I suggest opening an online self-directed trading account for your TFSA money with the financial institution where you currently have your other accounts and do your banking. Once you’ve successfully opened this self-directed TFSA trading account, consider buying a few shares in one or two stocks—preferably good Canadian blue chip stocks, such as one of the big five banks, utilities or telecom companies, which will appreciate in value over time, and also pay dividends. (To help you make your decision, have a look at MoneySense‘s list of good dividend-paying stocks here.)

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Now, many other financial planners or advisors might suggest going for growth stocks only inside a TFSA. But remember companies that pay dividends have strong balance sheets, stable businesses and predictable cash flow. These are also companies that have a solid record and a reputation for high-quality management and strong products or services. Historically, companies that provide dividends to their shareholders have experienced better performance over the long term, with less volatility. To complement your investing strategy, you might want to consider enrolling in each stock’s Dividend Reinvestment Plan (DRIP). This allows for the quarterly or annual dividends of your stocks to be used to purchase more shares of your company, thus allowing your TFSA to compound and grow quicker. While DRIP programs are a strong strategy for most folks, younger individuals, like yourself, gain even more through the benefits of DRIPs because you have more time for the years of compounding to work their magic and bring you excellent long-term returns. And finally, consider starting a monthly direct deposit of a fixed amount of money to your TFSA. Direct deposit is an easy and consistent “pay yourself first” strategy. This ensures you buy shares on a regular basis without having to make a physical transaction every month (where you may be tempted to spend the money instead of to save it). As the cash amount grows monthly and reaches about $5,000 or so, consider adding another stock to your account. Or, simply add more shares to one of the two stocks you already own. This is a great way to learn about investing and putting some of the knowledge you gain to action. As you learn more about money (and your salary grows), you can choose to refine your strategy, and perhaps open an RRSP* (Registered Retirement Savings Plan) as well. You may also want to add some exchange-traded funds (ETFs) to the mix. But even if you simply stick to a dividend-paying stock strategy, your TFSA (and eventually your RRSP) will do just fine. Good luck with your future investing!

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Heather Franklin is a fee-for-service financial planner in Toronto.

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