Written by Aditya Raghunath at The Motley Fool Canada
On average, individuals believe they can retire if they have more than $1 million in savings. But becoming a millionaire might seem out of reach for those who have begun their financial journey. The cost of living has grown at an exponential rate in the last three decades if we look at apartment rents, real estate prices, and the cost of a university degree.
So, how do you get ahead and accelerate your retirement plans by a few years? Well, Canadians should consider leveraging the benefits of the TFSA (Tax-Free Savings Account) and building long-term wealth. The TFSA is a registered account that allows you to grow investments without owning a nickel to the Canada Revenue Agency in taxes.
Due to its tax-sheltered status and flexibility, the TFSA may easily be the best wealth-building vehicle for young investors in 2023. So, how do you get your TFSA to $1 million?
Focus on aggressive savings
The first step to investing is to save money, which can be deployed across various asset classes such as equities, bonds, mutual funds, real estate, gold, and even cryptocurrency. Ideally, Canadians need to invest at least 10% of their pre-tax income, and this number should increase by a small percentage every year.
Young investors also might need to make sacrifices to build a secure future. For instance, you can limit your expenses by using public transport instead of buying a car, which is a depreciating asset.
The power of compounding cannot be understated. You need to start saving at an early age and benefit from exponential returns in retirement.
The TFSA contribution limit for 2024 is $7,000, which can return over $300,000 over a period of 40 years, given annual returns of 10%. Now, if you invest $500 each month in the TFSA for 30 years, your portfolio would be worth more than $1.14 million, given annual returns of 10%.
But if you begin your investment journey late and save $500 per month for 20 years, your portfolio value would be less than $400,000.
Invest in great companies
Investors can choose to buy and hold low-cost exchange-traded funds, allowing you to diversify your investments and lower overall risk. But investing in blue-chip growth stocks can help you enjoy outsized gains over time.
The ongoing market opportunity allows investors to buy and hold quality stocks at a discount. One such blue-chip TSX stock is Hydro One (TSX:H), which also offers shareholders a tasty dividend yield of 3.1%. Hydro One operates as an electricity and distribution company. It owns and operates high-voltage transmission lines and low-voltage distribution networks.
Hydro One serves residential apartments, small businesses, industrial and commercial customers, and municipal utilities.
In the last eight years, Hydro One stock has returned 133% to shareholders after adjusting for dividends. In this period, the TSX index has returned just 91%. Priced at 20 times forward earnings, Hydro One stock is not too expensive.
Hydro One is part of a recession-resistant sector and generates stable cash flows across business cycles. Despite a challenging macro environment, Hydro One stock is forecast to improve earnings from $1.75 per share in 2022 to $1.89 per share in 2024.
The post Millennials: 3 Easy Steps to Becoming a TFSA Millionaire appeared first on The Motley Fool Canada.
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