Three savings strategies for your TFSA

When the Tax-Free Savings Account was introduced in 2009, the banks promoted it as a high interest savings account.  Three years later, Canadians are still confused by tax free accounts, and how to use this savings vehicle.

Here are three strategies to consider when saving inside your TFSA:

Playing it safe

Many people are comfortable playing it safe with their TFSA.  It’s the perfect place to build an emergency fund, and simple to set-up monthly contributions towards a high interest savings account within your TFSA. 

The best high interest savings accounts are currently paying 2 per cent interest.

The nice thing about using your TFSA as an emergency fund is that you’re able to withdraw money relatively quickly when you need it, but the extra steps required to access funds from within your TFSA should deter you from making frivolous withdrawals.

Short term goals

When your savings has already been earmarked for a specific goal, like for a down payment on a house or to pay for education expenses, the stock market is the last place to put your money.  Preservation of capital is more important than risking your money trying to earn an extra few hundred dollars in the short term.

While fixed income products like GICs don’t make the most exciting investments, you’ll have the peace of mind knowing that your savings are still there when you need it. 

Outlook Financial is currently offering a 3-year cashable GIC at 2.90 per cent

A long term approach

While most people considered the $5,000 annual contribution room too low for any significant investment opportunities, the TFSA has become a reasonable alternative to making RRSP contributions.

When you consider that couples have $10,000 in combined annual contribution room, the TFSA becomes even more attractive when investing for the long term, especially for 30-somethings.

If you can start maximizing your TFSA contributions and invest that money in your 30’s, you can build up a sizeable, tax free investment portfolio before you retire.

What’s right for you?

Everyone should strive to take full advantage of their TFSA, no matter how old you are or what you’re saving for. 

For peace of mind, your TFSA is a great savings vehicle for building an emergency fund.  It can also be used to preserve capital for short term savings goals like a down payment on a house or towards a new vehicle.

Finally, if you’re looking to invest your money for the long term, use your TFSA on its own or as a complement to your RRSP when investing for retirement.

Also Read:

Do you really need an RRSP?

RRSP vs. Tax-free savings: Which is best?

How to avoid tax-free savings account trouble

Robb Engen is half of the Boomer & Echo personal finance blogging team with his mother, a former financial advisor.  Reach him at robbengen@gmail.com