Why Every University Student Should Open a TFSA

By RateHub.ca

It’s a conundrum. As a student, it’s tough to save money when you have so many expenses and

so little income. And yet, the best time to start saving is when you’re young.

 

The reason? The magic of compounding, a simple process that reinvests the returns of an

investment, or interest-bearing savings account, so that it multiplies over time.

In banking terms, it’s generally the interest that’s reinvested, and upon which new interest

gradually compounds as the account’s value increases. When investing in stocks, it’s important

to choose dividend-paying shares (or funds) because the reinvestment of those dividends does

the most to push the compounding factors.

 

And, it’s even better if you can avoid tax upon withdrawal — which you can do thanks to the

Tax-Free Savings Account (TFSA).

 

There are a couple of minor drawbacks. The first is the TFSA contribution limit, which prevents

savers from bulk-loading the accounts. On the bright side, these annual limits ($5,500 in 2017)

simplify the setting of annual savings goals and are quite generous for a university student.

 

The second is a requirement that contributors reach the age of majority in the province or

territory where they reside before setting up an account. So, people residing in Alberta,

Manitoba, Ontario, Prince Edward Island, Quebec and Saskatchewan can open TFSAs on their

18th birthdays. But those residing in British Columbia, New Brunswick, Newfoundland and

Labrador, the Northwest Territories, Nova Scotia, Nunavut, and Yukon have to wait until they

turn 19. The contribution room, however, begins to accumulate at age 18.

 

A TFSA is a great tool for those who work during the school year and/or summer because it can

help you get ahead of student loans. By putting away some cash from summer or on-campus

jobs, you can let your money grow tax-free, and then use those funds to pay down your loan

after graduation.

 

It’s important for students and recent graduates to articulate their money goals and allocate

investments accordingly to ensure the investments you choose correspond to your risk profile

and time horizon. Due to their tax-free nature, some of the funds housed in a TFSA should

always be for longer-term goals like eventual retirement. Yet many younger investors get

caught up in a counterintuitive investing mindset.

 

While a financial professional will look at a student’s lengthy time horizon to retirement — 40-

plus years — and recommend they fill their TFSA portfolios with higher-performing, albeit

somewhat riskier, investments, younger investors frequently resist.

 

That’s because many young people are surprisingly financially risk averse — in part because

they haven’t garnered sufficient experience with equity markets, but due mostly to the fact

that earnings as a student tend to be low; any short-term investment losses can appear

catastrophic.

 

And that’s bad, because by the time they become comfortable with the ups and downs of the

markets, the window on some of their most lucrative investment opportunities may close.

While such fears are natural, it’s important for younger investors to condition themselves to

step back and take the long view on their savings and investments. Equities that will be held for

a long time, and thus produce outsized growth in real terms, are the ones that most need to be

sheltered from tax.

 

Meanwhile, money that will be required for monthly bills, textbooks or other short-term

purchases should be kept in liquid accounts such as a basic no-fee chequing account.

 

RateHub.ca is an independent financial product comparison site that empowers Canadians to

make smart financial decisions by comparing rates on mortgages, credit cards, chequing

accountssavings accounts and insurance.