Me and my TFSA
Brian Pomares, 20, lives 30 minutes north of Montreal in the town of Saint-Eustache, Que. He recently completed a local college program in broadcast studies and is now actively looking for a full-time job. While many 20-year-olds haven’t given investing much thought, Brian was inspired by a class at that introduced him to investing. “I took a personal finance class in college and read Dan Bortolotti’s blog on low-cost investing at Canadiancouchpotato.com,” says Brian. “And I also read every MoneySense post I can.”
All of this self-education led Brian to open his own TD Direct investing account for his TFSA and last year he deposited his first $1,000 into it. “I wanted to learn more about investing and the advisor at the bank encouraged me to try this approach,” he says. Unsure of his risk tolerance, he took the advice of the advisor and went with a conservative 60/40 split between equities and fixed income.
MORE Me and my TFSA
Brian has been pleased with the results, which is giving him the confidence to set up an automatic $200 biweekly contribution to his TFSA account. Right now, Brian is working as a full-time waiter earning about $25,000 annually. To keep costs down he’s living at home with his parents, which he hopes will enable him to pay off his $9,000 student loan as quick as possible. “I know people say you shouldn’t save while you have debt, but I really want to do both,” says Brian. “This is a good time for me to learn about investing and I think you have to put some money into it to really learn the ropes.”
As for his debt, Brian aims to pay it off in two years—maybe sooner if a good-paying job in broadcasting materializes soon for him.
When he finds that job Brian believes he’ll be able to increase his biweekly contributions to his TFSA and re-examine his risk tolerance. “I have a long-term time horizon so maybe 60/40 is too conservative for me. I’m not sure.” Either way, Brian would like to stick with the TD e-Series funds—he’s just not sure whether he should have some international diversification at some point. “That’s what I’d like to look at once my TFSA starts growing. I’m just not sure which e-Series funds I should add at that time.”
Eventually, Brian would like to do some traveling or perhaps buy a house in a few years, but real estate is fairly cheap on the outskirts of Saint-Eustache so he isn’t too worried about affordability. “I plan to live at home for two or three years and to save as much as I can,” says Brian. “I think I can live very comfortably here on a fairly modest salary.”
If he is disciplined, he’s on track to generate long term growth
Starting early and making a regular contribution to his TFSA is a great strategy for Brian, says Vickie Campbell, a certified financial planner with Ryan Lamontagne in Ottawa. As well, Brian ‘s $200 biweekly contribution will add $5,200 annually to his TFSA. With investment growth and the compounding of that growth, he will build a good nest egg for a home purchase or travel. With a 5% return on his investment, she estimates Brian will have roughly $29,000 saved in five years.
By contributing to the TD e-Series of funds, Brian is able to purchase his investments on a regular basis without the costs of placing trades. With this simple process, it is easier to maintain good discipline and have his money invested regularly at very low cost, which will help growth in the long term.
Brian’s allocation of 60% to equities and 40% to fixed income provides him with exposure to the stock market with the fixed income portion of his portfolio reducing his risk. He should review this regularly—once every year or two—to ensure it meets his risk tolerance. As Brian’s holdings in the Canadian index grow, he may want to consider adding some the United States or international exposure. He could progress to having equal amounts of his equities in Canada, the U.S. and international investments—again, using TD e-Series funds. This will diversify his portfolio and reduce the exposure and risk of having all his investments in Canada.
Finally, Brian still has a student loan. It is important that he keep paying it off. Any surplus cash or increase in pay could be used to pay down the loan quicker as the quicker it’s gone, the more he’ll have to invest in his future.