Compound Interest: How to Grow Your TFSA to $1,000,000!
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We all know that investing is so important in helping us achieve financial freedom and planning for retirement. So, as Canadians, we are lucky to have tools that can help us achieve our goals faster. Having registered accounts like a Tax-Free Savings Account (TFSA) can have a huge impact on your long-term performance, especially if you take advantage of compound interest.
Compound interest is, as Albert Einstein said, “…the eighth wonder of the world.” Einstein also added, “He who understands it, earns it…he who doesn’t…pays it.”
Allowing your money to continue to grow each year with compound interest creates a snowball effect that eventually grows exponentially.
That’s why the classic question, “Would you rather have a double penny for thirty days or $1 million?” You should take a double penny for 30 days. By day 27 you would have over $600,000, which means by day 28 you would have over $1 million and by day 30 over $5 million.
The TFSA is so important because it allows you to accumulate more of your money, which ultimately leads to faster growth. Since you don’t have to pay tax on the Canadian stocks you buy in your TFSA, all that money can keep accumulating each year.
How much can you earn with compound interest over 30 years?
Compound interest has the potential to grow your money quickly. An investor with $25,000 today who saves $500 per month ($6,000 per year) and grows his portfolio at a compound annual growth rate of 8.5% would see his portfolio worth $1 million in 30 years.
That’s right, on just $205,000 in total savings over 30 years, an investor could earn over $850,000 in interest. And because it accumulates so quickly, if you let it grow in your TFSA for another 10 years (40 years in total), it would be worth over $2.5 million.
This is the power of compound interest. The longer you give your money to invest and the more you can save, the faster it will accumulate.
The trick is to make sure you buy high quality stocks, ones that will rise steadily and without too much volatility. It also helps find stocks that pay a dividend.
Not only will dividend income help your portfolio be more stable over the long term, but it will also provide you with even more money to find new investments and continue to grow your capital.
A blue-chip dividend stock to buy for the long haul
Many blue chip stocks will be ideal as the base holdings in your TFSA. These massive companies are very stable and will earn you excellent cash, which you can use to invest in higher growth companies or reinvest in blue chip stocks, taking full advantage of compound interest.
Although several Canadian stocks are worth buying today, one of the best that offers a significant dividend yield is ECB (TSX: BCE)(NYSE: BCE).
The entire telecommunications industry is an ideal industry for long-term investment. But of all stocks in the sector, BCE is both the largest and the best in terms of income and stability.
BCE has massive and, more importantly, well-integrated operations. This makes the company a cash cow and allows it to continue to grow its business every year.
This growth in its business not only helps drive up the stock price, but also allows BCE to increase its dividend every year. This is ideal for investors looking to use this cash flow to reinvest in other stocks and take advantage of compound interest to grow their TFSA.
And as attractive as BCE has been for dividend investors in the past, it is now particularly attractive for long-term investors, as 5G technology offers significant growth potential.
So if you’re looking to take advantage of compound interest and grow your TFSA to $1 million or more, I’d consider buying high-quality stocks that look like BCE.