For clients who are starting to build their investment portfolio, Bradburn suggests starting by having a strong understanding about your lifestyle (e.g., career), sources of wealth (e.g., salary, real estate, group RRSPs, inheritance), life goals (e.g., needing to save for a wedding or buying their first home), debt levels, as well as whether you have an emergency savings fund. From there, Bradburn explores the risks and rewards of various investment options. “If they’re wanting to buy a house in a just few years, they will need a down payment of 20 per cent, which is a lot of money to save within a short timeframe. So that can restrict the types of investments to consider.”
Deciding to invest with cash
One low-risk option can be cash. Using cash to invest in a TFSA can offer a number of benefits depending on your circumstances. For instance, if someone has an unknown timeline for saving money coupled with a very low risk tolerance, then Bradburn would suggest investing in cash in a TFSA. “The nice thing about holding onto cash is that it’s liquid,” says Bradburn. “You can easily access your cash, and you don’t have to sell your security or try to break a GIC. It’s just there, and ready to go.” He’s also seen people use cash in a TFSA as an emergency account — giving them immediate access when needed.
Things to keep in mind
Although the best part of TFSAs are the tax savings, there are things to be aware of when making the investment. Bradburn cautions that most TFSA cash accounts are limited to one or two transactions per month as it’s designed to be a savings rather than a chequing account. You also need to keep in mind the rules around accessing and then reinvesting your money.
“For example, if you had a balance of $20,000 in your TFSA, and you took $5,000 out for something, you couldn’t put that money back until the next calendar year in which case you’d be able to recontribute but then you’d also get the next calendar year’s contribution limits as well.”For Bradburn, though, it comes down to an individual’s goals, timelines and how much risk they’re willing to take on. “A TFSA is supposed to be a passive registration for encouraging responsible long-term savings and growth,” he reiterates. “Take the time to self-assess where your current finances are and determine what’s most important to you.”