Don’t Make This Killer TFSA Mistake

Dave Chilton, The Wealthy Barber and former Dragon on CBC’s Dragons’ Den, talks about one of the biggest mistakes he’s seeing Canadians make with their TFSAs.

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Very short, but very important video. I am going through a lot of people’s personal-financial plans now, their investment accounts. It’s helping them, but selfishly it’s helping me as I put together “The Wealthy Barber” again, and I start doing all these videos. You see certain patterns of mistakes and wow, am I seeing this one a lot.

I cannot believe how many people have done a very good job of building up their TFSA. In many instances, making the annual contributions to the max and done a horrible job of investing it. In fact, in many instances, they didn’t invest it. They just let it sit there earning a very low interest rate in the account.

Now in the odd circumstance, they could come back and say, “Hey, we’re using the TFSA as part of our down payment building strategy because we’re buying a house in a year or two. We don’t want to lock up money. We don’t want to take on any volatility, any risk.” That makes some sense. But I’m seeing this over and over again from all people. From all ages with all different goals. A lot of people, for example, using the TFSA to help fund their retirement later in life are still just letting the money sit by earning a very low rate of return. Come on, you’ve still got to invest. It’s kind of odd that I don’t see this with RRSPs very often.

Do you think it’s Tax-Free Savings Account? The word savings has kind of impacted people subconsciously and they’re treating it as such instead of realizing they have to invest the money and try to optimize their return within the proper risk framework. I don’t know, but I’ll tell you it’s frustrating.

People are giving up a lot of money here. If you’re earning two and three percent, And you could over a 25- and 30- and 40-year time frame earn seven and eight. Are you kidding me? We’re talking hundreds of thousands of dollars. I would say in some cases, this is the biggest mistake I’m seeing relative to the impact it’s going to have on people later in life.