We all know that investing is so important in helping us achieve financial freedom and plan for retirement. So, as Canadians, we are fortunate to have tools that can help us achieve our goals faster. Having accounts registered as a Tax Free Savings Account (TFSA) can have a huge impact on your long term returns, especially if you take advantage of compound interest.
Compound interest is, as Albert Einstein said, “… the eighth wonder of the world”. Einstein also added, “Whoever understands it earns it … whoever does not understand it … pays it.”
Allowing your money to keep growing each year with compound interest creates a snowball effect that ends up growing exponentially.
That’s why the classic question, “Would you rather have a dime doubled for thirty days or $ 1 million?” You should take a doubled penny for 30 days. On day 27, you would have over $ 600,000, which means that on day 28 you would have over $ 1 million and on 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 of that money can continue to be compounded each year.
How much can you earn with compound interest over 30 years?
Compound interest has the potential to make your money grow 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 be worth $ 1 million in 30 years .
That’s right, on just $ 205,000 of total savings over 30 years, an investor could earn over $ 850,000 in interest. And because it gets worse 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.
That’s the power of compound interest. The longer you invest your money and the more you can save, the faster it will accumulate.
The trick is to make sure you’re buying high-quality stocks, which will experience steady growth without much volatility. It also helps find stocks that pay dividends.
Not only will dividend income help your portfolio be more stable over the long term, it will also earn you even more money to find new investments and continue to build your capital.
A high dividend stock to buy over the long term
There are lots of blue chip stocks that will be ideal as core holdings in your TFSA. These massive companies are very stable and will bring you excellent cash, which you can use to invest in higher growth companies or reinvest them in blue chip stocks, taking full advantage of compound interest.
While several Canadian stocks are worth buying today, one of the best that offers a large dividend yield is AEC (TSX: BCE) (NYSE: BCE).
The entire telecommunications industry is an ideal industry for long term investment. But of all the stocks in the industry, BCE is both the largest and the best in terms of income and stability.
BCE has massive operations and, more importantly, well integrated. This makes the company a cash cow and allows it to continue to develop its activity every year.
This growth in its business not only contributes to the steady rise in the share price, but also enables BCE to increase its dividend each year. This is ideal for investors looking to use that cash flow to reinvest in other stocks and take advantage of the compound interest to grow their TFSA.
And as attractive as BCE was to dividend investors in the past, today it is particularly attractive to long-term investors, as 5G technology offers significant growth potential.
So if you are looking to take advantage of compound interest and grow your TFSA to $ 1 million or more, I would consider buying high quality stocks that look like BCE.
The publication Compound Interest: How to Grow Your TFSA to $ 1 Million! first appeared on The Motley Fool Canada.
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Silly contributor danieldacosta owns shares of BCE INC.