Today I did a second financial review with a friend. At one point she looked at her TFSA and her face changed.
Her money had been sitting there at 0.5% for years. She honestly believed the TFSA itself was what produced money. That opening a TFSA was the investment.
When she realized it wasn’t, she got mad. Not at me. At the years.
I don’t blame her. Nobody explained it to her. And after more than 20 years of investing my own money and helping family and friends with theirs, I can tell you she is far from the only one. She’s now moving $10,000 of her TFSA to Wealthsimple to invest in ETFs, and I’m proud of her.
So let me explain it the way I explained it to her.
A TFSA is just a box
Picture a box. That’s your TFSA.
You open the box and put your money inside. Then you close it. What happens?
Nothing. The money just sits there. A box doesn’t do anything by itself.
Now picture this instead. You open the box and put an investment inside, something that actually earns a percentage. You close the box. And this time, while the box is closed, the investment keeps working and produces more money for you.
Same box. Completely different result.
That’s the whole idea. The account is not the vehicle. The account is the box. What you put inside is what works, or doesn’t.
The three boxes most Canadians have
Here in Canada we have a few of these boxes, and each one has its own rules about taxes. The rules I give here are general. For the current contribution limits and details, always check the official pages on canada.ca.
TFSA (Tax-Free Savings Account)
Whatever grows inside a TFSA grows tax-free. When you take money out, you don’t pay tax on it either. You can use it for anything: a trip, an emergency, retirement, a house. That flexibility is why so many people have one.
The limits and rules are on the CRA’s TFSA page.
RRSP (Registered Retirement Savings Plan)
The RRSP is the retirement box. When you put money in, you generally get a tax deduction now. The money grows inside without being taxed along the way. Later, when you take it out, usually in retirement, it’s taxed as income.
Details are on the CRA’s RRSP page.
FHSA (First Home Savings Account)
The FHSA is the newer box, made for buying your first home. It mixes the best of both: you can get a tax deduction when you put money in, and when you take it out to buy a qualifying first home, the withdrawal is tax-free.
Rules and limits are on the CRA’s FHSA page.
Three boxes. Three sets of tax rules. But the same truth for all of them: the box does nothing by itself.
What you can put inside the box
This is the part nobody tells you at the bank counter. Inside these boxes, you can usually hold different things. Some of the common ones:
Cash or a high-interest savings account. Safe, easy to access, and it earns a little interest. Fine for short-term money. Not built to grow over many years.
GICs. You lock your money for a set period and get a guaranteed rate. Predictable. Good for money you’ll need on a known date.
ETFs. One purchase gets you a basket of many companies. This is what my friend is doing. For most people, a low-cost, broad ETF is a very reasonable way to start.
Individual stocks. You buy pieces of specific companies you believe in. This is what I’ve done for more than 20 years. It takes more work and more stomach, and I’ll be honest: you shouldn’t expect to beat the market doing it. I wrote about that in Can You Beat the Market? What 20 Years of Picking My Own Stocks Taught Me.
What you choose depends on when you need the money and how much up-and-down you can live with. But the point stays: you have to choose something.
The most common mistake: cash sitting in the box
Here’s what happens to so many Canadians.
You go to the bank. Someone says, “You should open a TFSA.” You say yes. You deposit money. You leave feeling responsible. You did the smart thing.
And then the money sits there as cash. For years. Earning a tiny rate, like my friend’s 0.5%.
You weren’t lazy. You did what you thought was investing. You just never got the second half of the instruction: now put something inside the box that works.
Cash inside a TFSA is still cash. Tax-free cash, sure. But tax-free on almost nothing is still almost nothing.
That’s what made my friend mad. Not losing money. Losing time. Years when her money could have been working while the box was closed.
Put your money in something that works
So how do you fix it?
Not by opening a new account. You already have the box. You fix it by deciding what goes inside.
If it’s money you need soon, cash or a GIC can make sense. If it’s money for many years from now, something that grows over time, like a broad ETF or companies you understand, is usually what you want working for you.
Before any of that, keep some emergency money aside so you’re never forced to sell at a bad moment. And when you do invest, think long term. Prices will go up and down along the way. I wrote about how I think about that in Stop Checking Your Stock Prices: What Facebook Marketplace Taught Me About Real Investment Risk.
Check your boxes this week
Here’s what I’d like you to do this week.
Log in to your TFSA. Then your RRSP. Then your FHSA, if you have one. Don’t look at the balance first. Look at what’s inside.
Is it cash? A GIC? ETFs? Stocks? What is it earning?
If you find your money sitting there like my friend’s did, don’t beat yourself up. You just found out your box was empty. Now you know what to put inside.
I’m not a licensed financial advisor. I’m someone who has been investing his own money for a long time and likes helping people understand theirs. For your own situation, talk to a qualified professional.
