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In 2020, $69,500 is the maximum amount of money you can contribute to a Tax-Free Savings Account (TFSA). That’s the accumulated contribution room from all the years since the TFSA was created in 2009.

On the surface, $69,500 doesn’t look like a whole lot of money. The average Canadian house price is about $580,000; $69,500 barely covers a 10% down payment on that. But looks can be deceiving. With diligent contribution and smart investing, you can potentially grow a $69,500 TFSA to $695,000 or more. In this article I’ll be exploring a three step process that could take you there.

Step 1: Get your savings established

The first step to investing in a TFSA is getting your savings in the account in the first place. If you were at least 18 in 2009 and have never contributed, you can put $69,500 in the account this year. If you exceed your contribution limit, you’ll have to pay a penalty on it, so be careful.

If you don’t have $69,500 to invest right now, you can gradually add it over a period of years. By the way, if you do this, you’ll have a higher contribution limit in the future, since new TFSA room is added every year.

Step 2: Pick the right investments

Once you’ve got your TFSA money ready to invest, you need to pick your investments. You’ll never turn $69,500 into $695,000 with savings account interest, so this step is crucial.

There are basically two ways to invest in a TFSA: the safe and slow method and the quick and risky method.

Gallery: The ‘Halloween Strategy’ and More Surprising Investing Tips That Work (GOBankingRates)

The safe and slow method is where you hold dividend stocks like Fortis Inc (TSX:FTS)(NYSE:FTS) for a long time. Fortis pays about a 3.7% dividend yield at today’s prices. That’s a pretty dependable source of return right there. Add 6.29% in capital gains every year and you’ve got a 10% annual return.

At a 10% rate of return, it takes about 24 years and four months to get turn $69,500 into $695,000; 10% compounded over 24.3 years gets you to 1,000%. That’s the cumulative return needed to get $69,500 to $695,000. As you can see, this return is possible even with a defensive stock like Fortis.

The quick and risky method is where you hold growth stocks like Shopify and hope to beat the market. Shopify has returned about 109% per year since it went public. At that rate of return, it would take only three and a half years to turn $69,500 into $695,000. While that might seem exciting, remember that this method is a lot riskier and could see you lose your shirt.

Step 3: Re-invest periodically

Above, I showed you the math on turning a $69,500 TFSA into $695,000. As you saw, even with defensive stocks, it could work given a long enough time frame.

But ultimately, you shouldn’t rely on just your $69,500 to get you to your savings goal. Instead, you should re-invest the extra contribution room you get every year, giving you an extra edge that can make a massive difference over the decades. The best investors don’t just invest one lump sum and wait, they build up their positions over time. By doing so, you can massively increase your ending amount.

Each year, the TFSA gets between $5,000 and $10,000 in new contribution room. Even if we stay on the lower end of that range for the next decade, that’s $50,000 you could potentially invest. If you make those contributions diligently and invest wisely, there’s no telling how far your money could go.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool recommends FORTIS INC.

The post How to Turn a $69,500 TFSA Into $695,000! appeared first on The Motley Fool Canada.

Here’s a question…

What monthly return do you think it takes to turn $10,000 into $2 million in 5 years.

A 30% return?

A 50% return?

How about a 100% return – that sounds more like it doesn’t it?

It’s easy to think that making a huge amount of money like 2 million requires a huge return. But it’s not actually the case….

To turn 10,000 into 2 million in 5 years you only need to make a 10% return a month.

How can this be?

Simple, with compounding interest.

In today’s post, I’m going to show you what compounding interest is, explain how it works, and show you how understanding it can allow you to turn $500 into $46.4 million in just 10 years.

Sound interesting?

Let get to it.

How To Turn 100 Into 5000

The Greatest Mathematical Discovery Of All Time?

Compounding interest is the greatest mathematical discovery of all time.

Think I’m exaggerating?

Eisenstein seems to think so…

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it” – Albert Einstein”

And he’s much smarter than all of us, so let’s take his word for it.

So, what really is compounding interest?

The simplest way to explain it is that it’s where you earn interest on top of interest.

Here’s an example…

Imagine you put $1000 into a bank with a 10% monthly interest rate.

In the first month, you make 10% of $1000, which is $100.

The second month you make 10% again, only this time on your initial investment ($1000) plus the interest made from the previous month ($100).

So rather than make $100 again, you instead make $110.

As this continues the amount you make each month gets higher and higher. At the end of the second year, for example, your $1000 is $9849. After 5 years, it’s over $200,000.

And that’s what compounding interest basically is.

Making interest on-top of interest. The more money you have the more you make (and the faster you make it).

And that’s it, that’s all there is to it.

Not that hard after all, eh?

How Compounding Interest Will Help Your Trading

In a practical sense, compounding interest isn’t that useful; we can’t use it to enter traders nor can we use it to create a trading strategy.

But simply understanding what it is and how it works can help us.

Here’s why…

Most traders, especially beginners, have widely unrealistic expectations of how much money they can make a day, week, month or year.

Some think they can make 1 – 5% a day – that’s CRAZY.

Do you have any idea of how much that ends up being?

These expectations, because of how unrealistic they are, cause traders to take silly risks; risks that ultimately result in big losses.

By understanding how compounding interest works, however, you realize that you don’t need to make loads of money every day to be successful.

How To Turn 100 Into 3000

Consider the following scenario…

Let’s say you start trading with $500 and manage to make 10% a month, which is certainly possible.

After 1 year you have $1569.

Not bad…..but not enough to buy a Lamborghini either.

But look what this turns into over the next few years assuming you continue to make 10% a month…

Year 2: $4924

Year 3: 15,453

Year 4: 48,498

In year 5 you make 152,207 – now we are hitting some high figures.

And it continues to get bigger…

In year 10, for example, assuming you keep making 10% a month, you’ll have…..wait for it…..

46.34 Million!

With that kind of money, you really can buy a Lamborghini AND a Yacht.

So you see, you don’t need to start with a lot of money or do particularly well to make big money.

Sure, in the real world you’re not going to make 10% every month, or even at all actually – you’ll have a few where you won’t make anything.

But even so, you’ll still make something big if you keep going.

In fact, if you only make 2.5% a month, which is even more achievable than 10%, after 10 years you’ll have $11.1 Million – more than enough buy a Lamborghini.

Summary

So is compounding interest the holy grail to turning a small account into a big one….not quite. But knowing what it does gives you a better idea of what to aim for and expect, which, at the end of the day, does make it easier for you to make money.