Q – I’d like your thoughts on a basic approach for my youngest daughter, who is 29 and single. She is saving for a future home purchase and also wants to build an emergency fund. She currently does not have an RRSP.
Most of her current savings are in a regular “high interest” savings account at a bank. She has opened a TFSA at the bank, with only a small amount in it, and also has begun contributing to a Wealthsimple TFSA with automatic monthly contributions. Both are very small, so she has almost all the cumulative room available for TFSA contributions.
Would you advise having investments for saving towards a future home purchase and emergency funds in the same TFSA? I was thinking of a few high dividend stocks, (e.g. BCE, Telus, Fortis, RBC). Would that be liquid enough to serve as emergency funds, or should she have a portion of high interest savings only for the emergency portion? The other question would be whether to subscribe to DRIPs, if available, for the stocks, or let the dividends accrue to the emergency cash?
I understand you can have several TFSAs at different institutions, as long as you keep track of your total annual contribution limits, so would the emergency cash portion be better held somewhere like Motive Financial? – Paul P.
A – There are several questions here so let me address each in turn.
First, TFSAs. Yes, legally you can have as many plans as you wish. In practical terms, I don’t advise multiple plans. It may not be a problem now when your daughter has lots of contribution room but in future years it may become more difficult to keep track of how much room is available if you have multiple accounts. I would limit the total number of accounts to two at most, and preferably one.
For the house saving portion, your idea of high-quality dividend stocks would work well. I would use DRIPs to gradually increase positions in each company. I can’t comment on whether that would produce a better return than the Wealthsimple TFSA because it depends on the asset mix selected. However, she would have more control by choosing her own stocks. It comes down to how active she wants to be in managing her money.
As for the emergency fund, how much does she need? She has no dependents who rely on her for support. Presumably, she wants to protect herself against job loss, which is certainly a concern these days. In that case, I think a fund equivalent to six months take-home pay would be adequate.
I would not invest this money in the stock market. Even blue-chip stocks fall when the market crashes, as we saw in March. Keep the money in a high-interest savings account. Motive Financial offers 1.55% in a TFSA, the same as in its non-registered Savvy Savings Account.
If your daughter doesn’t think it might create problems in the future, she could use a Motive Financial TFSA for the emergency fund and Wealthsimple or a self-directed plan for the house. Alternatively, she can ask about investing a portion of her Wealthsimple TFSA in cash and see what rate they offer. – G.P.