Tax Free Savings Account

New this year in the world of savings is the Tax Free Savings Account (TFSA), now to be honest I didn’t realize before they started talking about this account that you had to pay taxes on the money you earn in your savings. That’s the stupidest thing I’ve heard! I mean why should I have to pay for being responsible and saving money?!

The new TFSA isn’t great, but it certainly is a start. You can put $5000 each year into your TFSA, and if you don’t put in the whole $5000 then it carries over to the next year. For example if you put in $3000 this year, next year you can put in the normal $5000 plus the $2000 you didn’t put in for the year before for a total of $7000. And there is no time limit on this so say you only put in $4000 for the next 5 years but have more money in the fifth year you can put in $10,000.

I signed up for this pretty early so that I could get a pretty good interest rate (and I use that term loosely in this economic climate). I ended up getting my TFSA with an interest rate of 3.75%. Which, considering most banks are giving an interest rate of .01%, isn’t too bad!
Because I’m a little numbers obsessed and I have too much time on my hands I decided to make a spreadsheet to figure out how much money I would have in this account in 20 years, as well as how much of that would be earned on the interest.

So, in theory, if I was able to put $5000 a year in this account for the next 20 years I would have approximately $150,527.70, of which $50,527.69 would be the interest I have earned. Now this number isn’t exact because I’m not putting the $5000 in the bank on the first day of the year and my interest is done per month not per year, but still I figure this is close enough. I also doubt I will be able to afford to put away $5000 a year, but I’m sure going to give it a try!

On a side note, I was chatting with my boss about this, and she started telling me about how when she was about my age she had a savings account that had an interest rate of 20%!!! I couldn’t believe that! I started putting my money into bonds when I was really young and the highest interest rate I ever remember getting was like 6 or 7%. Made me realize very young though, that you have to have money to make money.