How to open a TFSA
While some TFSAs (e.g. the ones from most banks) offer a simple savings account with a fixed return we think that's like putting rocket fuel into an old sedan.
To really take advantage of the TFSA structure we recommend you put your money into an account that allows you to invest your money in higher-yielding assets.
Which TFSA to open
TL;DR: The Fynbos TFSA offers the lowest total costs and excellent options for how you invest your money.
There is some excellent research online into TFSAs but this predates the Fynbos TFSA which charges no platform fee and only 0.08% brokerage fees making it better priced than anything else in the market.
Getting a Fynbos TFSA
Getting a TFSA from Fynbos couldn't be easier. As with any financial service provider we need you to provide some personal information to pass our “Know Your Customer” (KYC) checks, which we're obliged to do, but as soon as that’s complete you’ll be able to fund your TFSA and start investing.
Start now
Rip the band-aid off and get the account open. It's a little bit of work but it's all do-able online and once its done, its done. Making your contributions every month or year after that is easy once the account is open.
Once you have your account set up, make sure to follow the instructions to deposit funds into your TFSA via an EFT from your bank or, even better, set up a recurring debit order contribution.
Stay within your limits
Never put more than R36 000 into your TFSA in a tax year. That includes the sum of all TFSAs you might have (if you have opened more than one). SARS will hit you with a 40% tax on anything you invest over that limit. Fynbos helps you track your TFSA contributions across all accounts.
Where to invest your TFSA funds
TL;DR: Do some research to find ETFs that give you lots of offshore exposure, majority equities but most importantly low fees.
Every person’s investment strategy will be different but here are a few things to consider when choosing your investment.
Invest for the long-term
If you’re young, funding your TFSA, then we assume that you are putting this money away for the long term (a few decades, not years). If that’s not true then you shouldn't be wasting your TFSA contribution allowance.
If you’re saving for a holiday, a deposit on a house, or a car, don’t use your TFSA.
The TFSA is for long-term wealth accumulation and growth where the benefit of not paying taxes on the income generated grows exponentially with time. If you max out your TFSA but withdraw a lot of it to fund short-term goals you’re destroying the long-term value of those tax-free gains.
Historically, the best long-term returns have come from equities so for anyone with long investment horizons you should ensure that the majority of your portfolio is "in the market".
Go offshore
The second thing to consider is that if you’re planning to be living the good life in 20 years time then expect the majority of your expenses to be driven by the cost of the US dollar and other foreign currencies. Said differently, you should be trying to grow your wealth in assets that are not only bought and sold in South African Rands because the value of the Rand relative to global currencies will have a huge impact on the value of your assets in the future.
There are plenty of funds that invest entirely in foreign equities and these are an excellent way to build your portfolio. Consider feeder funds that track equity indexes such as the S&P 500 or MSCI World
Minimise the fees you pay
Finally, and most importantly, minimise your fees. Every basis point counts when you're investing for the long term because costs compound just like gains.
The Fynbos TFSA has no platform fees so the next thing to consider is which funds have the lowest Total Expense Ratio (TER) (basically the cost to have your money in that fund) and also meet your other investment criteria.
Fees are evil
To illustrate the huge impact even a small reduction in fees can have, consider that if you earn a real return (after inflation) of 5%, over 30 years, you will end up with 12% less money if you pay 1% in fees instead of 0.5%.
To find the lowest-cost funds, look for passive funds that track an index instead of being actively managed by a fund manager. While there are some great fund managers out there, history has shown that over a long period of time, very few beat the market (less than 15% in South Africa) so it's hard to justify the high fees they charge.
Some Examples
An example of a great fund that meets all these criteria is the Satrix MSCI World ETF. It is tracking an index of large- and mid-cap companies across 23 developed markets globally and its Total Expense Ratio (TER), which is a standardised way to represent fees, is only 0.35%.
Another good example is the Sygnia S&P 500 ETF. It is tracking the S&P 500 which is widely regarded as the best single gauge of large-cap U.S. equities and has a TER of only 0.19%.
Commit and walk away
Do some research on which funds to choose, or consult with a financial advisor who is open to taking a flat fee in exchange for a fund recommendation that matches your investor profile, then invest your money and leave it alone.
Don’t panic if your investment loses some value in the short term, this is normal for higher risk equity heavy investments. They will be much more volatile than safer bets such as bonds but in the long term have proven to deliver much better returns.
The critical factor is not trying to time the market, it is time in the market.
By reducing the fees and taxes you pay you’re already taking critical steps to maximise your long-term wealth through an optimised TFSA. Now keep contributing and investing until you max out for the year and then start again next March.