We’ve discussed many tips on using TFSAs to improve your cash flow and here are two more important tips to maximize your cash flow, courtesy of CanadianTaxMan, a tax specialist himself.

1. Clean Up Your Debt First!

Generally speaking, unless you have a no or low interest rate credit card offer, any outstanding debt should be paid off before making a deposit into your TFSA.

If your interest rate for your debt is higher than what you would gain from a TFSA, you’re not doing yourself any favours by investing in TFSAs. Here’s why.

Let’s say for example that Jim has a car loan with a principal of $5,000 outstanding and his interest rate with his car dealership is 6.5%. If Jim has $5,000 of disposable income, it is likely better for him to pay off his outstanding car loan first before sticking that money into a TFSA. Why you ask?

Let’s say Jim is making $50,000/yr putting him in the 31.15% income tax bracket. So paying off his car loan at a 6.5% interest rate is essentially equivalent to earning 9.44% on a TFSA Investment. (9.44 = 6.5% car loan interest rate/0.6885 rate of after tax income).

In this economy, earning 9.44% would be very difficult since most people are only willing to invest safely in GIC’s right now which do not generally earn much more than about 5%.

So in summary, it is better to put the $5,000 towards the car loan and pay this off completely than to put this money in a TFSA since the effective interest on the car loan is higher than the interest that is likely to be earned on the TFSA.

2. Use That Compound Interest for Your Child’s Tuition

Paying off a tuition doesn’t have to be difficult. Here’s an example where you can pay for your child’s tuition in 5 years and have compound interest work to your advantage.

Let’s say you have a child who is currently planning on starting university in 5 years. Let’s say for example that tuition will cost $25,000 for a 4 year program. If you can invest $5000/year for 5 years into a TFSA and earn 5% on this money every year, then over $29,000 can be withdrawn after the 5 years tax-free. This would be more than enough to cover the tuition plus some additional expenses.

This is a lot better than having to take out a loan at the time the child starts university and having to pay interest on the principal, plus it allows the parent to stay debt-free avoiding a lot of stress and hassle.

See more articles on Tax Free Savings Accounts.