Chapter Review
Key Takeaways
- Financial planning is the ongoing process of managing your personal finances in order to meet goals that you’ve set for yourself or your family.
- Personal finance is the application of financial principles to the monetary decisions that you make either for your individual benefit or for that of your family.
- The financial planning life cycle of a typical individual’s life has three stages, each of which is characterized by different life events. Stage 1: Focus on building wealth. Stage 2: Focus on preserving and increasing wealth. Stage 3: Focus on living on one’s saved wealth after retirement.
- Your “personal debt” is how much money you owe to other people, businesses, banks, credit card companies, and other creditors.
- A few ways to get out of personal debt include consolidating debt, increasing your income, creating a budget, using a debt repayment strategy, considering credit counselling, using cashback rewards, reducing monthly bills, curbing impulse spending, scaling back on savings temporarily, and creating an emergency fund. Bankruptcy is a final option, but not the best one, as it negatively affects your future credit rating.
- One of the best ways to manage your money and personal finances is to build a personal budget. A personal budget (for an individual) or household budget (for a group sharing a household) is a plan for the coordination of income and expenses. A personal or household helps you track your income and spending so that you can manage money, avoid debt, and save for goals.
- Investing is what someone does when they buy something in hopes that it will grow in value over time.
- Compound interest refers to the effect of earning interest on your interest.
- The time value of money is a key financial concept that emphasizes that a dollar received today holds more value than the same dollar received in the future.
- In Canada, a credit rating is a numerical score that reflects an individual’s or business’s creditworthiness, based on their financial behaviour and credit history. Credit ratings in Canada are typically provided by two main credit bureaus—Equifax Canada and TransUnion Canada. While Canadian credit scores are similar to the U.S. FICO score, they are not exactly the same.
- Loans that involve some type of collateral are referred to as secured loans or secured credit. Collateral is something of value, such as a house (for a mortgage) or a car (for an auto loan). This collateral reduces the risk for the lender, which typically results in lower interest rates compared to unsecured loans.
- Loans that do not require collateral are referred to as unsecured loans or unsecured credit. Because there is no asset backing the loan, these loans are considered higher risk for the lender, which typically results in higher interest rates. Unsecured loans, such as personal loans or credit card debt, often come with interest rates ranging from 10% to 30%, depending on your credit score and financial history.
End-of-Chapter Exercises
- OECD Financial Literacy. The Organization for Economic Cooperation and Development began measuring the financial literacy of the countries within the OECD using simple scenario-based questions to test basic financial literacy knowledge. You can take the assessment or download the examples with answers. How did you do?
- Find Your Latte Factor. Use this Find Your Latte Factor calculator to determine how much money, over time, you could save by cutting out a small, unnecessary thing from your daily/weekly expenses. What did you discover? Share with your class and/or professor.
- Budget Calculator. The Government of Canada, through the Financial Agency of Canada, created a tool that provides an in-depth account of your personal finances. Use the Budget Calculator to document your situation. Export your budget as an Excel spreadsheet. What did you learn? Where can you make improvements?
- Financial Literacy. Test your financial literacy knowledge by taking the My Money Sense Financial Literacy Quiz built by the Government of Singapore. How did you do? Did you learn a few things? Share your learning with the class and/or professor.
- Make a Budget. Follow the TD Bank Budgeting Advice for Students and make a budget for yourself. Your college or university may also have a learning strategist who can help you with this. Follow the 50-30-20 framework: 50% of your income should go toward your needs, 30% of your income should go toward your wants, and 20% of your income should go toward savings or financial goals. After you finish, reflect on how you are doing and what adjustments you may need to make to your spending habits. Discuss budgeting with the class and/professor. It’s quite conceivable that your peers have budgeting challenges similar to yours.
- Reduce Expenses. Determine three ways in which you can reduce your expenses this week. Put your ideas to work this coming week and track how you do. Were you successful? If not, why not? If not, what will you change when you try again? If you were successful, how much did you save? Share your results with the class and/or professor.
- Online Banks. Use the Internet to research online banks, such as Tangerine, and review their bank fees. Usually, these banks have no fees or lower fees than brick-and-mortar banks (the Big Five). Would you trust your money to an online bank? Why or why not?
- Check Your Credit Rating. Use the Internet to find information on how you can check your credit score. What is your credit rating? How can you find out? Are there free options? Share what you learned with your class and/or professor.
- Investing. Visit one of the Big Banks’ websites and learn more about investing as a student. What are the current interest rates banks are paying on investments? Do you like the idea of investing in GICs, or are you more interested in investing in stocks? Explain. Share your findings with your class and/or professor.
- Financial Calculator. Use the calculators at Dinkytown.net to answer the following questions. Starting today, how much would you need to save each month to become a millionaire before you retire? You need $5,000 for a Caribbean Cruise in one year’s time. How much would you need to deposit monthly in a savings account paying 1% interest in order to meet your goal? Share your results with the class and/or professor.
- Rent Versus Buy. Use the Internet to gather information regarding the cost of renting a two-bedroom apartment or buying a two-bedroom condominium in your area. Go to Dinkytown.net and use the site’s “rent-versus-buy calculator” to compare these costs. Discuss your findings with the class and/or professor.
Self-Check Exercise: Managing Personal Finances Quiz
Check your understanding of this chapter’s concepts by completing this short self-check quiz.
Additional Resources
- TD Bank Budgeting Advice for Students
- Khan Academy’s Seven Minute Explanation of Compound Interest
- 7 Effective Tips for Reducing Your Expenses
- 30-Day No Spend Challenge
- How to Save Money on Household Bills
- How I Saved $10,000 in Six Months
- A Third of Canadians Say They’re “House Poor”, and a Fifth Regret Their Purchase
- Government of Canada, Credit Report and Score Basics
- How to Pay Off $50,000 of Debt in One Year
- What College Students Need to Know About Money. YouTube Video.
- Compound Interest. YouTube Video.
- Financial Empowerment: Personal Finance for Indigenous and Non-Indigenous People
- Student Banking 101: What You Need to Know About Investing as a Student
- Financial Literacy Programs, Government of Canada
- One Page Financial Plan. YouTube Video
- Making a Budget. Government of Canada
- Financial Consumer Agency of Canada
Attributions
This chapter compiles content from various Open Educational Resources (OER). For details, please refer to the Attributions page.
