Personal Finance

Financial Literacy Month: Lessons You Never Learned in School

financial literacy month

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November is Financial Literacy Month! To celebrate, we asked seven financial experts to share their top financial lessons for Canadian millennials.

From investing advice to not sweating the $3 decisions to understanding interest charges, here are the essential financial lessons that you never learned in school.

Bridget Casey: “You don’t need a finance degree or a million bucks to start investing.”

One of the biggest misconceptions people have about the stock market is that it’s extremely risky and difficult to access if you don’t have a finance degree. Many people miss out on a lifetime of investment returns and financial security simply by thinking they don’t know enough to get started. In reality, investing in the stock market has never been more accessible and affordable than it is today.

Exchange-Traded Funds (ETFs) have made it dead simple to create a low-cost, diversified self-directed portfolio. Even if you have just a little money to invest, new investors can use a handful of ETFs to achieve a level of portfolio diversification that would have required hundreds of thousands of dollars to assemble in the past. Discount brokerages like Questrade also make building your portfolio more affordable than ever by charging no commissions to purchase ETFs. For those that do want to try their hand at individual stock-picking, commissions run as low as $4.95 per trade – a fraction of what used to be the lowest commissions only a decade ago.

For those intimidated by the prospect of even managing ETFs, robo-advisors provide the ideal “set it and forget it” solution. As a result, you don’t actually need to know anything about stocks to get started investing. Providers like Wealthsimple will take the burden of stock-picking and rebalancing your portfolio off your shoulders. You only need to answer a few questions about your financial goals and risk tolerance, and they’ll take care of the rest. Best of all, you can open an account with as little as $100.

One of the best investments you can make is in your financial literacy about what options are out there to help you build wealth in the stock market. You’ll reap the rewards for a lifetime!

Bridget Casey is the founder and content creator of Money After Graduation and is regularly featured as a millennial finance expert on BNN and CBC. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary.

Scott Simpson: “Avoid this common TFSA pitfall”

TFSA stands for Tax-Free Savings Account, and too often, that’s how it’s used – as a savings account. Many Canadians stick their money into a TFSA savings bank account, thinking they’re earning interest and putting aside some money for the future. But given that the interest rates are mediocre at best right now and the risk of erosion from inflation is real, it’s largely a mistake to use your TFSA savings account for your long-term savings (like retirement).

What people don’t realize is that their TFSAs can hold investments, not just savings, offering an opportunity to get a better return on investment. Case in point: when investing for the long term, your investments will simply be worth more if they grow at a higher rate of return. Here’s an example:

If you invest for 25 years and earn a 1% return rate/year while contributing $6,000/year (the current TFSA yearly max), you would see about $21,000 of growth. With the same contributions earning a 5% return rate/year, you would see about $150,000 of growth.

That $150,000 growth of your investments is fully tax-sheltered in a TFSA, so you will naturally receive a higher rate of return compared to the same growth rate had you invested in a non-registered account, where you have to pay taxes.

A simple way to think about it is like growing a vegetable garden in Canada. If you can use a greenhouse, your vegetables can be sheltered from the winter weather and therefore grow at a faster rate. Consider a TFSA investing account like a greenhouse, but for your money! Start investing and you’ll see your savings grow.

Unfortunately, TFSAs aren’t learned about in school, so it’s no wonder that 1 in 4 Canadians don’t understand the difference between TFSAs and RRSPs. It should really be re-named “Tax-Free Investing Account” to clear up the confusion. Although financial literacy is now being included in curriculums, the responsibility of educating people about essentials like this also falls on reputable financial institutions, such as Wealthsimple.

At Wealthsimple, we believe everyone should have access to financial literacy essentials and that investing should be, well, simple. It takes mere minutes to open a TFSA investing account with Wealthsimple – all you have to do is answer an online questionnaire and the computer’s algorithm will build a personalized portfolio suited to your financial goals and risk tolerance. Also, you can easily transfer an existing TFSA with a bank or investing account with the click of a few buttons, and we’ll cover any transfer fees. Bonus Offer: Get a $25 cash bonus when you open a Wealthsimple account with $500!

Scott Simpson is a Portfolio Manager at Wealthsimple, and for almost a decade, he’s been utilizing his specialized knowledge to assist clients with meeting their goals and objectives as they enjoy their lives.

Chrissy Kay: “Take advantage of free money”

Something I wish more Canadians learned in school is how much “free” money is out there. Unfortunately, many lack the knowledge and motivation to access these free sources of income. Don’t let that be you! With just a few hours of time, you could add thousands of dollars to your savings every year.

One of the higher-impact ways to access free money is to lower your taxable income. Contributing to your RRSP is a powerful way to do this. You’ll not only receive a larger tax refund but (if you’re a parent) you may also receive more in Canada Child Benefits.

In retirement, you can continue to keep your taxable income low with smart tax planning. Doing so will help you to receive more free money in the form of Guaranteed Income Supplement payments.

Decreasing your taxes owing is another way to access free money. Taking all the deductions and credits available to you could save you hundreds in taxes per year. (Tax-filing software makes it easy to find and maximize the deductions and credits you qualify for.)

Two other important sources of free money are employer-provided: RRSP matches and discounted employee stock options. These forms of compensation typically range from 5–10% of your annual salary. Don’t miss out on these lucrative forms of free money. If you’re not already enrolled in these programs, contact your HR or payroll department to sign up TODAY!

Finally, let’s talk about four popular forms of free money: high-interest savings accounts, credit card rewards (like travel or cashback), money-making apps (like Ampli), and cashback shopping sites. These easily-accessible options put your savings and spending to work (potentially earning you hundreds in interest and cashback every year).

As you can see, there are many forms of free money out there. For the most part, after a one-time setup, there’s minimal effort to continue receiving this income. Taking the time to learn about and earn free money could very well net you more per hour than your day job… so go get that free money!

Chrissy Kay is the blogger behind Eat Sleep Breathe FI. She writes about financial independence, money, and life, and co-hosts the Canada-centric Explore FI Canada podcast. Follow her on Twitter @esb_FI.

Robb Engen: “Focus on the big picture (or don’t sweat the small stuff)”

When it comes to managing our money, many Canadians tend to be penny-wise and pound foolish. We obsess about areas of our finances that ultimately don’t matter: the interest rate on our savings account, gas prices, or a daily latte, to name a few.

Sure, saving a few dollars is better than the alternative. But while we’re preoccupied with $3 decisions, we’re missing the big picture on what could potentially amount to a $30,000 decision. Here are three big picture areas to focus on instead:

  • Housing – Homeownership seems like a rite of passage for many Canadians, with nearly seven in 10 of us owning a home. In the rent vs. buy debate, renting is perceived as a waste of money and “paying someone else’s mortgage.” Meanwhile, real estate prices have become more and more unaffordable in our largest cities. Those who do buy are becoming increasingly house-poor, with mortgage payments, property taxes and general upkeep taking up the bulk of their income. Renting is often the cheaper and more flexible way to live, with renters saving and investing the difference to grow their wealth.
  • Transportation – Automobile sales are also on the rise. We’re buying larger vehicles (trucks and SUVs) and financing them over a longer period of time (7 or 8 years). Some people view car loans as a fact of life. Escaping the monthly car payment trap, even for five years, could mean savings of up to $50,000 ($10k per year).
  • Career – Gone are the days when we work for the same employer for 40 years and retire with a gold watch and a defined benefit pension plan. Today’s workers are increasingly vulnerable with term contracts and no benefits. Focusing on negotiating your salary, upgrading your skills, changing jobs, or working on a profitable side hustle can add tens of thousands of dollars to your lifetime earnings. You may even want to consider starting your own business.

Focus on the big picture areas of your finances that can dramatically increase your savings or earnings, and stop obsessing over the $3 decisions that ultimately don’t add any value to your life.

Robb Engen is the co-founder of Boomer & Echo, an award-winning personal finance blog, and a financial expert for The Globe & Mail and The Toronto Star.

Jordann Brown: “Pay yourself first and plan for the worst!”

It’s financial literacy month, and if you’re feeling overwhelmed by all of the advice being spouted from news outlets – you aren’t alone. Instead of trying to time the stock market or learn about cryptocurrency, keep things simple. Here are three financial life lessons everyone should know:

First, pay yourself first. You can do this by automating your savings: set up an automatic deposit from every paycheque, which transfers to your high-interest savings account or investing account. Whether it’s $50 or $500, just do whatever you can afford. This lesson is probably the most life-changing one I’ve learned. Most people get paid, spend their money, and try to save whatever is leftover. The problem is that our spending is a lot like a goldfish in a bowl – the bigger the bowl, the bigger the goldfish. Paying yourself first means you’ll put money away for financial goals first and then spend whatever is leftover.

Second, plan for the worst-case scenario. No one wants to think about death, job loss, or catastrophic injury – these aren’t pleasant topics. But these things happen, and they are incredibly hard to live through. Don’t add to your potential stress by scrambling financially. Take the time to make a will (it’s easy with Willful), create a financial plan, and above all, get insurance that covers you in the event of critical illness, disability, or death (aka life insurance). Make sure you have an emergency fund – and keep it well-stocked with regular contributions. Once you have a plan in place, don’t forget to update it periodically as your circumstances change.

Jordann Brown is a Canadian finance writer and founder of the personal finance blog, My Alternate Life.

Tamar Satov: “Don’t carry a credit card balance”

There are few things in Canada more ubiquitous than credit cards. A whopping 93% of adults in this country have at least one credit card, the 2019 Canadian Financial Capability Survey (CFCS) reports, which is even more than the 88% of us who own a smartphone. And while there isn’t anything inherently wrong with credit cards—I have one and use it for the bulk of my spending—it’s vital that young people understand how credit card interest works to avoid some serious financial pitfalls.

Unfortunately, many young Canadians don’t know how credit cards calculate interest charges, a 2020 survey conducted by Loans Canada finds. When asked if making a credit card’s minimum monthly payment would prevent them from being charged interest, 62% of respondents aged 18 to 24 (and 43% of those aged 25 to 34) said yes. (That’s incorrect—credit cards charge interest on any unpaid balance.)

To put this problem into perspective, let’s assume one of the survey respondents above bought a new $1,000 smartphone using a credit card with a typical 19.99% interest. When the bill arrives, it shows the minimum payment is only $30, which seems like a bargain if you don’t know that daily interest will be charged on the remaining $970. If that cardholder continues making only the minimum payment each month, it will take nearly 12 years to pay off the balance, with total interest charges of $989.53—nearly double the original cost of the phone.

You can see how this small misunderstanding could quickly land a young person in a massive hole of debt that could take years to climb out of. And, unfortunately, more than 4 in 10 Canadians carry a credit card balance from one month to the next, according to the 2019 CFCS.

If, however, you pay off your credit card balance in full each month, you’ll never have to worry about interest charges. Plus, you’ll still get all the convenience of cashless purchases, building up your credit score, and earning reward points.

However, if you must carry a balance for whatever reason (we get it: stuff happens), get a low interest credit card or a 0% balance transfer credit card and make paying down debt your mission. Such a smooth move can save you hundreds (even thousands!) of dollars in interest charges in the long run.

Tamar Satov is a Canadian finance writer and contributor to MoneySense, The Globe & Mail, Today’s Parent, and Canadian Living.

James Gauthier: “Know what you’re buying and ask questions”

Having the knowledge and confidence to make your own financial decisions can be empowering and beneficial for your health and wealth. It takes time, patience and a willingness to learn to provide you with the necessary background to make wise decisions regarding your personal finances. However, most educational sources (such as textbooks, presentations or articles) barely address potentially one of the most expensive lessons in finance: the conflict of interest (aka “an agency problem”).

But buyer beware! Most financial institutions are for-profit corporations, and a large percentage of their representatives are financially incentivized to sell you products or services beyond what you need, or something that you don’t need at all! Don’t be fooled by fancy titles like Customer Service Representative, Investment Advisor, Insurance Specialist, or even Vice President. A more appropriate name for these roles might be “Commissioned Salesperson.”

Sales-oriented financial employees can be very generously compensated, which attracts top-notch talent. Financial services are an essential service for many, and there is nothing wrong with companies trying to make a profit….except that their profit comes directly out of your pocket!

To protect yourself from this inherent conflict of interest between consumers and financial service representatives, you should ask the following questions:

  • “What are all of the fees that I will be paying?”
  • “How are you compensated?”
  • “What kind of ongoing customer support can I expect?”
  • “What are the penalties I will face if I don’t like the service and wish to go elsewhere?”
  • “Do you have a fiduciary obligation to work in my best interest?”
  • “Do you own the same product/service that you are trying to sell me?”

If you don’t like the answers that you get, you may wish to keep looking until you do. When it comes to investing, you may wish to consider using a robo-advisor instead of a financial advisor who earns a commission. Robo-advisors do not employ an agency sales force, which can greatly reduce your fees and conflicts of interest. While robo-investing has only been around for a little over five years, Canadians have switched billions of dollars to robo-advisors, providing a proof statement that investors appreciate the convenient and direct online investing format. It can also save you a bundle on fees.

James Gauthier is Chief Investment Officer at Justwealth. He is an experienced asset allocator who for nearly 25 years has devised some of the most innovative and sophisticated asset allocation policies for institutions, high net worth clients, and large wrap programs in Canada.

What are your financial lessons to share for Financial Literacy Month? Comment below!

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