Core concepts to help build sound financial management skills in youth.
“Pay yourself first”
In general, there are four main uses for money: spending, saving, investing and giving away. Finding the right balance among these four categories is essential, and a budget can be a very useful tool to help you accomplish this.
An important starting point in creating a budget is thinking about and recording your short- and long-term financial goals (e.g. a new electronic device, vacation, vehicle, house, further education). Doing so will help generate a baseline for mapping out and putting concrete plans in place.
This is the formula to help you achieve money success: income – savings = expenses. In other words, savings should be prioritized and built into your budget plan, and expenses should be planned and paid from the remaining money after savings have been factored in.
To help prioritize savings in your budget, consider setting aside a specific amount on a regular basis, such as through a pre-authorized contribution plan where funds are taken from your account on set days and deposited in an investment vehicle or savings plan.
In creating a budget, it’s important to include and track: income, savings goals, fixed expenses and flexible expenses (needed and wanted).
For a budget to be most effective, it’s important to factor in all lifestyle expenses and other financial components, and ensure they’re logged appropriately.
“Understand your true earnings and how they are taxed”
In general, there are four main sources of income: employment, investments, inheritance and unexpected (such as a lottery win). Each of these sources may be taxed in different ways and at different levels.
Canada’s federal tax rates are based on income level. You can find the current and previous income tax rates for individuals on the Government of Canada website .
It’s important to distinguish between marginal tax rates and average tax rates. Your marginal tax rate is the rate of income tax that you will pay on your next dollar of income earned. Your average tax rate is calculated considering your total income tax payable as compared with your total income. Further to federal tax rates, there are also varying provincial and territorial tax rates.
Tax considerations exist in various areas of wealth planning. There may be opportunities to incorporate potential tax benefits into your plans and there may also be negative tax consequences associated with certain decisions. Additionally, when choosing the best investments for your circumstances, taxes should not be the only consideration, and it’s important to factor in the after-tax rate of return in determining tax-efficient investments. For these reasons, it’s crucial to consult with a qualified tax advisor to ensure your circumstances and needs are appropriately accounted for.
“Not all money is created equal”
A form of borrowing that gives a customer the ability to obtain something on a promise to repay in the future.
When you borrow, certain information is shared with a credit bureau. Over time, additional information, such as whether you’ve paid your bills on time, whether you’ve missed payments and how much debt is outstanding, will get shared with the credit bureau. These factors go into calculating your credit score—a number assigned that indicates to lenders your capacity to repay a loan—as reported on your credit rating report.
300 (just getting started) to 900 (the best score you can achieve)
The “magic middle number” is 650. A score above will likely qualify you for a standard loan; a score below would likely create difficulty in getting new credit.
Pay all bills on time, even if it’s just the minimum payment. Missing even one payment can negatively impact your credit score.
Regardless of type, remember that all forms of credit come with a cost—i.e. interest, usually monthly, and fees (the amounts lenders charge for use of their money).
To avoid over-indebtedness, it’s crucial to ensure funds are available to pay your bills. Planning goes a long way to help stay on top of debt. Try creating a list of all your outstanding credit and write down when payments are due and what the interest rate is for each. A good general rule is to repay the debt with the highest interest rate first, and always try to determine where you can make more than the minimum monthly payment.
“Think about and map your goals”
Identifying your short- and long-term financial goals will help determine which types of investments and planning approaches may be most suitable and effective to help you save for your needs. In doing so, it’s crucial to first distinguish between what you actually need versus what is a “nice-to-have.” Going through this process allows you to set realistic goals that you can confidently work towards achieving.
Simple projectionA simple cash-flow analysis that looks at short- and long-term goals.
Detailed planA comprehensive wealth plan, also referred to as a financial plan, which helps guide individuals towards achieving more complex financial goals throughout their lifetimes and beyond.
Your stage of life will greatly impact your financial picture now and in the future, and the financial and investment decisions you make. In general, there are three main wealth stages that individuals move through and between over the course of life:
Whether you develop a simple wealth projection or a more detailed wealth plan, the process involves analyzing and interpreting all of your financial information. From there, results are generated, and those results are modified and tweaked until desired goals become feasible. Your current stage in life may impact what type of recommendations are made, as well as how you implement the recommendations to pursue your financial goals, and will differ by individual (e.g. increase savings towards your retirement goal by opening a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)).
Wealth plans and projections should be treated as living, breathing documents. To make sure they continue to work for your personal situation, they need to be reviewed on a regular basis. A good rule of thumb is to revisit it annually—unless you experience an unexpected life event, your goals change or there’s a material change in your financial picture. One of the best ways to ensure you revisit it regularly is to simply schedule the time in advance on your calendar.
“Match your financial vision with the right investments”
While there is a wide variety of investment options available, the two primary types of accounts in which they are held—registered and non-registered—can have implications for investors.
Registered: Accounts and plans that are registered with the government for income tax purposes and that provide tax-deferral opportunities (e.g. RRSP, Registered Retirement Income Fund (RRIF), Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), other pension plans) or are non-taxable (TFSA).
Non-registered: Accounts that are not registered with the federal government, do not have limits, and earn income that must be included as taxable income each year (e.g. investment accounts with corporate stocks, bonds, mutual funds, exchange-traded funds (ETFs) or guaranteed income certificates, to name a few).
An asset class is a broad category of investments (e.g. cash, bonds or stocks) that have a distinct risk/return relationship. An investment vehicle is the financial product that enables investors to buy and sell the underlying asset class (e.g. a mutual fund or an ETF).
In the investing world, there is a strong relationship (correlation) between risk and return. Generally speaking, the higher the potential return, the more risk an investor should be willing to accept. Keep in mind, for most types of investments, returns are not guaranteed.
With investing, it’s important to diversify, which means finding the right balance of investments and creating a portfolio that includes different types of investments to reduce overall risk and volatility.
When building your investment portfolio, it’s important to first gauge your risk tolerance, which is the amount of market volatility, specifically the ups and downs, that are reasonable to expect during your time horizon. Defining your risk tolerance will help you determine the type of portfolio that best suits your needs and also help you manage expectations during down markets. Once you have a sense of where you are on the risk tolerance spectrum (risk-averse versus risk-tolerant, or somewhere between), you are in a better position to invest in a portfolio that aligns with your overall goals and objectives as an investor.
“Protect yourself, your family and all of your assets”
Your “estate” is all of the property that you own—from your car, home or other real estate to bank and investment accounts and personal possessions.
While creating a Will is an important step in the estate planning process, estate planning is the broader process of creating a detailed plan, in advance, that includes tasks and decisions for the management and disposal/transfer of a person’s assets during their lifetime and after death. It can, together with your Will, serve to help assure that your wishes and intentions are carried out and that your assets can be passed down to your heirs in the most tax-efficient ways.
This is a guiding legal document in the administration of an estate where you outline your decisions for how property and possessions are to be distributed at death. If an individual passes away without a valid Will, they are said to have died “intestate” and, simply put, this means the provincial or territorial laws determine how the estate will be administered and divided. In other words, individuals lose all choice as to who receives what, and it may also create extra fees, taxes, and delays in administering the estate.
This is a written document that legally authorizes another party to act on an individual’s behalf during their lifetime. It may help to provide personal and financial comfort should you become incapable of making these decisions (due to an accident, significant illness, cognitive condition, etc.). *In Quebec, this is called a Mandate.
A beneficial first step in estate planning is building an inventory of what you own and what you owe, as well as other important financial information (e.g. location of your Will, POA/Mandate, insurance policies, digital assets, etc.).
In Canada, there is no true estate tax, but there are three potential taxes that may apply at death:
Insurance may be an estate planning option to consider. Why?
Over the course of life, your priorities and circumstances can change, so it’s important to review and revisit your estate plans every few years or after a significant event (e.g. a change in marital status, birth or death of a loved one, etc.).
Learn more about The RBC WM Financial Literacy program.
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