The Ultimate Guide to Financial Literacy

Financial literacy is the ability to understand and manage your personal finances effectively. It is a crucial life skill that empowers people to make informed decisions about their money. This guide aims to provide a comprehensive overview of financial literacy and offer practical tips on how to achieve financial security.

Table of Contents

1. What is Financial Literacy
2. Why You Should Care About Financial Literacy
3. Personal Finance Basics
4. Bank Accounts
5. Credit Cards
6. Budgets
7. How to Start Investing

What is Financial Literacy?

In today’s economy, the earlier you learn the basics of how money works, the more confident you are and the more successful you’ll be with your finances later in life. But don’t worry if this is something you were never taught, it’s never too late to start learning. That’s why CanFi is here to teach you everything you need to know about financial literacy. 

Financial literacy also means understanding financial principles and concepts, such as the time value of money, compound interest, financial planning and making money owed. 

Why You Should Care About Financial Literacy

Learning about financial literacy is critical for anyone who wants to achieve financial stability, security, and freedom. Understanding personal finance basics, such as budgeting, saving, and investing, allows individuals to make informed decisions about their money and empowers them to take control of their financial lives. With financial literacy, individuals can avoid debt, improve their credit scores, and build wealth.

Moreover, financial literacy is critically important for achieving long-term financial goals, such as retirement planning and ensuring financial security in case of emergencies. Without proper financial planning, individuals may find themselves struggling financially later in life or unable to handle unexpected expenses. Financial literacy also enables individuals to better navigate the complex financial landscape and understand financial products such as loans, insurance, and credit cards, allowing them to save money and avoid financial traps such as high-interest debt.

Personal Finance Basics

The first step to achieving financial literacy is to understand the basics of personal finance. This includes creating a budget, managing expenses, and saving for emergencies. A budget is a plan that outlines your income and expenses and helps you understand where your money goes. Managing expenses involves controlling unnecessary spending and finding ways to save money. Saving for emergencies is critical and can be achieved by setting up an emergency fund.

Think about these questions: how do you manage your money? Which savings and investment vehicles are you using? How much disposable income do you have? What recurring expenses do you have? 

Personal finance is about making and meeting your financial goals, whether you want to own a home, help other members of your family, save for your children’s college education, support causes that you care about, plan for retirement, or anything else.

Bank Accounts

Having a bank account is essential for managing your finances effectively. It allows you to deposit money, pay bills, and manage your finances online. There are several types of bank accounts, including checking accounts, savings accounts.

Types of bank accounts that everyone should have: 

1. Checking account: This is the most common account held at a bank. It is used for day-to-day transactions such as paying bills, making purchases and withdrawing cash. Your paycheck can also be directly deposited into this account.

2. Savings account: This account is ideal for saving money that you won’t need for immediate expenses. Typically, savings accounts have a higher interest rate compared to checking accounts (often referred to as High Savings Interest Accounts), so the money you save can earn more money over time. 

3. Emergency fund: While this is not technically a specific type of bank account, keeping a separate account for unexpected expenses such as medical emergencies or job loss is important. The general rule of thumb is saving up at least 3-6 months of living expenses.

Other types of accounts that you can have: 

Investing Accounts

There are multiple types of accounts that you can use as investing accounts. Depending on your goal, such as retirement, buying a home, saving for education or achieving long-term financial goals.

For example, a Tax-Free Savings Account (TFSA) is a great option for most people to consider as part of their financial plan. It is a type of investment account that allows you to save and invest money tax-free, meaning that you won’t be taxed on any of the money you earn in the account through interest, dividends, and capital gains.

A Registered Retirement Savings Plan (RRSP) is a tax-deferred investment account that can be used to save money for retirement. When you contribute to an RRSP, you can deduct the amount contributed from your taxable income, meaning you’ll pay less tax in the year you make the contribution. The money within the account grows tax-free, which allows your investments to compound over time. You’ll only be taxed on the money you withdraw from an RRSP when you retire. RRSPs are a great way to save for retirement, and many employers offer group RRSPs as part of their benefits program.

A Registered Education Savings Plan (RESP) is designed to help people save for their children’s post-secondary education. When you invest in an RESP, you’ll receive government grants on your contributions, making it a great way to save for your child or grandchild’s education. The government grants offered in RESPs include the Canada Education Savings Grant (CESG), which can provide up to $500 per year, depending on your income, as well as the Canada Learning Bond (CLB), which provides up to $2,000 per child for low-income families. The investments within an RESP grow tax-free, and when your child is ready for post-secondary education, they can withdraw the money and pay tax on the earnings from the investments.

How to Choose a Bank

Choosing which bank to open a bank account with is an important decision. There are many factors to consider, such as the bank’s reputation, fees, interest rates, convenience, and technology. Start by researching banks and comparing their fees, interest rates, and services. Look at online reviews or customer experiences to understand how banks treat their customers. Ensure that the bank provides convenience and technology services that can meet your needs, such as mobile banking and online bill payment. Consider opening an account with a bank that has physical locations and in-person customer service if that’s important to you. Evaluate the bank’s ATM or branch locations to determine that it will be easily accessible for you. By carefully considering these factors, you can choose the right bank to open your account with and set yourself on the path to financial success.

Credit Cards

Credit cards can be a powerful tool for managing your finances but can also lead to financial instability. It is essential to use credit cards responsibly by paying bills on time, avoiding high-interest rates, and not overspending. It is also important to monitor your credit score, which is a measure of your credit worthiness and can impact your ability to access credit in the future.

Difference between credit cards and debit cards

Credit cards and debit cards are both widely used payment methods, but there are some significant differences between them. Debit cards are linked to your bank account and draw funds directly from the account when you make a purchase or withdrawal. Credit cards, however, are a type of loan that allows you to borrow money up to a certain limit. When you use a credit card to make a purchase, you are borrowing money from the lender. Repayment of credit card purchases is essential to avoid interest rates that can accumulate from your spending over time. Debit cards typically do not have annual fees, while credit cards may have fees for use or rewards. Another key difference is that credit cards can help impact your credit score whereas debit card usage has no impact on your credit score. Lastly, the use of a credit card versus a debit card to make purchases can ultimately affect your spending habits, as it is easier to overspend on a credit card without the obligation to pay for it immediately.

What is APR?

APR stands for Annual Percentage Rate, which is the annual interest rate that you pay for borrowing money. It is the total cost of borrowing expressed as an annual rate and includes not only the interest but also any additional fees or charges that you may incur. Lenders are required by law to disclose the APR , so borrowers can compare costs across different lenders. A high APR means more money paid towards interest on the loan or credit card balance over time. Understanding the APR on your loan or credit card is important, so you can accurately calculate the total cost of borrowing, determine how long it will take to repay the balance, and ultimately make better decisions about your finances. Most credit cards will have a 19% – 22% APR. 

Which Credit Card Should I Choose?

There are many different types of credit cards available, each with its own benefits and drawbacks. Rewards cards give you cashback or points for every purchase you make, while travel cards offer points that can be redeemed for airline or hotel stays. There are also low-interest cards with a lower Annual Percentage Rates (APR) or balance transfer cards that offer a 0% interest rate for a certain period. To choose which credit card to use, you should compare its benefits against your spending habits and financial goals.

If you frequently use your credit card for everyday purchases, a rewards card could give you the most value. Look for one that matches your spending habits and offers a cashback reward percentage that can help you earn money on the purchases you make. Travel reward cards offer bigger advantages if you often travel, as they provide exclusive perks like air miles, airport lounge access or hotel discounts.

On the other hand, if you carry a balance on your card from month to month, a low-interest rate card could be a better choice for you. Additionally, if you need to transfer a balance from another card, a balance transfer credit card with an introductory 0% APR period can help you pay off your debt faster and potentially save you a lot of money in interest. 

When choosing a credit card, consider the interest rates, fees, rewards, bonuses, repayment plans, customer service, and technology. Compare these factors to what you look for in a credit card and balance your budget, income, and payment habits before deciding on which type and brand of credit card you will use. By selecting the right credit card for your financial goals and personal lifestyle, you can get the best value and optimize your credit score.

Budgets

Here are some steps to help create a budget:

1. Track Your Income and Expenses: Start by determining how much money is coming in and how much is going out. Collect all your income statements and track all your expenses. Record this information in a spreadsheet, budgeting app, or on paper.

2. Categorize Your Expenses: Once you’ve collected your income and expenses, categorize them by category. Use categories like rent/mortgage, utilities, food, transportation, entertainment, and other expenses that match your lifestyle. Be comprehensive to make sure you capture all of your expenses correctly.

3. Analyze Your Spending: Compare your income and expenses to see if there are areas where you can cut back. Identify the expenses that are fixed and must be paid every month, such as rent or insurance. Be vigilant about variable expenses that can fluctuate each month, like entertainment, transportation, or groceries. 

4. Set Financial Goals: When creating a budget, consider your financial goals. Determine how much money you need to save each month in order to achieve the goal over time. Consider setting up an emergency fund, paying off debts, saving for retirement, or planning for a big purchase like a house or a car.

5. Create a Budget Plan: Once you have tracked your spending, categorized your expenses, analyzed your spending habits, and set your financial goals, it’s time to create a budget plan. Use your spreadsheet or budgeting app to create a monthly or weekly plan that allocates your income and prioritizes your expenses. Determine how much money should go towards each expense category based on your analysis and goals. 

6. Regularly Review and Update Your Budget: Review your budget monthly or weekly to make sure you’re sticking to the plan. Adjust as needed to account for changes to your income or expenses. Stay disciplined and remember that good budgeting habits require continuous monitoring and updating. 

Creating and sticking to a budget requires attention to detail and discipline. However, the effort can pay off by providing you with a clear view of your financial status, helping you plan for future goals and ultimately achieve financial security.

How to Start Investing

Investing is an essential part of wealth building and achieving financial security. It is important to understand the different types of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Investing requires a long-term mindset and should be done with careful research and analysis. It is also important to diversify your portfolio to minimize risk.

What is the Stock Market?

The stock market is a collection of exchanges and markets where stocks are bought and sold. In a stock market, companies issue stocks or shares that represent ownership in a portion of the company. Investors can buy and sell these stocks on the stock market, with the price of the stocks fluctuating based on supply and demand. And even though it’s called a stock market, other financial securities, such as exchange-traded funds (ETFs), corporate bonds, and derivatives based on stocks, commodities, currencies, and bonds, are also traded there.  Some of the biggest stock markets are the New York Stock Exchange, NASDAQ, and Shanghai Stock Exchange. 

The stock market is essential for driving the global economy as it helps companies raise capital to fund their operations or expansion and investors to participate in the growth of these companies. It also plays a crucial role in determining the value of retirement accounts, pension funds, and other investment portfolios.

The stock market is also a reflection of the overall economic health of a country as it reflects changes in corporate performance, investor confidence, and economic indicators. Overall, the stock market is a significant player in the global financial system and can provide a means for investors to achieve long-term wealth growth through investing in a diverse range of stocks

Stock Market Jargon To Know

Here is some common stock market jargon and their definitions:

1. Bull market: A financial market where prices are rising and investor confidence is high.

2. Bear market: A financial market where prices are falling and investor confidence is low.

3. Blue chip stocks: Large, well-established companies that are known for their reliability, financial stability and strong track record.

4. IPO: Initial Public Offering – The first time a company offers shares of its stock to the public, thereby transitioning from being a privately held company to being publicly traded.

5. Dividend: A payment made by a company to its shareholders, usually in the form of cash, based on the company’s profits.

6. Market capitalization: The total value of a company’s outstanding shares of stock, calculated by multiplying the current share price by the total number of shares outstanding.

7. P/E ratio: Price to Earnings ratio – A measure of a company’s current stock price relative to its earnings per share.

8. Volatility: A measure of how much the price of a security or the overall market fluctuates over time. High volatility means that prices are changing quickly and often.

9. Index: A weighted portfolio of stocks or other securities that reflect the performance of a particular market or industry.

10. Stock split: A corporate action where a company increases the number of its outstanding shares by a certain multiple and accordingly reduces the price per share, while maintaining the total market capitalization.

11. Exchange-traded fund (ETFs): a type of investment fund that holds a diversified portfolio of stocks, bonds, commodities, or other types of securities.  They track the performance of a particular index, such as the S&P 500 or the NASDAQ,

12. Mutual funds: A type of investment consisting of a portfolio of stocks, bonds, or other securities. Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.

13: Bonds: Are issued by companies, municipalities, states, and sovereign governments to finance projects and operations. When an investor buys a bond, they’re effectively lending their money to the bond issuer, with the promise of repayment plus interest. A bond’s coupon rate is the interest rate that the investor will earn.

How Do I Start Investing?

Here are the general steps to get started with investing:

1. Establish your financial goals: Determine why you want to invest and what you’re hoping to achieve in the long-term, and what kind of risk you’re willing to take.

2. Create a budget: Before investing, ensure that your daily finances are in good order and that you have an emergency fund set up.

3. Choose an investing account: There are different types of accounts, such as brokerage accounts and retirement accounts (e.g., RRSP, TFSA, RESP), that offer different tax benefits and investing options.

4. Understand the different types of securities available: Stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and alternative investments all offer different benefits and risks, so it’s essential to understand how each works.

5. Build a diverse portfolio: Diversification can help reduce the risk of losses and maximize returns by investing in different types of securities, industries, and geographic regions.

6. Make your first investment: Once you’ve done your research, evaluated your risks, and analyzed your investment objectives, you can start buying securities through your chosen investing account.

It’s important to note that investing involves risk, and you should not invest money you cannot afford to lose. Additionally, it’s always recommended to consult with a financial advisor who can help guide you in making investment decisions that align with your goals and risk tolerance.

Conclusion

Achieving financial literacy is a lifelong journey, but it is an essential skill that can lead to financial stability and security. By understanding the basics of personal finance, bank accounts, credit cards, budgets, investing, retirement planning, and asset protection, you can make informed decisions about your money and achieve your financial goals.