Banking Basics

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Questions and Answers

What is the purpose of interest in a bank account?

It is paid by the government

It is charged by the bank for holding your money

It is the cost of using your own money

It is earned by lending your money to the bank (correct)

Opening a bank account is safer than keeping all your money in a drawer.

True

What does CDIC stand for?

Canada Deposit Insurance Company

When you open a bank account, you are accepting the responsibility to track your balance, check your account regularly, and safeguard your account information, debit card, cheques, and ___.

PIN Signup and view all the answers

Match the following banks with their names:

TD Bank = Toronto Dominion Scotiabank = Scotiabank CIBC = Canadian Imperial Bank of Commerce BMO = Bank of Montreal RBC = Royal Bank of Canada Signup and view all the answers

How can you manage your credit and build a good credit score?

Making payments on time each month Signup and view all the answers

What is the average annual interest rate for credit cards in Canada?

20% Signup and view all the answers

Using credit cards for purchases and paying off the balance every month is a good way to build credit.

True Signup and view all the answers

Payday loan companies offer short-term loans at very high ______ rates.

interest Signup and view all the answers

Match the following financial tips for young people with their descriptions:

Set up an emergency savings fund = Typically 3-to-6 months' living expenses Start learning about investing = Establish an automatic savings program to reach financial goals Rent within your means = Understand your rights and responsibilities as a tenant Ensure adequate insurance coverage = Rent, auto, health, liability, disability Signup and view all the answers

What are some electronic banking services available with most bank accounts?

ATM networks Signup and view all the answers

Responsible use of debit cards can help build your credit rating.

False Signup and view all the answers

What is overdraft protection?

Overdraft protection is a service that covers electronic transactions exceeding your balance, with a fee. Signup and view all the answers

A ____________ investment pays a guaranteed interest rate on specific days and protects your initial investment.

fixed income Signup and view all the answers

Match the investment type with its description:

Equity Investment = Buying and selling stocks on the stock market, with no guaranteed returns Mutual Fund = A portfolio of stocks managed by a professional, allowing investment in multiple companies RESP = Special savings account for a child's post-high school education RRSP = Retirement savings plan where you can invest a portion of your income Signup and view all the answers

Study Notes

Banking

A bank account is an agreement with a bank that allows you to keep your money in the bank and take it out when you need it.
Interest is the cost of using somebody else's money, and you can earn interest by lending your money to the bank.
Banks are licensed to receive deposits, make loans, and provide financial services, and are managed by the national government in Canada.
Bank deposits are guaranteed by the CDIC (Canada Deposit Insurance Company) up to $100,000 per person per type of account.

Types of Financial Institutions

Banks: financial institutions licensed to receive deposits and make loans, such as TD Bank, Scotiabank, CIBC, BMO, and RBC.
Trust companies: legal entities that act as a trustee, being the intermediary between borrowers and lenders, such as Canadian Western Bank, HSBC Bank Canada, and Citibank Canada.
Credit unions: provincial cooperative saving and lending associations that are owned by their members, such as Servus Credit Union.

Deciding on a Financial Home

Consider the following when choosing a financial institution:
- Location: choose an institution that is convenient, perhaps near your home or job.
- Comfort level: consider how you are treated when you approach a financial institution and whether they offer student accounts with discounts or other incentives.
- Security: ensure that the institution is insured to protect your money, such as CDIC insurance.
- Services offered: consider what services you need, such as deposits, withdrawals, bill payments, and loan applications.
- Service charges: compare fees among institutions to avoid unexpected charges.

Opening a Bank Account

When you open a bank account, you're accepting the responsibility to:
- Track your balance to avoid overdrafts.
- Check your account regularly to report any errors or suspicious transactions.
- Safeguard your account information, debit card, cheques, and PIN.

Banking FAQs

Financial institutions can pay you interest because they lend your money to people for mortgages and loans.
Having one or more bank accounts is a good way of establishing a credit rating or indicating that you are responsible with money.
There are several types of accounts, including chequing, savings, and money market accounts.
Debit cards are a convenient way to access your money, but be aware of potential fees.
Electronic banking services, such as ATM networks, telephone banking, and mobile banking apps, make it easy to manage your account.

Not So Free Student Accounts

Many banks offer student accounts with no monthly fees, but be aware of other fees associated with these accounts, such as over transaction limit fees, out-of-network ATM fees, overdraft fees, and NSF fees.
Read the fine print and understand the fees associated with your account to avoid unexpected charges.

Interest and Investments

Interest is the percentage of principle charged by the lender for the use of their money.
Simple interest is calculated as a percentage of the principle, while compound interest is calculated as a percentage of the principle plus accrued interest.
The Power of 72 Calculator can be used to calculate the number of years it will take to double your money at a given interest rate.
Fixed income investments, such as GICs, treasury bills, and government savings bonds, offer a guaranteed interest rate and protect your initial investment.
Equity investments, such as buying and selling stocks on the stock market, offer no guarantee and your investment could increase or decrease in value.### Stocks and Mutual Funds
If a company loses money, stockholders may not make a profit and might even lose their initial investment.
Stocks can be bought and sold on the stock market, such as the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).
Stocks can be traded at any time, with no fixed term.
A mutual fund is a portfolio of stocks managed by a professional to make money for investors.
Investors can buy and sell pieces of the fund at any time, with no fixed term.
There are different types of mutual funds, including those with varying levels of risk, focus on specific industries, or focus on specific countries.

Saving

A Registered Education Savings Plan (RESP) is a special savings account for education after high school.
As of 2007, individuals can invest up to $50,000 in an RESP.
The federal government adds $0.20 for each dollar contributed to an RESP, up to a maximum of $500 per year.
RESP investments can be boosted through government matching programs and compound interest.
A Registered Retirement Savings Plan (RRSP) is a special retirement savings plan registered with the government.
Individuals can contribute 18% of their income or $26,010 (as of 2017) to an RRSP each year.
Contributions to an RRSP are tax-free, but withdrawals are taxed.
Starting RRSP contributions early can benefit from compound interest.

Credit and Debit

Credit allows individuals to borrow money with the promise of returning it with interest.
Credit enables individuals to pay for things they cannot afford all at once, such as houses, cars, and postsecondary education.
Credit is essential for countries, companies, and individuals, but it must be managed by building a good credit score, keeping debt low, and using low-interest credit options.
Credit comes at a cost, especially if loans are high-interest, leading to debt and financial hardship.
A credit score is a number that reflects an individual's credit management and is stored on a credit report by one of Canada's two credit bureaus, Equifax or TransUnion.

Managing Credit

Individuals can manage their credit and build a good credit score by making payments on time, using less than 35% of available credit, building a longer credit history, limiting credit checks, and using a variety of credit types.
Lenders send information about accounts to credit bureaus, also known as credit reporting agencies.

Credit Cards

Credit cards have an average 20% annual interest rate in Canada, making them a high-interest form of credit.
Using a credit card responsibly and paying off the balance each month can help build credit, but overspending can lead to unmanageable debt.

Payday Loans

Payday loan companies offer short-term loans at very high interest rates and provide other services with high fees.
These services should be avoided and used only as a last resort, as the high interest rates can rapidly create debt.

Cost of Credit

If individuals don't pay off their credit card balance each month, interest assessed on their account means they may pay more for items than expected.
Overspending and accumulating credit card debt can lead to alarming interest payments.

Financial Tips for Young People

Set up an emergency savings fund, typically 3-to-6 months' living expenses.
Establish credit, but maintain a good payment record and do not charge more than you can pay off in 1 month.
Start learning about investing and establish an automatic savings program to reach financial goals.
Rent within your means, understand your rights and responsibilities as a tenant, and take advantage of employer savings benefits.
Ensure adequate insurance coverage, such as rent, auto, health, liability, and disability insurance.
Start saving early, especially for a down payment on a home.

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Description

Learn about bank accounts, earning interest, and the basics of banking. Understand the concept of interest and why you should open a bank account.