Podcast
Questions and Answers
Which step focuses on analyzing personal values and attitudes towards money?
Which step focuses on analyzing personal values and attitudes towards money?
What is primarily evaluated in Step 4 of financial planning?
What is primarily evaluated in Step 4 of financial planning?
What type of goal is defined as lasting longer than 5 years?
What type of goal is defined as lasting longer than 5 years?
What term describes the total demand for goods and services that influences employment opportunities?
What term describes the total demand for goods and services that influences employment opportunities?
Signup and view all the answers
Which institution is responsible for setting the 'Prime rates' in Canada?
Which institution is responsible for setting the 'Prime rates' in Canada?
Signup and view all the answers
Which principle involves taking ownership of financial decisions and their consequences?
Which principle involves taking ownership of financial decisions and their consequences?
Signup and view all the answers
What is the primary purpose of the Registered Retirement Savings Plan (RRSP)?
What is the primary purpose of the Registered Retirement Savings Plan (RRSP)?
Signup and view all the answers
Which of the following options qualifies as a refundable tax credit?
Which of the following options qualifies as a refundable tax credit?
Signup and view all the answers
What is the contribution limit for the First Home Savings Account (FHSA) per year?
What is the contribution limit for the First Home Savings Account (FHSA) per year?
Signup and view all the answers
Which tax is an excise tax on specific goods and services in Canada?
Which tax is an excise tax on specific goods and services in Canada?
Signup and view all the answers
What does the net worth calculation represent?
What does the net worth calculation represent?
Signup and view all the answers
Which of the following ratios indicates how much of a person's earnings is allocated to debt payments?
Which of the following ratios indicates how much of a person's earnings is allocated to debt payments?
Signup and view all the answers
Why is understanding the time value of money important in personal finance?
Why is understanding the time value of money important in personal finance?
Signup and view all the answers
When creating a budget, which step involves categorizing different types of spending?
When creating a budget, which step involves categorizing different types of spending?
Signup and view all the answers
What is a distinguishing feature of an ordinary annuity?
What is a distinguishing feature of an ordinary annuity?
Signup and view all the answers
What is a key characteristic of preferred stocks compared to common stocks?
What is a key characteristic of preferred stocks compared to common stocks?
Signup and view all the answers
Which of the following is NOT a benefit of investing in a mutual fund?
Which of the following is NOT a benefit of investing in a mutual fund?
Signup and view all the answers
What is the main purpose of an emergency fund?
What is the main purpose of an emergency fund?
Signup and view all the answers
Which of the following scenarios qualifies for Employment Insurance (EI) benefits?
Which of the following scenarios qualifies for Employment Insurance (EI) benefits?
Signup and view all the answers
What is the primary purpose of an Initial Public Offering (IPO)?
What is the primary purpose of an Initial Public Offering (IPO)?
Signup and view all the answers
What factor contributes the most to determining your credit score?
What factor contributes the most to determining your credit score?
Signup and view all the answers
Which of the following is NOT a factor that directly influences stock prices?
Which of the following is NOT a factor that directly influences stock prices?
Signup and view all the answers
Which of the following is an example of a risk management strategy in investing?
Which of the following is an example of a risk management strategy in investing?
Signup and view all the answers
Which of the following statements about fixed-rate mortgages is true?
Which of the following statements about fixed-rate mortgages is true?
Signup and view all the answers
What is the primary advantage of using the avalanche method for debt repayment?
What is the primary advantage of using the avalanche method for debt repayment?
Signup and view all the answers
Why are personal loans often considered better than credit cards for debt consolidation?
Why are personal loans often considered better than credit cards for debt consolidation?
Signup and view all the answers
Which of the following options is a downside of using a line of credit?
Which of the following options is a downside of using a line of credit?
Signup and view all the answers
What is a common protection against predatory lending practices?
What is a common protection against predatory lending practices?
Signup and view all the answers
What should your credit utilization ratio ideally be to positively impact your credit score?
What should your credit utilization ratio ideally be to positively impact your credit score?
Signup and view all the answers
What does the Ontario Consumer Protection Act guarantee borrowers regarding credit information?
What does the Ontario Consumer Protection Act guarantee borrowers regarding credit information?
Signup and view all the answers
Which of the following best describes a variable-rate mortgage?
Which of the following best describes a variable-rate mortgage?
Signup and view all the answers
What is indicated by a higher price-to-earnings (P/E) ratio?
What is indicated by a higher price-to-earnings (P/E) ratio?
Signup and view all the answers
Which of the following stocks is characterized as having low risk and lower returns?
Which of the following stocks is characterized as having low risk and lower returns?
Signup and view all the answers
Which of the following best describes a limit order?
Which of the following best describes a limit order?
Signup and view all the answers
What does the quick ratio specifically consider when analyzing a company's liquidity?
What does the quick ratio specifically consider when analyzing a company's liquidity?
Signup and view all the answers
Which stock classification generally reflects companies that are leaders in their sector and typically have a market cap in billions?
Which stock classification generally reflects companies that are leaders in their sector and typically have a market cap in billions?
Signup and view all the answers
Which of the following indicators provides a measure of a company's dividends relative to its stock price?
Which of the following indicators provides a measure of a company's dividends relative to its stock price?
Signup and view all the answers
What is the primary focus of technical analysis in stock trading?
What is the primary focus of technical analysis in stock trading?
Signup and view all the answers
What is the purpose of the interest coverage ratio?
What is the purpose of the interest coverage ratio?
Signup and view all the answers
What would likely happen if a company's liquidity ratios are consistently below 1?
What would likely happen if a company's liquidity ratios are consistently below 1?
Signup and view all the answers
Study Notes
Financial Planning
- Financial planning is the process of managing money to achieve personal economic satisfaction. It increases control over finances by mitigating debt and dependency on others.
Steps in Financial Planning
- Step 1: Develop Financial Goals: Analyze values, money attitudes, and family financial decision-making practices.
- Step 2: Understand Your Financial Situation: Assess income, savings, expenses, and debts. List assets and debts.
- Step 3: Identify Alternative Courses of Action: Consider maintaining the current path, expanding it, changing it, or taking a completely new approach.
- Step 4: Evaluate Alternatives: Weigh your life situation, personal values, and economic conditions.
- Step 5: Create and Implement a Financial Action Plan: Choose effective strategies, formulate a budget, establish accounts, and decide about investments.
- Step 6: Re-evaluate and Revise the Plan: Regularly track financial progress and adjust the plan as needed.
Developing Personal Financial Goals
- Factors Affecting Goals: Timing (short-term, intermediate, long-term), specific needs (consumer products, infrequently purchased items, intangible purchases).
- SMART Goals: Realistic goals aligned with income and life situation.
Influence of Economy
- Market Forces: Supply and demand, interest rates, inflation rates. High demand leads to higher interest rates.
- Bank of Canada: Canada's central bank. Sets the prime rate, aiming for stable money supply, interest rates, and consumer prices.
- CPI (Consumer Price Index): Measures inflation, influencing consumer spending and employment opportunities.
Financial Statements
- Personal Balance Sheet: A snapshot of financial position, calculating net worth (total assets minus total liabilities).
- Cash Flow Statement: Records cash inflows and outflows over time, aiding in spending habit analysis.
- Income Statement: Summarizes income and expenses over a defined period, showing profit or loss.
Evaluating Financial Progress: Ratios
- Debt Ratio: Liabilities divided by net worth, indicating the debt-to-worth relationship (lower is better).
- Savings Ratio: Monthly savings divided by gross income (10% is often recommended).
- Total Debt Service Ratio: Annual mortgage/rent + property tax divided by gross annual family income (ideally less than 40%).
- Gross Debt Service Ratio: Mortgage/rent + property tax + 50% condo fees divided by gross family income (a rough guide to creditworthiness).
- Debt Payments Ratio: Monthly credit payments divided by take-home pay (less than 20% is generally good).
Budgeting
- Budget: A financial plan outlining expected income and expenses over a specific period.
- Creating a Budget: Determine income, track expenses (recording for a month, categorizing expenses, differentiating needs and wants), set goals, allocate income, ensure total expenses don't exceed income, and regularly review/adjust.
Time Value of Money (TVM)
- Money available now is worth more than the same amount in the future due to potential earnings.
-
Components: Present value (current worth of a future sum), future value (future worth of a current sum), and interest rates.
- PV=FV/(ITR)^n
- FV= PV(1+ITR)^n
Annuities
- Annuities: A series of equal payments made at regular intervals (ordinary or annuity due). Used in loans, savings, and insurance premiums.
Ethics in Financial Decision-Making
- Ethics guides financial decisions, promoting trust, fairness, and long-term stability.
- Key Principles: Honesty, integrity, fairness, responsibility, transparency.
- Ethical Dilemmas: Credit card use (overspending), loan payments, investments (risk/reward, environmental/social impacts).
- Navigating Ethical Challenges: Recognizing issues, gathering information, considering alternatives, making decisions, and reflecting on choices.
Income Sources and Financial Planning
- Income Sources: Employment, investments, rentals, others.
- Employment Income Types: Salary, wages, commissions, bonuses.
- Investment Income: Dividends, interest, capital gains.
- Gross vs Net Income: Gross is total income before taxes, net is after.
- Deductions: Income reductions, including CPP, EI, federal/provincial taxes.
Strategies to Increase Income
- Develop new skills.
- Pursue higher education.
- Negotiate salary.
- Start a side hustle.
- Invest for passive income.
Canadian Taxes
- Types: Taxes on purchases (HST), excise taxes, property taxes, capital gains tax, and taxes on earnings.
- Taxable Income: Portion of income subject to taxation.
- Deductions: Expenses reducing taxable income (e.g., RRSP/FHSA contributions, union dues, childcare, moving expenses).
- Tax Credits: Directly reduce taxes payable (non-refundable and refundable).
- Marginal Tax Rates: Progressive tax system based on increasing income brackets.
- Average Tax Rate: Total tax paid divided by taxable income.
Tax Planning Strategies (RRSP & FHSA)
- RRSP (Registered Retirement Savings Plan): Tax-deductible contribution, tax-free investment growth, helps lower current or future tax bracket.
- FHSA (First Home Savings Account): Tax-deductible contributions, tax-free growth, designed for first home purchases.
- TFSA (Tax-Free Savings Account): Tax-free growth, flexible withdrawals, without income restrictions.
Retirement Programs
- CPP (Canada Pension Plan): Mandatory contribution-based program for retirement income, designed to replace ~ 25% of pre-retirement earnings.
- OAS (Old Age Security): Non-contributory, tax-funded pension for seniors, with clawbacks for high-income individuals.
- EI (Employment Insurance): Temporary financial assistance for unemployed individuals, bridging the gap between jobs, based on previous earnings and regional unemployment.
Saving Strategies
- Emergency Fund: Savings for unexpected expenses/emergencies (typically 3-6 months of living expenses).
- Strategies: Setting realistic goals, creating budgets, automating savings, using windfalls, considering side hustles.
Understanding Investing
- Investing: Allocating money to generate income/profit over time.
- Purpose: Long-term goals, wealth building, and beating inflation.
- Common Investment Types: Stocks, bonds, mutual funds, ETFs.
- Risk and Return Tradeoff: Lower risk typically means lower returns.
Understanding Stock Markets
- Stock Market: Marketplace for buying/selling company shares, facilitating capital flow.
- IPO (Initial Public Offering): Process for companies going public to raise capital.
- Investing in Stocks: Profit from capital gains and dividends.
- Stock Exchanges: Organized markets for stock trading, ensuring liquidity and fair prices.
- Stock Types: Common stock (ownership, voting rights, variable dividends), preferred stock (fixed dividends, no voting rights).
- Indicators: Price-to-earnings ratio, dividend yield, and market cap.
Credit Basics
- Credit Score: Numerical representation of creditworthiness (300-850).
- Credit Report: Detailed record of credit history (loans, payments).
- Factors Affecting Credit Score: Payment history, credit utilization, credit history length, types of credit used, and new credit inquiries.
Types of Credit and Uses
- Credit Cards: Convenient, rewards, flexibility but high interests if unpaid, used for daily purchases, emergencies.
- Personal Loans: Fixed payments, lower rates than credit cards; fees, less flexibility, useful for large purchases, debt consolidation.
- Lines of Credit: Flexible borrowing, lower rates than credit cards; risk of overspending, ongoing expenses, emergencies.
Debt Reduction Strategies
- Snowball Method: Pay off debts from smallest to largest.
- Avalanche Method: Pay off debts with highest interest rates first.
Mortgages and Consumer Protection
- Fixed-Rate Mortgage: Predictable payments.
- Variable-Rate Mortgage: Lower initial rates but payments adjust to interest rate changes.
- Refinancing: Securing a lower interest rate, reducing payments, or adjusting loan terms.
- Consumer Protection Rights: Rights in Ontario to clear credit terms, cancel contracts (e.g., payday loans), and access credit info.
- Predatory Lending: Exploiting borrowers with high interest rates, hidden fees
Risk Management and Insurance
- Risk Management: Identifying, assessing, and controlling risks to capital earnings.
- Insurable Interest: A stake in the value of an entity for which insurance can mitigate loss.
- Indemnity: Principle of restoring the insured to the pre-loss financial state.
- Pooling Risk: Combining risks from many to reduce individual costs.
Types of Insurance
- Life Insurance: Guarantees payment to beneficiaries upon death, covering funeral/debt.
- Health Insurance: Covers medical expenses associated with illness/injury, preventive care.
- Disability Insurance: Provides income replacement during disability from illness/injury.
- Auto Insurance: Protects against accidents, theft, and damage to vehicles (legally required).
- Home Insurance: Protects homeowners from losses related to home, property, or liability.
- Liability Insurance: Protects individuals/businesses from lawsuits arising from negligence.
Insurance Assessment and Comparing Policies
- Assessment Steps: Income evaluation, dependant analysis, asset analysis, liability analysis.
- Policy Comparison Factors: Premiums, deductibles, exclusions, and coverage types (e.g., term life vs. whole life).
Claim Disputes and Resolution
- Causes of disputes: Understanding of coverage, disagreement on claim value, policy exclusions, insufficient documentation, missing deadlines.
- Resolution strategies: Policy review, gathering evidence, formal review request, public adjuster, state insurance department complaint.
Estate Planning
- Wills: Legal documents outlining asset distribution after death.
- Power of Attorney: Legal documents empowering someone to make decisions on your behalf (property/personal care).
- Estate Taxes: Canada doesn't have a direct estate tax but capital gains tax may apply, with potential province probate fees.
- Estate Planning Strategies: Gifting, trusts, beneficiary designations on accounts.
- Importance: Ensures wishes, protects beneficiaries, minimizes taxes/fees, and prevents disputes.
Renting vs Buying
- Renting Pros/Cons: Lower upfront costs, flexibility but no equity building, less responsibility.
- Buying Pros/Cons: Equity building, potential appreciation, customization, higher upfront costs, less flexibility, responsibility for maintenance.
- Cost Comparison: Rent vs. mortgage payments, property taxes vs. utilities/insurance.
- Flexibility Comparison: Relocating, long-term commitment.
- Long-Term Impact: Wealth building, savings, and stability.
Home Buying: Navigating the Process
- Financial Preparation: Assess finances, improve credit score, save for down payment, get pre-approved for a mortgage.
- House Hunting: Determine needs/wants, neighborhood/school research, realtor assistance.
- Making an Offer: Fair price, contingencies (inspections, financing), negotiations.
- Home Inspection and Appraisal: Critical steps to understand property condition and value.
Real Estate Investment
- Types: Single-family homes, multi-family units, commercial properties, vacation rentals.
- REITs (Real Estate Investment Trusts): Professionally managed investment pool, offering real estate exposure without direct ownership.
- Returns: Rental income, property appreciation, tax benefits, equity building.
- Risks: Market fluctuations, maintenance, vacancy periods, interest rates, damage, tenant issues.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz covers the essential steps in financial planning, guiding you from setting financial goals to creating and implementing a financial action plan. Each step is critical for successfully managing your finances and achieving personal economic satisfaction. Test your knowledge and understanding of these important concepts.
