Personal Finance: Money Management

Money Management Definition

• Focuses on short-term financial decisions related to income and expenses
• Aims to balance liquidity with adequate investment returns

Understanding Liquidity

• It offers access to ready cash for covering short-term, unexpected expenses
• Directly related to an individual's personal cash flow

Sources of Liquidity

• Chequing accounts enable easy access and spending
• Savings accounts limit access to funds
• Credit cards provide revolving loans, with high-interest rates (20-30%) if balances are not paid monthly
• Emergency funds help avoid interest charges altogether

Rule of Thumb for Emergency Funds

• Maintain three to six months' worth of expenses in an emergency fund

Importance of Emergency Funds

• It is essential for financial security, acting as a financial safety net for unexpected expenses

Depository Institutions

• Financial institutions that accept deposits and provide loans
• Includes chartered banks, trust and loan companies, and credit unions

Chartered Banks

• They accept deposits and provide business/personal loans
• Deposits are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 per depositor

Trust and Loan Companies

• Provide services similar to banks, along with financial planning, such as trust account administration (e.g., RBC Estate and Trust Services)

Credit Unions

• Provincially incorporated, member-owned financial cooperatives
• They serve the financial needs of groups with a common bond (residential, religious etc)
• Deposit insurance protection extends through provincial agencies, not outside provincial boundaries

Non-Depository Institutions

• Financial institutions that do not offer federally insured deposit accounts
• Includes finance companies, mortgage companies, investment dealers, insurance companies, and mutual fund companies

Finance Companies

• Specialize in personal loans or leases to individuals (e.g., Ford Motor Company of Canada LTD)

Mortgage Companies

• Specialize in providing mortgage loans (e.g., RBC Royal Bank)

Investment Dealers

• Facilitate investment purchases/sales via investment banking and brokerage (e.g., RBC Capital Markets)

Insurance Companies

• Protect individuals/firms from financial risks (e.g., RBC Insurance − life, health, property, casualty insurance)

Mutual Fund Companies

• They sell units to individuals and invest proceeds in securities to create mutual funds (e.g., RBC Global Asset Management)
• Minimum investment typically ranges from $500 to $5000

Payday Loan Companies

• Money Mart provides single-payment, short-term loans at a high cost

Schedule I, II, and III Banks

• Schedule I: Domestic banks (RBC, Scotiabank, CIBC)
• Schedule II: Foreign banks with Canadian subsidiaries (ING Bank of Canada)
• Schedule III: Subsidiaries of foreign banks limited in deposit acceptance (Citibank)

Credit Unions and Caisses Populaires

• Provincially incorporated cooperatives owned and controlled by members
• They serve groups sharing common bonds (residential, religious, etc.) and are eligible for provincial deposit insurance

CDIC Insurance Overview

• Provided by the Canada Deposit Insurance Corporation
• Insures deposits up to $100,000 per depositor

Banking Services

• Include chequing accounts, debit cards, monitoring account balances, NSF cheques, overdraft protection, etc

Chequing Accounts

• Allow fund access via cheques for day-to-day banking

Debit Cards

• Used for identification and making purchases against a chequing account

Cheque Registers

• Booklet for recording transaction details, including deposits, cheque writing, and bill payments

Monthly Statements

• Shows all bank activity for the last month

NSF Cheques

• Occur when funds are insufficient, leading to fees and credibility loss
• Debit cards eliminate the possibility of NSF cheques

Overdraft Protection

• Protects customers writing cheques exceeding their balance
• It incurs a high-interest rate (21%) and a fee

Stop Payments

• A financial institution's notice to not honor a cheque
• Accurate information is required, and a fee is charged

Online Banking

• Enables balance checks, fund transfers, and bill payments electronically

Credit Card Financing

• Allows purchases using Mastercard and Visa

Safety Deposit Boxes

• Boxes at financial institutions for storing valuables
• Annual fee is charged, and contents are insured

Automated Banking Machine (ABM)

• This machine allow users to deposit/withdraw funds at any time
• Convenience fees may apply when not using your bank

Certified Cheques

• Cheques that payees can cash immediately, with funds already withdrawn

Money Orders and Drafts

• Direct banks to pay a specific amount to a named person

Traveler's Cheques

• Cheques charged against a financial institution or credit card sponsor
• Physical cheques that can be deposited

Factors to Consider when Selecting a Financial Institution

• Convenience (location, ABMs, online banking)
• Deposit rates
• Fees

Tax-Free Savings Accounts (TFSAs)

• Register Investment accounts for after-tax dollars without tax payable on investment growth
• Withdrawals are tax-free, and contribution room carries forward

Savings Deposits

• They pay interest, and funds are normally withdrawable at any time

Term Deposits

• Short or long-term investments
• Returns are slightly higher than savings deposits, but lower than GICs

Guaranteed Investment Certificates (GICs)

• Instruments specifying minimum investment, interest rate, and maturity date, covered by CDIC
• Returns are based on annualized interest and time until maturity
• Cashable GICs may offer lower interest rates

Canada Savings Bonds (CSBs)

• Short to medium-term, high-quality securities from the Canadian government
• Virtually risk-free and highly liquid
• Available for purchase from early October to April 1
• Cashable at any time, offering a competitive interest rate
• Regular interest bonds pay out interest yearly
• Compound interest bonds reinvest the interest earned

Money Market Funds (MMFs)

• Pool money from individuals to invest in short-term securities (≤1 year)

Optimal Allocation of Short-Term Investments

• Anticipate upcoming bills and maintain adequate chequing account funds
• Invest additional funds in liquid investments
• Maximize returns based on risk tolerance

Credit Definition

• Funds provided by a creditor to a borrower for repayment with interest or fees

Credit Repayment

• It is divided into principal repayments and interest

Types of Credit

• Installment loans are repaid regularly with blended payments
• Revolving credit (credit cards) involve a maximum amount based on credit history, with interest charged monthly

Advantages of Using Credit

• Helps establish a good credit history and score
• Creates credit access for large purchases
• Useful for online transactions
• Offer benefits and transaction records
• Eliminates the need to carry cash

Disadvantages of Using Credit

• Potential for difficulty making payments or impulse purchases
• Damaged credit ratings due to missed payments
• Large payments which hinder savings

Credit History

• It represents the track record of using credit instruments like credit cards, loans, and leases
• A favorable credit history is established through timely bill payments

Credit Application Process

• It involves filling out the application, negotiating the interest rate and the loan contract

Application Process Steps

• Personal balance sheet and cash flow statement, providing proof of income and negotiating insurance

Credit Bureaus

• Offer Credit reports that document a person's credit payment history
• Equifax Canada and TransUnion Canada are the main companies
• Permission is needed to allow firms to access the report, and customers must be provided privacy policies

Credit Reports Content

• Personal information, consumer statements, account summaries, history, bank and public information, creditors, and contacts

Credit Scores

• Scores range from 300-900
• A rating of a person’s creditworthiness
• Creditors utilize this to determine whether to extend a loan, affecting interest rates

Understanding Credit Scores

• Bureaus might have varying information, with each institution setting credit extension criteria (600+ is good) Low credit scores are typically due to missed payments or high debt
• Poor credit history impacts reports for 3-10 years, and bankruptcy for 6-7 years

Reviewing Your Credit Report

• Review annually to ensure accuracy, identify lender considerations, and address deficiencies

Credit Card Features

• Credit cards help establish/grow credit, eliminate cash, facilitate payment methods, earn benefits, provide financing until the due date, and track spending

Types of Credit Cards

• Mastercard, Visa, and American Express are popular, earning 2-4% from merchant payments
• Prestige Cards (gold/platinum) offer extra benefits to individuals with excellent credit
• Specialized Cards offer credit for specific establishments, with higher rates than standard cards

Credit Card Specifics

• Credit limits indicate maximum allowed amounts
• Overdraft protection allows purchases beyond limits (with fees)

Credit Card Grace Periods

• The period between purchase and payment due is ≈ 20 days;
• Cash advances/convenience cheques charge high interest and fees with no grace period.

Credit Card Financing

• Paying only a portion of the credit card bill monthly results in a very high interest rate (20-30%)
• The Finance charge is the interest and fees paid for using credit

Credit Card Interest Calculation Methods:

• Previous Balance: Interest is charged on the beginning balance of the new billing
• Average Daily Balance: Interest is charged on the average daily balance, resulting in lower fees if you pay the outstanding balance
• Adjusted Balance: Interest is charged based on the balance at the end of the billing period

Credit Card Statements

• Detail differences from the previous balance (new purchases, cash advances, fees)

Considerations when Comparing Credit Cards

• Acceptance by merchants, annual fees, interest rates, and maximum limits

Personal Loans

• These are used for financing large purchases

Secured Loans

• They are backed by collateral

Unsecured Loans

• They are not backed by collateral
• Loan contracts specify loan terms (amount, interest rate, payment schedule)

Loan Amortization

• It is the repayment of principal via equal payments

Loan Maturity

• Is the duration that longer maturity loans have lower payments with more interest

Home Equity Loans

• The loan uses home equity as collateral
• Home equity is the market's value less debt owed

Home Equity Loan Credit Limits

• They are offered up to 80% of home market value minus outstanding mortgages

Second Mortgages are Possible

• But, the loan is subordinate to another loan

Home Equity Loan Rates

• Interest rates are typically variable, tied to specified prime rates, that offer the lowest rate to best customers

Car Loans involve selecting a car based on preference, price, condition, insurance, resale value, repair expenses, and financing rate

Negotiating Price

• The sticker price is sticker (Manufacturer's Suggested Retail Price)
• Attempt Negotiation by phone, fax, trade-ins and value research

Purchasing vs. Leasing Cars:

• Leasing entails:
  • No need down payment
  • Return Car at end of lease period
  • Lower monthly car payment VS
  • No equity investment
  • Responsible for maintenance and damage
  • A Kilometer limited

Student Loans

• They finance student expenses during post-secondary education, through federal programs

Student Loan Limits

• Limits are set based on need, full-time students begin payments after education, part-time students pay interest while studying

Loan Repayment

• Student still must pay off loans upon declaring bankruptcy within seven years of ceasing to be a student

Improving Credit Scores

• Catching up on late payments, making minimum payments on time, and debt reduction

Reviewing Personal Financial Statements

• Look at analyze budget, balance sheets, and personal cash flow statements

Budget

• Establish a self-imposed credit limit

Balance Sheets

• Evaluate available assets

Cash Flow Statements

• Determine areas to cut expenses

Consumer Proposals

• It is an offer to creditors to modify payments. Creditors can object within 45 days
• Removed from the credit bureau report

Bankruptcy, as a Last Resort

• Occurs when debts exceed $1000, and repayments are unattainable
• Property is given to a trustee who's then licensed to administer the proposal
• Sold assets are distributed to creditors
• Spouses are unaffected

Avoiding Credit Repair Services

• The ability to fix credit mistakes without paying for service

Identity Theft

• It is when a person’s information is misused to acquire money, goods, or establish a new identity for criminal purposes shoulder surfing, dumpster diving, skimming, pretexting, phishing, and pharming

Protection Measures from Identity Theft

• Limit information sharing; safeguard ID; shred documents; monitor billing cycles; do not give out your SIN; change passwords; review privacy policies; clear browser cache; install firewalls; suspect unsolicited content; and exercise caution

Actions to when taken Becoming an ID Theft Victim

• Get new ABM cards and licenses
• Advise passport services of stolen passports, as well as change mail forwarding for those who are impacted by identity left