Lesson 2_ Banking, Investing & Saving good.pdf

Banking, Investing & Saving Unit 1: Resource Choices Lesson 2 JCS CALM Banking Thinking about bank accounts and earning interest 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....

Banking, Investing & Saving Unit 1: Resource Choices Lesson 2 JCS CALM Banking Thinking about bank accounts and earning interest 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. You can earn interest by lending your money to the bank. You pay interest when you borrow money from the bank. Banking So why open a bank account? It’s safer than keeping all of your money in your PE locker. It gives you access to services, including direct deposit, pre-authorized bill payments, automated teller machines (ATMs) and a debit card. Some accounts allow you to earn interest on the money you keep in the bank. Banks are licensed to receive deposits, make loans and provide financial services. In Canada, banks are managed by the national government. Bank deposits are guaranteed by the CDIC (Canada Deposit Insurance Company) up to $100,000 per person per type of account. CHECKING & SAVINGS ACCOUNTS  THE BASICS OF BANKING While saving is a good idea, jars of coins under your desk or bills rolled up into a sock in a drawer can’t really get you very far. You need to choose a financial institution, a place where you can put your money. There are several reasons for doing this: It’s a safe place for your money -- a place where you can’t lose it or have it stolen. It will help you save money because your cash is not always right at hand for spur-of-the-moment spending ideas. You can make money, if the type of account you have pays interest. Having one or more accounts will give you good references when you need a loan or want to get a credit card. This may be the most important reason for banking at some institution. Types of Financial Institutions Banks, trust companies, and credit unions are all financial institutions that can provide you with services. It is very important that you are able to recognize the difference between them, so you can register with the organization that is right for you. A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide other financial services. In Canada, banks are managed by the national government. Bank deposits are guaranteed by the CDIC (Canada Deposit Insurance Company) up to $100,000 per person per type of account. The major banks in Canada (The Big Five) are: o TD Bank (Toronto Dominion) o Scotiabank o CIBC (Canadian Imperial Bank of Commerce) o BMO (Bank of Montreal). o RBC (Royal Bank of Canada) These banks have branch offices that you can visit in cities and towns across the country as well as extensive ATM networks. There are other banks, also guaranteed by the CDIC, that have few or no branch offices that you can go into. Instead, you do all your banking over the internet. These banks tend to have higher savings interest rates and lower fees than the major brick and mortar banks mentioned above. Some examples are EQ Bank, Tangerine, Motusbank, and Alterna Bank. A trust company is a legal entity that acts as a trustee, being the intermediary between borrowers and lenders. Trust companies are like banks in that their deposits are also covered by the CDIC. Both federally and provincially registered trust companies exist in Canada. Some of the most well-known trust companies are Canadian Western Bank, HSBC Bank Canada, and Citibank Canada. Credit unions are provincial cooperative saving and lending associations that are owned by their members (customers) rather than being owned privately or by shareholders. They are considered nonprofit businesses. These can be CDIC insured as well. An examples f these institutions is Servus Credit Union. Deciding on a Financial Home Brianna has just been hired for her first job, working at the same store as her friend, Amy. While talking about Brianna’s upcoming first day of work, her friend Vanessa is surprised to hear that Brianna hasn’t opened a bank account yet. “I’m just going to use one of those cheque-cashing places like my brother Robert does,” Brianna says. “What? I thought those places are a rip-off. Don’t they charge big fees to cash your cheque?” Vanessa asks. “Really? I’ll ask Robert about that,” Brianna says. “I just figured it would be cheaper than a chequing account. And when am I ever going to write a cheque?” You can get a free chequing account like I did. Just make sure you don’t have to keep a minimum amount in it,” Vanessa says. “It’s totally free?” Brianna asks Vanessa explains, “Well, there’s no monthly fee. If I spend more than I have in my account, they’ll charge a fee. But I use a phone app to list all my transactions and it keeps track of my balance so that doesn’t happen.” “Well, that sounds pretty easy,” Brianna says. “Because I have a student account, they’ll also charge me a quarter a transaction if I make more than 25 withdrawals a month, but for me, that’s lots!” Vanessa says. “A debit card would be nice. I’ll ask my mom about it,” Brianna says. Brianna asks her mom if she should get a bank account or use a cheque-cashing place like Robert does. Her mom says Robert does that because he can’t stand depositing a cheque and waiting a few days before he can access his money. “So, now he pays fees to cash his cheque, fees to load the money onto a prepaid debit card, and fees pretty much every time he uses it. He could do all that for free with an account at my credit union,” she says. Do you already have an account in a bank, credit union, or trust company? If you do, are you satisfied with the financial services you receive? If you don’t, you will want to set up an account once you begin working. Many businesses today insist that you have a bank account because they prefer to use Electronic Fund Transfers (EFTs) rather than issuing paper cheques for payroll transactions. Money paid using an EFT, also known as direct deposit, is not subject to a holding period, meaning that money is accessible in its entirety as soon as it is deposited into an account. Consider the following to help you select a place to keep your money: Location. o From opening a new account to obtaining cash, there will be times you need to conduct your financial business in person. Choose an institution that is convenient, perhaps near your home or job. If you live in a rural area, you might have only one or two choices; if you live in a city, you may have more options, so look for an institution with outlets you can get to easily. Comfort level. o Consider how you are treated when you approach a financial institution. Many places may encourage student accounts with discounts or other incentives. In a small community or an institution where family members are known, you may be especially welcome. A few places, unfortunately, may project an attitude of distrust of new young clients. Since you could be using the services of your financial institution for a number of years, pick one where you feel respected and valued Security. o Security is the reason you keep your money in a financial institution rather than a sock -- your money is safe from loss, theft, and your own impulsive spending. For additional peace of mind, be sure any institutions you consider are insured to protect your money. They will be pleased to explain their association with the CDIC, the Canada Deposit Insurance Corporation. Services offered. o In addition to deposits and withdrawals, what other services will you want from your financial institution? Will you wish to write cheques?Pay bills? Make utility payments? Save for an education or other purpose? Contribute to an RRSP or other investment? Apply for a loan? Obtain a credit card? Conduct electronic banking? If you choose a branch that offers electronic banking services, you will be able to pay bills, transfer funds, and make other transactions by phone, online, using a mobile app, or through an ATM. Service charges. o The fees to conduct financial transactions can vary widely from one institution to another. It pays to shop around and compare. Learn from Jason’s mistakes later in this lesson.  Get a head start on building important financial relationships by choosing a bank or credit union to call home. Then as you get older, you’ll have a trusted place to turn to when you’re ready for a credit card or loan. You can switch banks at any time, but you might not want the paperwork hassle. So, it pays to invest the time in making a good choice now. Opening A Bank Account When you open a bank account, you’re accepting the responsibility to:  Track your balance. An overdraft habit can cost you a lot more than fees. The bank can close your account or report you to banking credit bureaus which means that borrowing money in the future will be much more difficult (ex. buying a house). And if you intentionally write a cheque without the money to cover it, you can be charged for can close your account or report you to banking credit bureaus which means that borrowing money in the future will be much more difficult (ex. buying a house). And if you intentionally write a cheque without the money to cover it, you can be charged for cheque fraud.  Check your account regularly. The bank doesn’t have to help if you wait more than 60 days to report potential errors and suspicious transactions.  Safeguard your account information, debit card, cheques, and PIN. Any legal protections become null and void if something happens after sharing your card, cheques, account numbers, or PIN number with someone. On the other hand, a number of laws provide you with certain rights regarding your account. The financial institution must:  Provide your money “on demand.” The exceptions are any holds they’re allowed to impose on particular types of deposits.  Give written notice of changes. They must send a notice warning you about upcoming changes to fee schedules or account terms.  Investigate and resolve errors and unauthorized transactions— as long as you report them within 60 days.  Provide detailed monthly statements. You can choose to receive statements by mail or electronically.  Automatically provide federally backed insurance coverage of at least$100,000 for deposits in chequing, savings, and money market accounts at a bank insured by the Canadian Deposit Insurance Corporation (CDIC).  FAQ Banking Accounts ❖ Financial institutions can pay you interest because they lend your money to people for mortgages and loans which have an interest rate charged to the borrowers. ❖ Having one or more bank accounts is a good way of establishing a credit rating or indicating that you are responsible with money when you go to apply for a credit card or loan. ❖ There are several different types of accounts. A straight savings account probably pays a higher interest rate on your money than a chequing account, but charges you for withdrawals. Also, some savings accounts increase the interest paid as the minimum balance held in the account increases. ❖ A chequing account allows you to put money in and withdraw it with very little or no charge. It is probably the best type of account for the day-to-day use of your money - withdrawing cash and paying bills. Some chequing accounts charge a monthly service fee and then allow an unlimited number of withdrawals. Some chequing accounts charge for withdrawals after a set number of free withdrawals within the month. Some accounts are a combination of both savings and chequing accounts. ❖ Most “brick and mortar” institutions allow you to use debit cards with your bank account. Debit cards are really just another way to remove money from your account. When you are paying for something, you “swipe” or “tap” your card and your money is transferred immediately from your account to the store. The advantage of a debit card is that it helps control your spending as it will not debit an account that does not have enough money in it. Responsible use of debit cards does not build your credit rating as debit cards do not extend credit. ❖ Electronic banking services are also available with most bank accounts. They include ATM networks, telephone banking, computer banking and mobile banking apps. E- transfers, mobile cheque deposits and automated bill payments make paying bills and transferring funds as easy as clicking your mouse. ❖ As Brianna learned, there are other services besides financial institutions which can cash cheques for you, but they charge you for the service, usually a percentage which can range from 4% or higher of the cheque’s total value. This means that you are paying someone else your money to cash your cheque. A banking institution can give you a much better deal. This goes for your pay cheques and other cheques written out to you. Not So Free Student Accounts All of The Big Five banks and most Trust Companies and Credit Unions offer student and/or youth bank accounts that are advertised as “Free Accounts”. These free chequing accounts are usually the best deal in banking. But “free” doesn’t mean totally without cost. It just means no monthly fee. In some cases, you’re required to keep a minimum balance to qualify. Fee types and amounts will vary from institution to institution. Scan the chart for a list of the most common fees associated with “Free Student Banking”.  FAST FACTS ABOUT BANKING FEES ON “FREE” ACCOUNTS Types of Fees Charged When... Over Transaction Limit ($1.25 - you exceed the number of transactions allowed per $1.50 per transaction) month (usually 25 - 30) Out-of-Network ATM Fees ($2.00 you use an automated teller machine (ATM) not owned - $3.00 per transaction) by your bank or in a network your bank belongs to Overdraft Fees ($5.00 per you have an electronic transaction that exceeds your transaction) balance NSF (Non-sufficient Funds) you write a cheque or have a pre-authorized payment ($25.00 - $30.00) come out of your account for an amount that exceeds your balance Statement Fee you request a monthly paper statement of account ($2.00 per statement) Don’t let the fees scare you away! You can avoid many of them simply by managing your account responsibly. Others, like ATM fees, can be avoided by using your own bank’s ATMs or using debit card purchases to get cash back. Plus, banks must clearly disclose all fees to potential customers. That makes it easy to comparison shop for the bank services you want most. Let’s see how Jason copes with bank fees: Wipeout! After seeing that his chequing account balance on Monday morning was $35, Jason uses his debit card to buy a $19 phone charger for his car. Later that day the bank deducts a $18 pre-authorized payment for gym fees. Then later that night, the $2 shortfall prompts the bank to charge his account with a $5 overdraft fee. In the afternoon, Jason uses his debit card at a fast-food place. His bank approves the $9 transaction but charges him another $5 overdraft fee. Unfortunately, Jason forgot to record the $25 cheque he’d written to the school last week. When his bank receives it on Monday, they reject it and deduct a $30 non sufficient funds fee. Jason checks his account that night and flips out when he sees that his balance is –$76. “That’s stupid! My account is negative and I still get charged these fees!” Jason says to his dad. “My account was already negative when I went to the fast-food place! Why didn’t they just turn down my debit card?” “Ironically, they call it overdraft protection. The bank offers you the option for protection from having your card declined,” his dad explains, “but you pay for it big time.”“Just tell them you want to opt out of overdraft protection. Of course, you might be stuck at the register without a way to pay next time,” his dad reminds him. “That’s OK,” Jason says. “I’d much rather be turned down than pay another $5 fee for a $9 burger and fries!” Jason’s dad explains, “You may have forgotten that you chose to apply for overdraft protection. You gave the bank permission to cover the amount of your purchase that is more than what is in your account. This service comes with a fee.” Without overdraft protection, it may be embarrassing to have your card declined when you don’t have enough money in your account, but it doesn’t cost you a cent. And you’re prevented from digging a deeper hole by continuing to spend money. As Jason learned, your online balance might not be your actual balance, because some transactions take several days to show up in your account. The only way to know your real balance is to record transactions as you make them and keep your own running tally. These three easy tools can help you do that: » The cheque register in your box of cheques, which you fill in by hand » A spreadsheet program on your computer, where you enter amounts » A mobile cheque book app on your smartphone or tablet Consistency is key! So experiment with a few options to see which you like best. Banking A little more about interest… The interest rate is the percentage of principle charged by the lender for the use of his or her money. Banks pay you an interest rate on the money you deposit because they borrow your money while it’s in the bank. If you borrow money from the bank, you pay interest to the bank until you return all of the money you borrowed. The BMO Smart Saver interest rate was 0.65% annually. If you put $1000 in the account on January 1st, the bank would add $0.54 to your account each month until you earned $6.50 over the year ($0.54 x 12 = $6.50). Simple vs. Compound Interest Banking There must be an easier way to calculate compound interest, right? Yes! Use The Power of 72 Calculator. Basically, to figure out the number of years you’ll need to double your money at any given interest rate that compounds annually (once per year), just divide the interest rate into 72. If you want to double your money at a 4% interest rate, calculate 72 ÷ 4 = 18. It will take eighteen years to double your money if the interest rate is 4% and interest is compounded annually. INVESTMENTS: Thinking about the most common types of investments.  Fixed Income Investment is a type of investment that pays you a guaranteed interest rate on specific days and protects your initial investment (called the Principle). ○ Common types of fixed income investments include Guaranteed Investment Certificates (GICs), treasury bills (TBills) and government savings bonds ○ GICs are sold by banks in specific amounts (from $500 to $100,000) ○ GICs are usually for a specific term, ranging from one year to ten years. You receive small interest payments throughout the term, and your Principle is returned at the end ○ T-bills are investments in the federal or provincial government. They are sold at less than face value (for example, you pay $990 for a $1000 T-bill), and at the end of the 3-, 6-, or 12-month term, you are paid the full value. ○ In 2017, the Canadian government discontinued the Canada Savings Bond program.  Equity Investment is buying and selling stocks on the stock market. There is no guarantee - your investment could increase or decrease in value, and your Principle is not protected. ○ Equities are pieces of a company that are called “stocks”. When you buy a stock, you own a small piece of that company. ○ When companies make money, they give some of their profits to their stockholders. ○ If a company loses money, stockholders may not make any profit, and might even lose the money they initially invested (the Principle). ○ Stocks are bought and sold on the stock market. There is a famous stock market in New York (NYSE) and there is one in Toronto (TSX). ○ You can buy and sell stocks at any time - they don’t have a fixed term  Mutual Fund is a portfolio (or group) of stocks managed by a professional whose job is to make money for a group of investors. There is still no guarantee, but a mutual fund makes it easier to invest in many different companies. ○ Investors can buy and sell pieces of the fund at any time - there is no fixed term ○ There are different types of funds. For example, there are different levels of risk (high, medium and low), some focus on specific industries (like technology or socially responsible companies) and some focus on specific countries SAVING: Thinking beyond your piggy bank Saving RESP Registered Education Savings Plan - a special savings account for people who want to save for a child’s education after high school. ○ As of 2007, you can invest up to $50,000 in an RESP ○ Your RESP can be a savings account or other type of investment ○ Every year, the federal government will give you $0.20 for each dollar that you contribute, to a maximum of $500 per year. ○ So, if you put $1000 into an RESP, the government will add $200 extra! ○ Even if you only save $5 per month, you can boost your education savings through the government matching program and through compound interest.  RRSP Registered Retirement Savings Plan - a special retirement savings plan that you register with the government. ○ Your RRSP can be a savings account or other type of investment offered by a bank. ○ Every year, you can put 18% of your income or $26,010 (as of 2017… it changes each year) into your RRSP. ○ You don’t have to pay income tax on the money you put into your RRSP, but you do have to pay tax on the money when you take it out of your RRSP after you retire. ○ You should start putting money into your RRSP early so that you can benefit from compound interest. If you put $1000 into your RRSP every year for 30 years, and the compound interest rate was 5%, you would end up with almost $70,000! ○ You will face a penalty if you take money out of your RRSP before you retire (there is an exception when you buy your first house). Credit and Debit Credit allows you to borrow money with the promise that you will return the money with an added amount of interest. Credit allows us to pay for things that we could not afford all at once, such as houses, cars, and postsecondary degrees. It can also provide us with available money in case of an emergency. Credit is an essential part of our financial system, for countries, companies, and individuals alike. The key is to manage credit by building a good credit score, keeping debt low, and using low-interest credit options. Credit comes at a cost, especially if the loans are high-interest, like those on a credit card. The money you owe is referred to as debt, and because this debt has interest, it will grow and reduce the amount available for spending, which can cause financial hardship. Credit and Debit If you fail to make interest payments, this will negatively affect your credit score, a number that lets others, like banks, loan companies, phone companies, employers, and landlords, see how good you are at managing credit, and therefore, how risky it would be to loan money to you. Your credit score is stored on a credit report by one of Canada's two credit bureaus, Equifax or TransUnion. It is created when you borrow money or apply for credit for the first time. Lenders send information about your accounts to the credit bureaus, also known as credit reporting agencies. Credit and Debit You can manage your credit and build a good credit score by: making your payments on time each month using less than 35% of your available credit (use credit wisely) building a longer credit history (have an account open for a long time and make payments against it) limiting credit checks (limit the number of times you apply for credit) using a variety of credit types (credit car, car loan, line of credit from a bank) Credit Cards Credit cards average 20% annual interest in Canada, meaning that they are a high interest form of credit. Getting a credit card, using it for purchases, and paying off your balance every month is an excellent way to build credit, but spending too much on your credit card can lead to unmanageable debt. Pay Day Loans Payday loan companies like Money Mart offer short-term loans at very high interest rates and also provide cheque-cashing and other services with high fees. These services should be avoided and used only as a last resort, as the extremely high interest rates will rapidly create debt, making your financial situation much worse. Please watch this video for a breakdown of the cost of payday loans. You can also use some of these interest rates to re-calculate what the same item would cost if paid for using these services. Cost of Credit If you don't pay off your credit card balance every month, the interest assessed on your account means you may be paying more for the items you purchase than you expect. And if you spend beyond your means and add up considerable credit card debt, the extra money you pay in interest can be alarming! To find out how much extra you might pay on credit card purchases, use this simple calculator. Financial Tips for Young People 1. Set up an emergency savings fund, typically 3-to-6 months' living expenses. Keep this money readily accessible. 2. Establish credit BUT maintain a good payment record. Do not charge more than you can pay off in 1 month. 3. Start learning about investing. Establish an automatic savings program to reach your financial goals. 4. If you are renting, rent within your means. Understand your rights and responsibilities as a tenant. 5. Make sure you are taking full advantage of the savings benefits available to you through your employer. 6. Make sure you have adequate insurance coverage (rent, auto, health, liability, disability). 7. When you can, start saving, early is better, and most people start with a down payment to a home.