An Ottawan's Guide to Basic Financial Literacy & Planning

An Ottawan’s Guide to Basic Financial Literacy & Planning

They say it’s never too early to be financially literate. In fact, the earlier someone learns about the proper way to save up and manage their money, the better it would be.

Many parents realize too late that they should have taught their kids the value of a dollar in the same way they taught them good hygiene and nutrition. By then, maxed-out credit cards or alarming shopping spree receipts become rude wake-up calls for teaching kids how to spend wisely.

Unfortunately, financial planning is not usually taught in school, either. Unless there’s an elective class that specifically teaches financial literacy, the subject isn’t part of a normal curriculum. 

So in this article, we’re going to tackle the basics of how money works and how you can make it work for you, in turn.

It may seem like an intimidating topic, but it’s one that can spell the difference between making educated decisions about money and being constantly in debt.

Why You Should Learn Financial Literacy

Perhaps the most compelling reason to learn financial literacy involves the “b” word: bankruptcy. Being bankrupt is not a good place to be at any point in your life. 

As the best bankruptcy lawyers in Ottawa will tell you, declaring that you’re bankrupt is not a guarantee that all your unsecured debts will be eliminated for good. If you aren’t careful, poverty, homelessness, and giving up all your possessions might be in the next stage of your life.

Knowing basic financial literacy can help you avoid being bankrupt and drowning in debt. At the very least, you can learn methods to significantly reduce them. 

Of course, some debts (like student loans or mortgages) can’t be prevented from occurring. But you don’t need to let crippling bad debt take over your life, either.

On that note, the best reason to be financially literate would be because you want a life that’s anxiety and worry-free. Living without the fear of impending bankruptcy and mismanaged finances is a good goal to start your personal financial journey. 

Luckily, that’s what this guide aims to do.

Your First Steps to Personal Finance

Before you start your long journey to financial security, here are the things you need to do first before you start taking hold of your finances.

1. Set Up A Bank Account (If You Haven’t Yet)

1. Set Up A Bank Account (If You Haven’t Yet)

How important is a bank account? For starters, it makes your hard-earned money more difficult to spend on a whim…or worse, get stolen.  

A bank account also enables cashless transactions which are the more convenient (and safer) alternatives to paying cash for purchases. And unlike cash payments, you can order stuff or services using online banking at any time of the day.

It will also help simplify your finances and regular payment for things like the rent, monthly bills, and setting aside funds for food and other expenses. You can even set up your current account in such a way that it automatically pays your bills and payables for you.

There are many conveniences to having a bank account in this day and age. For instance, queues at the bank can now be avoided thanks to online banking apps and ATMs which is vital when it comes to emergencies (more on this later).

You won’t be needing the help of a professional financial planner to open your first account, either. It’s a simple enough process that one quick trip to the bank can accomplish.

As you enter adulthood, you might just appreciate how practical checking accounts are when you receive your paychecks or customer’s payments. You can make numerous deposits and withdrawals as needed for your business or domestic requirements.

And when you’re ready to buy your first home, reputable mortgage services would likely ask to look at your bank statements for the past couple of months to gauge your financial situation.

2. Set Up Your Emergency Funds (A.K.A. Pay Yourself First)

2. Set Up Your Emergency Funds (A.K.A. Pay Yourself First)

Piggy banks are some of the earliest forms of saving for emergencies (even if those emergencies are typically related to your sweet tooth or the latest toy). As a child, you can get the kind of satisfaction that a full piggy bank can give as you near your savings goal.

But as you grow older, you’ll begin to appreciate having a separate account that’s primarily meant for emergency situations. That’s why setting aside a small amount from your allowance or salary to save for a rainy day is a good habit to form.

Bank accounts and piggy banks share a similar goal in that you are paying yourself first. A high-yield savings account would be the best type of account for this would be because it earns sufficient interest over time.

This way, you won’t have to turn to loan services if you find yourself short on car loans, mortgages, and other dues.

And it won’t have to be just for emergencies, either. Once you get into the habit of paying yourself, you might just find yourself with enough funds for a dream vacation or even early retirement.

3. Learn the Difference Between Debit and Credit

3. Learn the Difference Between Debit and Credit

A big part of being financially literate is knowing the differences between debit and credit cards. Both have their fair share of pros and cons so it’s a matter of being aware of them from the get-go.

A debit card will be linked to your bank account so you can use it for purchases as you would with actual cash. It’s pretty convenient, but you can’t borrow money on a debit card like you would with a credit card.

You also can’t build a credit rating and history using your debit card which is important for loans qualifications in the future.

On the other hand, a credit card allows you to borrow money without the need to subtract any amount from your bank account. But it’s with credit cards that you have to be extra careful when making purchases.

Credit cards are pretty useful for larger purchases like household appliances and furniture. Prestigious credit cards also allow installment purchases at no interest so it’s enticing to use them all the time.

But if you don’t pay your credit card balance on time (and in full), you’ll end up with snowballing interests and the possibility of being in long-term debt to your credit card issuer. 

So the bottom line with credit cards is to be discerning about how to use them (and always with building a good credit rating in mind).

4. Identify Your Personal and Financial Goals

Your financial goals change with every phase of your life but having a goal is the most important thing.

For instance, if you’re a student, you could set your sights on a new computer or laptop to help you study better. This can be considered a short-term goal that’s also an investment because you can use it for non-academic tasks.

A long-term goal would be something like setting aside funds for your retirement. A lot of young people might not find this necessary at the moment, but keeping your eyes on the bigger picture is key to a secure financial future.

This brings us to another important financial planning tool for the future: investing. We’ll discuss that in-depth in the next section.

The Importance of Investing 

The Importance of Investing

Investment may seem like an intimidating way to manage your money but it’s also one of the most fulfilling. As the best investment companies in Ottawa will advise their clients, the soundest financial strategies are those aligned with your personal goals and needs.

So how do you get started on investing? 

You can consider getting advice from professional and skilled stockbrokers who can also handle transactions on your behalf. They can come in the form of full-service brokers, online brokers, and robo-advisors. 

But if you want to invest in stocks, bear in mind that their prices can fluctuate throughout a day and are dependent on many factors. In short, it’s a risky investment vehicle that might not be for the financial faint of heart.

A less risky version of stocks would be mutual funds. The risk is spread out across multiple companies which makes it the ideal sponsored retirement plan choice of many employers.

If it’s a fixed interest rate you’re looking for, bonds might be a good investment choice for you. They are generally more stable and considered safer investments compared to stocks, and have a maturity date where the investor is paid in full plus interest.

5 Financial Tips for Beginners 

5 Financial Tips for Beginners

The time to build a sound financial future is now. To start, here are five practical and proven ways to make your money grow.

1. Practice delayed gratification.

It’s hard not to give in to temptation when you’re surrounded by sales and numerous reasons to spend your money. But as previously mentioned, you’ll need to pay yourself first by putting in a percentage of your income to your emergency fund.

Learn to discern your essentials from luxury items. You can give yourself a couple of weeks of not purchasing something you think is a “must-have”.

And if you feel the same after some time, then go ahead and make the purchase. This way, you’re given enough time to save up for the item and can actually afford it by then.

2. Learn to budget effectively.

It can’t be emphasized enough how you must learn to budget to ensure that your expenses aren’t exceeding your income. It’s the most effective way of knowing where your money is going.

You may have a sizable salary, but if you spend like there’s no tomorrow, you could still end up with no savings (or worse, be in debt). 

Budgeting can help you control your current and future financial situation. When something doesn’t fit your current budget, you’ll likely give it a lot of thought before delving into an investment or purchase that’s beyond your means at the moment.

3. Start saving for your retirement…now.

You may just be in your 20s but the earlier you start putting together your retirement fund, the better it will be. 

The great news is that this can also be accomplished within a corporate setup.

Don’t be afraid to ask your HR manager about company-sponsored retirement plans to get a picture of your retirement account several years down the line. Most companies will offer to match what you put into your contribution so you’re assured of a comfortable sum when you feel like you’re ready to retire.

4. Know how taxes work.

Even before you get paid at your first job, it’s a good idea to understand how taxes work. This way, you won’t be taken aback by your take-home pay after taxes.

You won’t need to consult tax lawyers to brush up on the basics of taxation, either. There are free online calculators to help you compute the percentage that goes to taxes from your gross pay.

There’s also some helpful tax software to guide you toward learning to do and file your own taxes!

5. Safeguard your health and wealth.

The best financial advisors in Ottawa will tell you that forewarned is always forearmed when it comes to practical financial planning. On that note, getting the right kind of insurance policy is key.

It could seem morbid at the moment, but life insurance companies can ensure that your loved ones are financially protected in the event of disability or death.

In the same vein, you can get your investments and possessions insured against damage and accidents, too. For instance, a good car insurance policy is one great way to protect you, your loved ones, and your vehicle while you’re on the road.