Managing Finances Flashcards
how does Canada’s diversity affect finances?
- Creates diversity in how people manage finances
- Families model financial behaviour
- Schools influence financial behaviour
- Fastest-growing population in Canada is over 80 years old (192% increase in Canadians over 100 predicted)
different generations: relationship to money
- Boomers: cash and layaway
- Gen X: credit and cash machines
- Gen Y: debit and online banking
- Gen I: banking apps, tap
different generations: households/relationships to each other
- Boomers: 1 family, 1 household, 1 income
- Gen X/Y: 1-2 families, 1-2 households, 1-2 incomes
- Gen I: multi-family, multi-households, multi-family
different generations: savings and debt
- Boomers: “penny saved is a penny earned”
- Gen X: “don’t pay a dime until 1999”
- Gen Y: “Buy now, pay later”
- Gen I: “Pay day loans”
different generations: wealth and net worth investments
- Boomers: “don’t put all eggs in one basket”
- Gen X: “diversification”
- Gen Y: “global investments”
- Gen I: “socially responsible investments”
debt
- Average household debt increasing
- Debt to disposable income ratio increasing (up 100% from the 80’)
- Debt at retirement: retirees have significant debt, 17x more likely to become insolvent in 2010 than in 1990
- 1/3 of surveyed Canadian students expected to graduate in debt
Childcare costs in Vancouver
- $1200/month spent on infant and toddler care
- 29% of income goes towards childcare
divorce in Canada
- 19% of Canadians surveyed reported that their parents had separated or divorced
- 41% of Canadian marriages estimated to end by the 30th year of marriage
- “Grey divorce” (divorcing in old age) on the rise
recommended financial management goals
- Savings
- Financial goals
- Budget
- Record-keeping
- Wise credit card use
- Insurance
- Estate planning
obstacles (and things that aren’t obstacles) to financial practices
- obstacles to budgeting: no choices on spending, income and expenses irregular
- obstacles to rest of practices: no need to do them
- not given as obstacles: Lack of time, lack of knowledge
payoffs of using recommended behaviours
- Increased satisfaction with finances
- Improved net worth
- Adequate emergency fund
credit
- time allowed for payment; an individual owes a certain amount of money for a certain time, and must pay it on time to avoid fees/penalties
- Was originally associated with gas stations, eating out, department stores, etc.
- For immigrants, having a credit card was a symbol of being Canadian
- older people better at managing credit than younger people
ways to develop a credit record
- Open chequing and savings accounts
- Pay bills, including rent, promptly
- Open a charge account with a store; pay amount promptly
- Indicators of credit worthiness: stability of employment and residence, income, home ownership
- New immigrants: credit record from previous country doesn’t transfer over; can get a secured credit card instead
what doesn’t build credit?
- Visa/debit
- Pre-paid credit cards
- Pay-as-you-go cell phone
- Payday loans
improving your credit
- Make all of your payments on time
- Pay off your credit card in full every month
- Consider a secured credit card with a low limit
- Cell phone contracts can build credit
top factors that lower credit score
- Too many consumer finance company accounts on your credit report
- Having too much available credit can sometimes harm your credit score
- A number of credit applications
- Your account balances are too high – keep your balances below 35% of your available credit limit
- There is not enough recent revolving account info on your credit report
FICO scores (from most to least impact)
- Bills paid on time
- Debt to credit limit ratio
- Length of credit history
- Credit app and loan variety
top reasons people are in financial trouble
- Excessive use of credit or using credit for living expenses
- Unemployment/underemployment
- No budget/lack of financial education
- Injury/illness
- Separation/divorce and family expenses
- High student loan debt/education expenses
- High housing costs
challenges for students
- Student loans are deposited as lump sums
- Students are not taught how to manage irregular income
- Budgeting isn’t exciting and debt is overwhelming with no immediate solution
- Financial institutions offer “student” products (ie. Student credit card, student line of credit, co-signed loan)
who has the most difficulty repaying loans?
- Larger $ loans
- Fields of study (income, getting job)
- Humanities
- Interdisciplinary studies
- Fine and applied arts
students are slower at repaying student loans when
- People are continuing their studies
- Have financial difficulties
- Can’t find a steady, well-paying job to take advantage of lower interest rates
repayment assistance program
- Borrowers will never be required to make student loan payments above an affordable level
- Affordable payments are based on the borrower’s family income and size
- Affordable payments do not exceed 20% of their income
discharging student loans
Aren’t eligible to discharge student loan debt until 7 years after terminated studies (before July 08, it was 10 years)
options when in debt trouble
- Negotiate with creditors
- Debt consolidation loan
- Credit counselling
- Consumer proposal and bankruptcy
the “new face” of bankruptcy
- Well-educated, middle class baby boomers
- 44% of population, have 59% of personal bankruptcies
- Ages 40-44 years old
- Increasingly women (since women are becoming more financial independent)
debts that aren’t discharged
- Court fines (ie. Traffic fines)
- Bail bond
- Alimony or child support
- Debts incurred by fraud
- Student loans if <7 years old
youth: financial statements, budgets, and savings
- majority (3/4) review financial statements monthly
- majority (2/3) have a budget, but only (1/5) stick to it
- majority (2/3) save money for the future
youth: purpose of their savings
- Buy a home
- Education
- Future in general or for emergencies
debt of young Canadians
- 50% say they have as much or more than they can handle
- Key debts are from credit cards and student loans
how young Canadians cope with debt
- Borrowed from family
- Borrowed from friends
- Used credit cards
young Canadians and finances
- Most young people have sole responsibility for managing their finances
- Most believe they have at least a fair understanding of personal financial matters
- Most think they do a good job of managing
- Only 25% have had personal finance training
gender and finances
- Men generally know more about finances than women
- Men and women approach finances differently (men think about numbers, women think about how finances affect them)
- Well-educated women are more likely to take financial risks than non-educated women
financial management vs. financial security
- Financial management: science or practice of managing money or other assets
- Financial security: ability to meet day-to-day obligations while planning, saving, and investing to achieve future financial goals (ie. Education, retirement, home ownership, etc.)
Financial management model
- Planning: Identify financial goals -> collect info -> analyze resources -> decide
- Action: Spend, invest, save
- Post-planning: Evaluate
budget
- spending plan or guide
- Comprised of variable expenses (ie. Money spent on clothes, food, and entertainment) and fixed expenses (ie. Money spent on rent and car payments)
business cycle
- Recession: moderate and temporary decline in economy
- Recovery: hopeful stage when things are looking better - consumer buying is up, employment is up, new homes are being built, etc.
- Expansion: prosperity, high growth, an active economy, and a high employment rate
level of living vs. standard of living
- Level of living: measure of the goods and services affordable by and available to them
- Standard of living: what an individual or family aspires to
gross domestic product
total market value of all goods and services produced by a nation during a specified period (usually a year); household production is not included in this
income vs. tax vs. income tax
- income: amount of money or its equivalent received during a period of time; main source is salary
- tax: compulsory levies that are an important source of government revenue
- income tax: personal tax levied on individuals or families on the basis of income received
types of income
- Discretionary income: income regulated by one’s own discretion and judgment
- Disposable income: the amount of take-home pay left after all deductions are made for benefits, taxes, contributions, and so on
- Gross income: all income received that is not legally exempt from taxes
- Psychic income: how one feels about income; the satisfaction derived from income
- Real income: income measured in prices at a certain time, reflecting the buying power of current dollars
where do people spend their money (after taxes; most to least)
- housing
- transportation
- food
- health/personal care
- recreation, clothing, etc.,
- this distribution depends on income (ie. Lower-income people spend more on food)
net worth
subtracting liabilities (what is owed) from assets (what is owned)
how to meet monthly expenses
- Make more money (income)
- Reduce expenses (outflow)
- Sell something, downsize
- Combine all of the above
emergency fund
saving up 3-6 months’ worth of income in case of emergencies
annual percentage rate
average yearly rate of interest paid over the life of credit or a loan (if in debt, cards with the highest APR should be paid off first)
Fair Credit Reporting Act vs. Equal Credit Opportunity Act
- Fair Credit Reporting Act: you have the right to receive a copy of your credit report (includes FICO/credit score)
- Equal credit opportunity act: prevents a lender from discriminating against a person in any aspect of credit transaction because of race, sex, age, etc.
debit
using money from the funds you already have rather than borrowing additional money
liquidity
the speed and ease of retrieving cash or turning another type of investment into cash
investment
- commitment of capital to the achievement of long-term goals or objective
- As you age, you tend to go for less-risky investments, as you don’t have a lot of time to regain any lost money
types of investments
- Stocks: represent ownership in a company
- Bonds: investments in which a person lends money to an organization (such as the government) in exchange for interest or dividends
- Mutual funds: groups of stocks, bonds, or other securities managed by an investment company – allow for diversification
- Real estate, retirement plans, collectibles, etc.
diversification
having a mix of investments as a way to spread risk across several categories
insurance
financial arrangement where people pay premiums to an insurance company that reimburses them in the event of loss or injury; its purpose is to protect people and financial assets
who has highest expenses?
People between ages 45-54 have highest median income, but also highest expenses (as they’re often paying for their kid’s college and saving for retirement)
7 categories of childrearing expenses (most $ to least)
- Housing (30-40%)
- Food
- Transportation
- Miscellaneous
- Education/childcare
- Clothing
- Healthcare
3 main financial styles of college students
- Drifters: least accepting of parents’ styles; exploring, but not committed to a personal style, average in knowledge, worst behaviours (30%)
- Followers: characterized as most accepting of parents’ styles, most unconcerned about developing personal style, had better knowledge and behaviours than drifters (39%)
- Pathfinders: Low in accepting parents’ styles, most committed to personal style, and best in knowledge and behaviours (31%)
gender gap vs. earnings gap
- gender gap: difference in earnings between men and women employed full-time outside the home (less of a gender gap between younger men and women than older ones)
- earnings gap: exists because of gender gap and because women tend to work for fewer years than men (usually due to caregiving responsibilities)
glass ceiling
- women being unable to move up into high level positions
- Can be due to employers and to women themselves (who have lower expectations before entering job market)
