ABCs of Canadian Personal Finance

November is Financial Literacy Month in Canada. But we cannot just depend on one month a year to become financially literate. So the school teacher in me has compiled this A to Z guide of all things Canadian personal finance.

Use it to clarify things and increase your financial literacy year-round.

A – Assets Under Management

Assets under management are the total market value of managed investments.  

The definition of what’s included as an asset and the formula for calculating it will vary by investment or financial institution.  For this reason, it’s important to ask questions about how AUM is calculated.

Assets under management (AUM) is used to evaluate a company or investment.  The theory behind this is that the higher the AUM of something, the better it is because it is more trusted.  AUM can be used as a measurement of the quality of management.

But it will fluctuate based on the market and is therefore not a static measurement.

Fees and expenses for investments or particular funds are often calculated as a percentage of AUM.  Because of this, as the AUM increases the percentage of the fees and expenses will usually decrease.  This enables the fund and investments to attract higher net worth investors.

B – Budget

Having a budget is one of the simplest things you can do to be in control of your finances.  If creating a budget feels overwhelming then start with tracking your expenses to find out where your money goes every month.

A budget does not need to be about deprivation either.  It is about aligning your spending with your values so that you have more money for the things you want.  

A budget is telling your money where to go, instead of wondering where it went.

John Maxwell

C – Compound Interest

This is one concept I wish I had understood earlier in life.  Although I was taught about the rule of 72 in junior high, I never really grasped the impact of compound interest until much later in life.

Compound interest is the eighth wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.

Albert Einstein

The rule of 72 is a quick way to find out how long it will take for your money to double.  Divide 72 by the interest rate and you will have a good idea of how fast your money (or payments) will grow.  

If you have a credit card with an 18% interest rate, the amount you owe will double in just 4 years.  It may take a bit longer for it to double if you are making minimum payments on that credit card.  But interest owed can add up quickly.

Let’s look at a more positive example.

If you have invested in something that has an 8% return, your money will double in 9 years.

The key to compound interest is time, the earlier you can invest your money the longer it has to continue to double.  

Using the example above, if you invested $1000 at the age of 18, at 27 it would be $2000, at 36, $3000, at 45, $6000, at 54 $12000 and at 63 before you hit retirement age that $1000 has grown to $24000 without you adding any other money to it.  

This is the power of compound interest.

D – Defined Benefit and Defined Contribution Pensions

There are 2 types of pensions in Canada.  A defined benefit model and a defined contribution model.

Defined benefit pensions are the creme de la creme of pensions.  Unfortunately, they are more expensive for the employer and are not as frequent as they once were. Government employees or those in the public sector are the most common current recipients of defined benefit pensions.

With a defined benefit pension you are “guaranteed” a certain amount when you retire.  But there is a risk with these types of pensions.  

If the company eventually goes bankrupt your pension may also disappear.  When Sears eventually went bankrupt it resulted in a substantial decrease of the defined benefit pensions of its pensioners.

Related Post- She’s working for $6.36/hour – a Teacher Pension Case Study

Defined contribution pensions are much more common in Canada.  

With a defined contribution the “guarantee” is in the contribution, not the retirement amount. If your company offers some form of contribution match then chances are you have a defined contribution pension.

Contributing to a defined contribution pension with an employer match is like earning free money.  You would be a fool not to.

E – Equifax and Transunion

Equifax and Transunion are the 2 credit reporting agencies in Canada.

As a Canadian, you are entitled to a free copy of your credit report from each agency once a year.  Requesting this free credit report and reviewing it for fraud and errors is a good idea. Between January 2014 – December 2017, Canadians lost more than $405 million to fraudsters.

Related Post – Free Credit Report in Canada – Why You Need One

You can help protect yourself against fraud by regularly checking your credit card statements, bank accounts, and credit report.

It’s important to check your credit report from both Equifax and Transunion as not all creditors report to both agencies.

But be aware that your credit report only includes all your lending-related information.  It does not include a credit score.  Many apps and banks enable you to check your credit score for free.

F – Financial Independence

The textbook version of financial independence or FI is when your investments accumulate to 25 times your annual expenses.

But it is so much more than just numbers on a spreadsheet.  Financial independence is the feeling of being financially secure and confident.  Of not having to worry about money.  And having the choice to work or not.

There are many different ways to reach financial independence. In our household, we are using real estate investments and ETFs to help us achieve financial independence.

G – GST

The goods and services tax, more commonly known as GST, was first introduced on January 1, 1991, by then prime minister Brian Mulroney. It is a value-added tax that is currently 5%.  But some provinces may have their own tax which can be blended with GST as a harmonized sales tax (HST) or kept separate as a provincial sales tax (PST).

GST is paid by consumers (you and me). And then, businesses that collect GST remit it to the government.

Low or modest income earners may be eligible for a GST credit.  The GST credit is tax-free and paid out quarterly.  There is no application process for the GST credit. It will be applied to you automatically if you are eligible when you file your tax return.

Maximum GST Credit	Family Composition
$456	Single
$598	Married or Common Law
$157	Per child under the age of 19

The GST credit is phased out based on income.  After $63,000 of annual household income, there is no eligibility for the GST credit.

This post may contain affiliate links which means I may receive a commission if you purchase through my links.  Please read my disclaimer for more information.

H – High-Interest Savings Accounts

Canada has many no-fee high-interest savings account options.  The best one, in my opinion, is at EQ Bank.

Related Post – Best High-Interest Savings Account in Canada

If you have money saved for any reason and it’s just sitting in your chequing account or the saving account at your brick and mortar bank, you are losing money.

Online high-interest savings accounts often offer interest rates that are more than 10 times greater than interest rates at the big 5 banks.

Another benefit of opening a high-interest savings account at a bank different than your day to day bank is that it makes it harder to access your savings.  The harder it is to get at your money the less likely you are to spend it.

I – Inflation

Inflation can be confusing  But essentially, it is the rise in the price level of products and the resultant drop in purchasing power of money. 

Inflation erodes the value of money.  So, something that you buy today for $1 may cost $1.25 or $1.50 in the future.

The dollar that you save under your mattress today may only be “worth” ¢75 in the future.

Because of inflation, it’s important to not just save your money but also invest it.

The Bank of Canada aims to keep inflation around the 2% mark. So if you’re money is not “making” you around that 2% mark, it is losing purchasing power over time.

J – Joint Bank Account

Joint bank accounts are those that have more than one owner.  You could have a joint bank account with a close relative or a business partner.

They are great for combining finances. But are not a requirement for a strong financial relationship.

If you’re looking for a high-interest savings account that is also a joint bank account, check the options at EQ Bank.

K – KYC – Know Your Client/Customer

KYC or know your client/customer is a financial services guideline.  If you have ever worked with a financial professional, chances are they have gone through the KYC process with you. Whether you were consciously aware of what they were doing at the time or not.

The KYC guidelines state that financial professionals must make an effort to verify your identity (that you are who you claim to be), your suitability for the particular investment/product, and they must assess your risk factors.  All of this KYC information is mandatory.  

And it fits under the Anti-Money Laundering Policy of many financial institutions.  This policy aims to decrease money laundering, fraud, and terrorism financing.

L – Life Insurance

There are two main types of life insurance, whole life, and term.  

Whole life insurance often has a higher premium but that premium will be consistent the whole time you have the insurance.  The younger you get whole life insurance the cheaper the premium is.

Term life insurance often has a lower premium but only for a set term (5 years, 20 years, 30 years, for example).  After the term is up the premium will increase substantially.

Life insurance may not be for everyone.  

But it is also not just for those with children or other dependents.  Chrissy at Eat Sleep Breath FI highlights 8 reasons why you might need life insurance (even if you don’t have kids).

Currently, hubby and I both have term life insurance plans as well as life insurance through our employers. But we hope to one day be self-insured by our assets and (somewhat) passive income streams

M – Marginal Tax Rate

Canada has a marginal tax rate system.  Not every dollar of income is taxed at the same rate.

There are income brackets that act as tax thresholds.  Every dollar you earn within that income bracket is taxed at that income tax rate. If you earn one dollar more than an income bracket that dollar will be taxed at a higher amount. Not all of your income, just that dollar.

Income	Federal Tax Rate
$0 – $13,229	0%
$13,230 – $49,020	15%
$49,020 – $98,040	20.5%
$98,040 – $151,978	26%
$151,978 – $216,511	29%
$216,511+	33%

Income is marginally taxed both federally and provincially. The income brackets are not the same provincially and federally. Another reason why income tax seems confusing.

N – Negotiate

Learning to negotiate and practicing your skills is one of the best things you can do for your personal finances.  So many times service providers will be happy to charge you a higher amount.  But if you make the effort to negotiate you can often get a better rate.

Related Post – How to Save Money with 5 Simple Phone Calls

But negotiation isn’t just for trying to lower your expenses.

Negotiating your salary can change the trajectory of your income for years to come.  According to a survey done by Robert Half, only 36% of employees negotiated their salary with their last job offer.

When you negotiate your starting wage, all future raises are often based on that starting number.  The benefit of negotiating a few extra percent at the beginning can have compound effects on all future income.

Learning to negotiate is a skill that needs to be practiced.  

At times it can feel awkward.  But you really have nothing to lose.  When negotiating chances are you are either going to improve your position or stay the same.

O – Old Age Security (OAS)

Old Age Security or OAS is a monthly pension payment from the government that you may be eligible to receive after the age of 65.  Opting to delay payments after 65 will result in an increased payment amount once you decide to receive payments.

As of 2020, the maximum monthly OAS payment is $614.14.  This amount will depend on how long you have lived in Canada after the age of 18.

OAS is a taxable benefit meaning you will have to pay tax on any amount you receive.

P – Prime Rate

The prime rate, also known as the prime lending rate, is the annual interest rate set by banks.  It is used for calculating the interest rate on variable rate loans and lines of credit.

Canada’s current prime rate is 2.45%.

The prime rate in Canada is closely related to the Bank of Canada’s target overnight rate.

The Bank of Canada’s target overnight rate is currently 0.25%.

As you can see these 2 numbers are not the same just related.  If the Bank of Canada changes their target overnight rate, you can usually expect the prime rate to change accordingly.

Q – Questrade

Questrade was established in 1999. And is now Canada’s largest discount brokerage.  It is an online brokerage meaning that they do not have brick and mortar locations.  And are an alternative to investing with the big banks.

Because they are a discount brokerage you will save on investment fees when using Questrade.  Saving on fees means more money stays in your portfolio and your pocket.

Questrade offers a great platform for DIY investors or people who want to invest in a pre-built portfolio.  Get $50 in free trades when you open a Questrade account by clicking the banner below.

R – Registered Accounts

Canada has a few registered accounts that each have their unique tax benefits. To find out what your current contribution limits are, login into your CRA my account online. 

RRSP

The registered retirement savings plan (RRSP) is a tax-deferred account.  This means that when you contribute to it you will receive a tax deduction.  Your money grows tax-free but will be taxed when you choose to withdraw it.

You can withdraw from your RRSP at any age for any reason. But you will have to pay tax on the withdrawn amount. There is no extra penalty for early RRSP withdrawals.

Related Post – A Complete Guide to Your RRSP

There are many other added benefits to the RRSP. The Home Buyers’ Plan and the Life Long Learning Plan are two examples of these benefits.

To get the most out of your RRSP, contribute to it during your high income earning years and withdraw from it when you are in a lower marginal tax bracket.

TFSA

The tax-free savings account (TFSA) has the advantage of enabling your money to grow tax-free.  You contribute to this account with after-tax dollars so there is no immediate tax benefit.  But there is no tax paid on earnings upon withdrawal.

Different from the RRSP, when you withdraw from your TFSA you can regain the contribution room the following year.  So if you have maxed out your TFSA contributions but then withdraw $5000, the following year you will be able to recontribute that $5000.

To get the most out of your TFSA, contribute to it early and often.  The more time your money has to grow the more it can compound. And the more money you can get out of it tax-free.

RESP

The registered education savings plan (RESP) is a savings vehicle that enables you to save for post-secondary education.

You contribute to an RESP with after-tax money and the withdraws are taxed at the marginal tax rate of the beneficiary.  This creates a slight tax advantage as the beneficiary is usually a post-secondary student in a lower tax bracket.

Related Post – RESPs in Canada – All Your Questions Answered

The real advantage of the RESP is the Canadian Education Savings Grant (CESG).  Through the CESG, the government will match 20% of your annual contribution up to a maximum grant of $500 a year and $7200 lifetime.

S – Saving Rate

Your saving rate is the percentage of your take-home pay that you put towards savings.  There are multiple ways to calculate your saving rate. Here are 3 common saving rate formulas, which I call the simple way, the complex way, and the debt inclusion method.

It doesn’t matter what method you choose, just as long as you are consistent over time. Changing formulas can drastically change your saving rate.  This is just another reason why it is pointless to compare saving rates with other people.

Your saving rate is personal and you should try to improve it over time.  The more you can save and invest now, the less time you will have to work later.

T – T-slips

The Canadian Revenue Agency (CRA) requires various T-slips when you file your annual taxes.  T-slips are tax slips prepared by your employer or administrator. They are produced as a way to record your annual income and deductions.  Here are some examples of T-slips you may or may not be familiar with.

• T4 – Statement of Remuneration of Paid (most common T-slip, provided when working for an employer)

• T4A – Statement of Pension, Retirement, Annuity, and Other Income (for supplementary income sources)

• T4OAS – Statement of Old Age Security (if you receive OAS)

• T4A(P) – Statement of Canada Pension Plan Benefits (if you receive CPP)

• T4E – State of Employment Insurance and Other Benefits (if you receive EI)

• T4RIF – Statement of Income from a Registered Retirement Income Fund (if your RRSP has converted to a RRIF)

• T4RSP – Statement of RRSP Income (If you have made withdrawals from your RRSP

• T5 – Statement of Investment Income (if you have taxable investment earnings)

• T2202 – Tuition Enrolment Certificate (for eligible post-secondary institutions)

The government of Canada website has detailed information for what each box number represents on your T-slips.

U – Uncashed Cheques

Did you know that even though cheques go stale after 6 months, cheques from the Canadian Revenue Agency (CRA) never go stale?

You could have a tax refund cheque from 10 years ago and could still cash or deposit it.

The CRA has made the process of discovering if you have stale cheques easy.  Just log into your online CRA account and click on the uncashed cheques option.

When I learned about this I checked right away and there were no uncashed cheques for me.  But if you have one or a few it is a nice bonus.

V – Variable-Rate Mortgage

Variable-rate mortgages are ones that have an interest rate that fluctuates based on the prime rate.  Usually, the interest rate is prime minus a certain value.  Traditionally, over time, variable-rate mortgages outperform fixed-rate mortgages. But this may not be the case in the short term.

With a variable rate mortgage, when the interest rate changes, the amount you pay towards your principal will also change.  The payment amount stays consistent throughout the term of the mortgage. This can be a good thing if the interest rate goes down.  But if the interest rate goes up, the change in interest could extend the amortization of your mortgage.

With a fixed-rate mortgage, the interest rate and payments stay consistent throughout the term of the mortgage. And so does the length of your amortization.

There is also a third type of mortgage and this is an adjustable-rate mortgage.  An adjustable-rate mortgage will have an interest rate that fluctuates with prime similar to a variable rate mortgage.  

Where it differs, is that the payment amount will also fluctuate.  So if the interest rate goes up so will your payments.  And if the interest rate goes does so do your payments.

With an adjustable-rate mortgage, your payments may fluctuate but your amortization length stays consistent.

Mortgage Type	Interest Rate	Payments	Amortization
Variable-Rate	Fluctuates with prime	Stays the same	Fluctuates with prime
Fixed-Rate	Stays the same	Stays the same	Stays the same
Adjustable-Rate	Fluctuates with prime	Fluctuates with prime	Stays the same

W – Will

A last will and testament is a directive for how you would like your affairs distributed upon your death.  If you have minor children or assets of any kind, you want a legal will.

Related Post – Why You Need a Will, and What Happens If You Don’t Have One

One of the easiest and cheapest ways to get a comprehensive will is through an online will creation service such as Willful or Epilogue.  But make sure you are informed of everything the online will service offers (and doesn’t offer) before you sign up.

Related Post – Creating a Will in Canada Can Be Simple and Affordable

It was important for us to create our wills when we bought our first home. At the time our affairs were very simple so a basic will through a lawyer is what we did.  To be honest, at the time I didn’t even know online wills existed.

Now that we have a little one and our affairs are much more complicated we have renewed our wills to include beneficiary and guardianship information.

If you are a parent and do not have a will, creating one should be a priority.

X – XAW

XAW is an iShares exchange-traded fund that includes all countries except Canada.  The reasons I included it on this list are: 1)  it’s difficult to find words that start with X. And 2) it’s worth having a short conversation about exchange-traded funds (ETFs).

But first, this information is for entertainment purposes only and should not be considered investment advice.  

ETFs are securities bought and sold like stocks.  They usually track an index which is a group of companies or a specific sector.  

Unlike index funds that can only be bought and sold for the price set at the end of the trading day, the price of ETFs fluctuates throughout the day.  They can also be purchased for their current value at any time the market is open.

Exchange-traded funds usually have low management fees making them a great option for DIY investors.  And they are a great way to add diversification to your portfolio.

Y – Yield

Yield is the earnings generated by an investment over a certain time frame.  It is often expressed as a percentage. To calculate the yield of a stock, you will need the invested amount and current market value. So if you bought a stock for $100 and it is now trading for $105, it is said to have a 5% yield.

Yield calculations also usually take into account interest earned or dividends received. 

For example, if a stock currently trades for $100 and has a $3 dividend then it has a 3% yield.

Z – Zero-Based Budget

A zero-based budget is a type of budget in which every dollar is given a role.  The goal is to allocate every dollar so at the end of the allocation, there are zero dollars left.  

In its simplest form, a zero-based budget is one in which income minus expenses equals zero.  

But, that doesn’t mean that you have to spend every dollar.  With a zero-based budget, expenses include your bills, debt repayment, saving, investing, and giving.

Final Thoughts

Wanting to increase your financial literacy can feel overwhelming at times.  There are so many different terms it’s hard to understand what is what.  And most of the information you can find online is American.

Hopefully, this list of Canadian personal finance terminology helps make it a little bit easier to increase your financial literacy.  If there is a term I missed or something that you still don’t understand feel free to leave a comment below.