Did you learn about money in school? Did your parents teach you about money? Today's video will be a beginner's guide on financial literacy.
So if you want to know how to properly use money to make the best financial choices, to live a more comfortable life and accomplish all your financial goals, then make sure you watch this video till the end. November is Financial Literacy Month, and this November is the 10-year anniversary here in Canada. This year, it's never been more important to educate yourself on financial literacy. A lot of Canadians are struggling financially because of the effects of the pandemic.
Financial Literacy Month helps Canadians better understand their finances and help to make better financial choices. With that being said, let's get into it. to the video. What is financial literacy?
Financial literacy is the ability to make smart financial decisions that help you achieve the lifestyle you want. This mainly includes earning income, budgeting, paying off debt, saving, investing, protecting yourself financially, and overall managing your finances. finances. Why is financial literacy so important? The more financially literate you are, the better decisions you will make with your finances.
So the more money you'll have and the more effective you'll be with your money. You could have the best paying job in the world and still be broke. Just because you make more money doesn't make you better at managing it. You could also have a low paying job but still build wealth because you have good money management skills. Without financial literacy, money gets wasted.
So that means working more, wasting more time, and building less wealth. Don't you want to afford the better things in life without getting yourself into debt? Traveling, buying a home, having children, your dream sports car.
Are you going to have enough money when you retire? Being more financially literate helps you get closer to your financial goals. Are you able to cover emergency fund? When you know how to manage your money, an emergency expense can be stress-free.
Okay, so how does money work? Money is an accepted payment for goods and services. When you work, you're either providing a good or a service.
For most people, working takes up all your time. So essentially, you're trading your time for money. You can make all the money in the world. but you can only have so much time.
So why are people so inefficient with their money? Because they're financially illiterate. Let's begin with earning income. Earning income is the foundation of your personal finances. This is the money coming in.
Types of earned income include hourly wages, salary, commissions, tips, and bonuses. When considering a job or a career, you should also consider the lifestyle you want to live and will you make enough money to afford that lifestyle. You should also consider the benefits you get. Pension benefits, RSP matching, union benefits, or a dental plan. room to grow, what's the highest position you can reach, what's the most money you can make.
Also, is there a high demand for this career? Will you have trouble finding a job? Will you need to get a student loan to pay for education for this career? And lastly, is this job actually something you'd like to do? Or do you just like the money?
Since earning income is the foundation of your personal finances, the better your foundation, the easier the rest of your personal finances will be. But don't just limit yourself to one source of income. If you really want to increase the money coming in, then consider other streams.
there are seven different types of income streams you should know. Earned income. This is what we just talked about, usually your nine to five job. This type of income is the most common and usually a primary source of income.
But earned income is limited to the skills you have and the amount of time you can work a day. Then there's profit income. This is when you sell a good or a service for more than what it costs you to produce.
This is your business owner or entrepreneur. This kind of income is scalable and your earning potential is unlimited. But with this reward, there's much more risk.
If you don't want to take that risk, then take a look. at interest income. This is when you get paid to lend out your money.
For example, a high interest savings account, bonds, or GICs. Now usually you need a lot of money to make a significant amount of interest income, but the pros are that it's risk-free and it's very passive. Another passive way to earn income is through dividend income.
Dividend income is income received for being a shareholder of a company. All you need to do is buy shares of a company that pays a dividend, and you'll receive a dividend payout usually quarterly. The next type of income is rental income. This is when you have an asset and let someone rented for money.
This could be anything from a house to your car to equipment. Another type of income is capital gains. This is when you buy an asset and sell it for more than what you bought it for.
Two examples would be stocks or a house. This is why investing in the stock market and in real estate is so popular. And lastly, royalty income.
This is the income received from allowing someone to use your property. Types of royalty income include music, books, pictures, patents, and even the use of a franchise. This type of income source requires the work of front, but usually once it's produced, it can become passive. The more of these seven income streams you have, the more money you'll make.
And if you happen to lose your job, you wouldn't be screwed because you have other sources of income. These seven income sources are either active income or passive income. Active income requires you to actively perform a service to get paid, while passive income can make you money while you sleep. There's only so much time in a day.
If you really want to grow your income, you'll need income sources that pay more and require less time. Many of these income sources can be considered investing. Investing in a business that can pay you profit income, investing in real estate that can pay you rental income or capital gains, and investing in a stock market that can pay you dividend income and also capital gains.
So one essential part of financial literacy is investing. One of the easiest barriers to entry in investing is in the stock market. This is where a lot of wealth has been built by capital gains, dividend income, and the power of compounding. Two ways I suggest you invest in the stock market is self-directed investing.
investing or with a robo-advisor. Self-directed or do-it-yourself investing is when you open a brokerage account and do the investing yourself. Before you pick a brokerage company to go with, think about what kind of investor you are.
Growth investor, dividend investor, ETF investor, what markets you want to invest in, the US market, the Canadian market, international. Then watch my videos on the many different brokers I've reviewed to see which one best suits your needs. Once you found a broker, the three main accounts you can open is a cash account, TFSA, or an RRSP. You'll want to contribute to your TFSA first, as all capital gains in this account are tax-free.
The catch is you could only contribute so much every year. Plus, there's lots of other rules you'll need to learn with the TFSA. Contributing to your RRSPs should only be done in certain situations, so you'll need to do some research before considering an RRSP account.
And your cash account is used once you've maximized your TFSA account. Once you know what account to open, then you can start doing research on what stocks and ETFs you want to invest in. Keep contributing to your RRSPs. to your account and keep doing research to know if you should keep holding your stocks, sell, or buy more. But if this is too much work and you just don't have the time, you can invest with a robo-advisor.
With a robo-advisor, all you need to do is answer a few questions like risk tolerance and goals with your money. Then the robo-advisor will pick a portfolio for you based on your answers. Add money to your account and set up automatic contributions and that's it.
The robo-advisor will handle everything for you, including investing your funds, rebalancing your portfolio, and reinvesting your dividends. all for a small fee. Once you reach your goal, withdraw your money and set a new goal.
Maybe your goal is to get into real estate investing. This type of investing requires a lot more money, usually at least 20% of the purchase price. In real estate, you can grow your money in a few different ways. You could rent out your property for more than the mortgage and profit the difference.
And while doing this, building equity in your home and the value of your home increasing. Or you can purchase a property and do renovations and sell for a higher price. Sounds easy enough, but there's a lot to learn about this type of investment. investing, and you'll need a team of experts to help you achieve it, like property managers, building contractors, realtors, lawyers, and a mortgage broker.
If you don't have the funds or the time to invest in real estate, but you want to invest in real estate, you could always invest in REITs, aka Real Estate Investment Trusts. REITs are companies that invest in real estate and can be purchased like a stock in the major stock exchanges. And lastly, you can invest in a personal or private business. There's a few ways to do this. Privately invest in someone else's business.
buy an existing business or start a new business when deciding to invest in a business you'll need to do research first what kind of business ideas do you have do you want to sell a product or offer a service will your business be local or global will your business even be profitable you'll need to create a business plan and most likely fund your business yourself it'll be hard to get a loan for a business within your first two years of operation you will also need to do things like register your business name decide whether you can be a sole proprietorship or do you need to incorporate register for HST, GHT, or PHT? Will you need a business license? Will you need insurance?
Will you need employees? If you want your business to be successful, you'll need to improve your financial literacy. So far, we covered earning income and investing.
The next essential part of financial literacy is saving. Like I already mentioned, you can earn all the money in the world, but if you don't save any of it, you won't be able to reach your financial goals or build wealth. And if you can't save, you won't be able to invest, so your money can't grow. So how do you save money? Easy.
Easy. Spend less money than you make. That difference is called saving money. But easier said than done. Dad, I need $300.
It's hard to spend less money than you make when you don't know how much money you spend. That's where budgeting comes in. A budget is a spending plan for your money. There's four main categories in a budget. Your needs, your wants, debts, and savings slash investments.
There's many different budget templates out there and there's many different ways to track your budget. One of the easiest ways is to do your spending on an account that has money managing and budgeting tools. One of the best would be Koho.
It's a reloadable prepaid visa with all the tools to help you manage your money and most importantly save your money. This video isn't sponsored by Koho, I just think they have the perfect product for people who struggle with managing their money. Once you start tracking your spending, you can see where all your money goes.
So you can try and decrease these categories to increase your savings. Another sneaky but effective way to save money is to pay yourself first. As soon as you get paid, put money into savings.
Then spend the rest. If you do the opposite, get paid. spend money and save what you have left you might find yourself saving less so pay yourself first and if you happen to have money left after you're spending save some more to make paying yourself first easier make it automatic set up your account so when you get paid money will automatically transfer from your checking to your savings. And speaking of savings accounts, you'll want to try and earn the best interest rate you can.
Inflation in Canada is around 2% annually, meaning your $100 will have the buying power of $98 after one year. Inflation is the the cost of goods and services increasing year after year. So everything gets more expensive, so you'll want to try and earn a decent interest rate to counter this. Another thing you should consider is when to save and when to invest. Savings are reserved for emergency funds and short-term goals.
With any long-term goals like retirement or your children's education, investing will be your better option because of better returns. This is where risk tolerance comes in. Let's say you plan to buy a house. If you can save for a house in two years, this will be considered short-term. You wouldn't want to this short-term savings goals invested because of short-term volatility.
Now, if you need five years to save for a house, this would be considered long-term. So it's more reasonable to have these savings invested because if anything happens in the stock market, like a global pandemic, you'll have time to recover. So you don't occur a loss.
And as for emergency funds, you'll want to first save for a $1,000 to $2,000 emergency fund, then slowly build up a fund of three to six months of living expenses. The amount of your final emergency fund will depend on many factors. like what line of work are you in how easy will it be to get a new job if you lose your current one how healthy you are you might be unable to work because of health complications how many dependents you have someone with five kids will need a way bigger emergency fund versus someone with no kids but don't get too carried away with your savings once again savings don't earn a whole lot and you will lose value due to inflation and make sure you're not saving just for the sake of saving have savings goals and have investing goals the next financial literacy lesson is what most people are good at. Spending.
Sold to the gentleman who bought every item in today's auction. Well good in a bad way. Now you can't just save and only buy assets with your money.
You will also need to spend money to survive. Like housing, transportation, food, clothing, and whatnot. So in this battle what's your weapon of choice?
Cash, a debit card, credit card or a prepaid MasterCard or Visa. With cash, you get the benefit of not getting yourself into debt. Once your cash is gone, the spending stops.
Cash is also good to use when buying and selling in classified ads, for cash discounts, tipping, cash- cash-only emergencies, and when using cash, studies show that you'll likely spend less. For the cons, cash is harder to track for budgeting. There's a chance of losing it, and you might get robbed, and you won't be able to make certain purchases like online purchases, pre-authorized purchases, pay bills, and somewhere where only MasterCard and Visa is accepted.
What about keeping your money in a checking account and using a debit card? Pros, no need to carry cash. If it gets lost or stolen, you can just cancel the card. You can send and receive e-transfers. You have budgeting tools, mobile check deposit, ability to withdraw cash at any ATM, overdraft protection and set up payroll direct deposit.
Cons, with the big banks you'll be paying a monthly fee. Unless you maintain a certain balance you can get a waive. Plus with a checking account there's many other fees you need to worry about. But with that being said there's many banks out there that offer no fee checking accounts like Tangerine, Simply and Modus Bank.
Another con is that using a debit card won't help you build credit. If you want to build credit you'll need a credit card. Because the credit card you get get the ability to borrow money.
Doing this properly is one of the best ways to build your credit. But with getting a credit card, you'll need to understand a few things. What's your annual interest rate?
What's your grace period? Interest rates for late payments and cash advances and foreign exchange fees. Pros of using a credit card is you get benefits that range from purchase protection and extended warranty to airport lounge access and free roadside assistance.
Also, most credit cards will offer you cash back or reward points. And another pro of a credit card is that you're protected under a zero liability. protection program.
Cons of a credit card include interest and other fees. Interest on a credit card is usually around 20%. This is why it's important to pay off your credit card before you get charged interest.
One of the biggest cons of a credit card is getting yourself into credit card debt. When you don't track your spending, this could be easily done without you even realizing it. You should only use credit cards for two reasons. To build your credit or take advantage of rewards and benefits.
If you're trying to build credit, make a few purchases every month and pay off the balance right away. If you tend to over- overspend and you can't pay off your full balance every month, maybe credit cards aren't for you. Another spending option is a reloadable prepaid mastercard or visa.
These will be cards like Koho, Stack, MoGo, and a PC money account. These kinds of accounts have no monthly fees and are limited on the fees they do charge. They offer you budgeting and money management tools to help you spend less, and a card like Koho will even offer you cash. back like a credit card and coming soon to coho will be coho save where instead of paying interest with a credit card you could earn an interest on your balance also since these cards are master card and visa you get their benefits the con with these cards is that they won't help you build But if you're not trying to get yourself into credit card debt, this might be a good thing.
But the thing is, your credit is another important part of financial literacy. Having a good credit report and credit score will allow you to get better credit cards and loans with better terms and interest rates. So why is this important?
Well, there's two types of debt out there. Good debt and bad debt. Bad debt is your car loans, credit cards, or any kind of debt that doesn't pay you back what you put in. Good debt, on the other hand, is something that will pay off, like a student loan, a business loan, or a mortgage. Debt can be a tool that can ruin your life financially, or if used properly, it could be a tool to help you build your wealth.
This investment strategy is called leverage. Another aspect of financial literacy is protecting yourself financially. This includes types of insurance. car insurance, home insurance, life insurance, and business insurance.
Having insurance protects you financially from hardship and debt. Also, you'll want to make sure that your assets are protected. Like any cash accounts should be protected under CDIC and any investment accounts should be protected under CIPF. So how can you learn about financial literacy? You can start off with getting as much free knowledge as possible.
YouTube videos, blogs, podcasts, and other free resources like budget planners, financial calculators, comparison tools, and free workshops and programs. You can also take it another step up and buy books, courses, programs, and even use mentors and experts. And the best way to learn about financial literacy is to take action and practice it. You could read everything you need to know about investing in the stock market, but if you don't actually invest, you're not applying that knowledge.
And making mistakes is another good way to learn something. This is why I would suggest you start learning as soon as possible. If you have very little to invest but keep going at it for years, you'll make mistakes. learn, and gain experience. But if you wait till you have more to invest, you'll still make those same mistakes and it will cost you a lot more.
Now I know financial literacy isn't the most exciting topic, but financial literacy is probably the most important topic. Money is something we all need. The more money we have, the more freedom we have. And the more money we waste, the more time is wasted. And money is the world's most valuable tool because money gives you your time back.
So educate yourself on financial literacy so you can reach your financial goals and live the lifestyle you always wanted. Now I can't teach you everything you need to know about financial literacy in one video, but hopefully you understand which topics are important. If you want to keep improving your financial literacy, make sure you subscribe and check out some of my previous videos or click one of the videos on the right.
Thanks for watching. Until next time, keep making money moves. Peace!