Mrs. Bacchus’ FREE Guide to Financial Literacy for Beginners

Before the Internet, people didn’t have easy access to information about finances. People’s experiences with budgeting, paying taxes, spending, and saving were dependent not only on their family’s financial literacy but their access to money. Needless to say, there is a wide range of financial literacy in our country and there are major gaps within certain populations. The S&P’s Global Financial Literacy Survey found that the rate of financial literacy in Canada is 68% and in the United States it is 57%.

Now with the availability and accessibility of information, people can learn how to manage money, invest, and advocate for their own financial goals.

That is why financial literacy is important. Financial literacy helps people make financial decisions for themselves and their families.

What exactly is financial literacy?

It means understanding how to manage your finances in a way that allows you to live comfortably while saving money, as well as understand your long and short term wants and needs. It also encompasses being familiar with appropriate ways of borrowing money such as loans and credit cards.

This guide will walk you through the basics of a variety of financial literacy topics. It will provide you with resources for finding more information and give you a starting point for increasing your financial literacy.

Wants and Needs

Learning about financial literacy begins with identifying your wants and needs. What are they? Write them down in a list, then determine which ones you can live without or put on hold until later in life. The more financial stability you have, the easier it will be to reach your larger financial goals.

It is important to understand the difference between wants and needs. Needs are things that must happen for you to survive such as food, housing, transportation, etc. Wants are anything that makes life more enjoyable but is not necessary. These include eating out at restaurants, owning an expensive car or laptop computer, etc. Learning about financial literacy means learning how to distinguish between wants and needs and prioritize how your money is spent (or saved).

Planning for Your Money

When you made a list of your wants, you probably listed some things that cost more than you’d have in your bank account in the average month. That’s where you need to form a financial plan. Financial planning involves spending some time defining your financial goals and then developing a financial plan to help you meet those financial goals. Take a few minutes today to think about what financial goals matter most to you. Are they short term, meaning things that would happen within the next year? Or are they more long term, like saving for retirement or buying a house? Whatever financial goal you want to achieve, make sure that it’s realistic and measurable so that you can track your success at meeting this financial goal over time.

You’ll also need to make a plan for how you will create income. This could include getting a job or starting a small business. Maybe you want to try out a side-gig in addition to your job to boost your income.

It’s important to think about saving and spending in the context of various financial goals. For example, how much do you spend on housing every month? What are you doing right now to save for the future? Do you have an emergency fund set aside in case something comes up where you need extra money? Or do you just rely on credit cards when financial challenges arise? Allocating your financial resources appropriately can help prevent financial stress and financial difficulty later.

Tracking Spending

Why should you write down your spending? Because financial literacy is about personal financial management.

It’s so easy to lose track of where your money is going when you’re not actively tracking it. It happens all the time – people spend a large amount of money every month on groceries only to find out they’re spending nearly as much money on eating out and going to the movies. Or students spend $300 each week on takeout food even though they have a fully stocked kitchen. If you want financial freedom, then tracking your spending is important.

The first step is to track where you spend your money for one month by writing down every single expense in a notebook or using an app like Mint. You can also go old school with Excel and use categories such as “clothing”, “groceries”, “transportation”, etc. Find what works for you and start tracking your spending now. Often, just being more aware of your spending can help you make better choices in your day to day habits.

Cutting Expenses

As you track your spending, you might notice certain trends. Hold yourself accountable and try to reduce your expenses in other areas. Maybe you can cut down on takeout by making more home cooked meals, or try mixing up different recipes so that you don’t get bored. Maybe you have subscribed to a service you rarely use.

Monitoring and reducing spending is an important financial habit, but it doesn’t have to be boring. Soon enough, you’ll be a pro and won’t even have to keep track anymore. It becomes second nature when it’s done often enough.

Avoiding advertisements and unsubscribing from marketing emails can help you stay focused on your financial goals. Unfollow that influencer on Instagram who makes you feel like you need to spend money to be happy or successful. Finding monthly expenses that you can eliminate or reduce will also help you meet financial goals.

For example, if you are frustrated with your current phone carrier and want to switch to a new provider, (I love Koodo!) that can help eliminate some unnecessary monthly spending. Taking care of routine expenses or financial tasks in one swoop is convenient for most people who have financial obligations as it reduces the number of steps they need to take.

It’s also important not to let certain financial situations overwhelm you, like switching from cable TV/Internet service provider to another or changing payment plans at your bank (changing mortgage rates or loan terms falls into this category too). Break the task into manageable parts and finish it. Your bank account will thank you and future you will be so proud.

Saving for Purchases, Emergencies, and Your Future

It can be so easy to spend all of your money, but that means you won’t have savings for the future. Set a goal for yourself and start saving today. Perhaps it’s $100 towards a new phone, or $200 in an emergency fund for when car repairs are needed. It’s okay if you need to adjust these financial goals as time goes on; just make sure they’re appropriate to where you are now.

Wherever possible, try saving as much extra money as possible rather than spending it. If your financial situation allows for multiple saving accounts then this is even better because it makes it more difficult to access the funds until they are intended for use (e.g., paying off debt vs building an emergency fund).

The 50-30-20 ratio is a helpful guide. Aim for 50% of your take home pay towards financial priorities (e.g., retirement savings, emergency fund), 30% of your income to monthly expenses and debt repayment, and 20% to spending on desires. Spending money on “wants” is okay and even encouraged when you’ve reached financial stability, but if you’re trying to get into the habit of saving then keep it simple as that will help prevent making large purchases over time.

Types of Savings Accounts

1) Tax Free Savings Account (TFSA): The TFSA was created by the Canadian government in 2009. It allows you to set aside money that earns interest tax-free forever. Even if you withdraw funds from your account, you can re-contribute them the next year with no penalty or taxes taken off of it! This financial tool is perfect for people who would like to save but also need access to their money fairly often. Check your CRA account to see how much money you can put into a TFSA.

2) Registered Retirement Savings Plan (RRSP): This financial tool is perfect for people who do not need access to their money right away but would like it put away for later use.

3) Registered Education Savings Plan (RESP): If you have children, you can put money away for their higher education in an RESP. When you open an RESP for a child, you can apply for the Canada Education Savings Grant (CESG). The grant will add 20% of the RESP contributions of up to $2,500. That means the CESG can add a maximum of $500 to an RESP each year.

4) High Interest Savings Account: If you want to have access to your money soon, a high-interest savings account is an option. This is the simplest way to save for shorter term financial goals. It will typically have a higher interest rate than a chequing or savings account.

Investing

Investing is buying financial assets, such as stocks and bonds. When you buy financial assets, your goal is to earn money from them with the expectation that they will increase in value over time. An investment may be risky or safe, depending on how much risk it involves.

You can open an investment account at a financial institution like a bank or financial planner. This account holds investments in different types of financial products such as stock-market securities (such as shares), mutual funds (which invest your money into several companies’ stocks and bonds) and GICs (which are short-term savings products).

Before you open an account, consider your needs. Are you looking for short term growth, which might involve more risk? Or are you looking for a long term, low risk investment? When do you need the money—or profits—you make from this account? Are you able to deal with financial loss or failure? If you have little investment capital, it might be best to start small and work up to larger investments.

If your financial institution offers financial advisors on staff, ask which one is right for you. Even when taking financial advice from a professional, it’s important to understand what they tell you so that you can take control of your financial future. Make sure financial institutions offer more than just financial products; find out if they also provide financial education services (such as workshops on how to save). Find out about their financial literacy programs, and see if information sessions are offered in person or online.

Wealthsimple is a financial planning platform designed to make financial advice and portfolio management easy for everyone. It is a user friendly way for beginners to try investing in stocks. Click here to open an account and receive 2 free stocks.

Giving Money to Charity

How much should you donate to charity? There is no one answer. Charitable giving is a personal financial choice. You might decide to give money to a charity, but you also might give your time and direct involvement. Whether it’s helping out in your community or around the world through a local food bank or international aid organization, just get involved and give back! Donating to a registered charity has tax benefits so keep any receipts somewhere safe for tax season.

Comparison Shopping and Loyalty Programs

If you’re going to buy something anyway, it pays to shop around for the best deal. Comparison shopping means that you do research on an item and its price before buying it. This can save you a lot of money every day. Find the cheapest gas in your area at GasBuddy.com.

Loyalty programs are a great way to help you save money by just doing what you already do. Do you often shop at the same grocery store? Join a free loyalty program and get savings. The store gets your repeat business and you save money. Win-win! The trick is finding a financial loyalty program that is worthwhile.

For example, Rakuten pays cash back when you shop online. It’s an add-on on your browser, so when you open a website from one of over 750 stores, a little box will open in the corner asking if you’d like to activate the rewards. If you do, and you make a purchase, you will automatically gain cash back. Click my referral link and get a $5 cash bonus by joining today!

Choosing a Credit Card

Credit cards can help you increase your credit score. When you use your credit card on a regular basis, you improve your financial history by confirming and building your payment habits. This helps you establish an acceptable financial profile for future creditors and financial institutions who may consider lending to you (e.g., to get a mortgage).

Credit cards often offer bonuses such as cash back or rewards for certain items. The savings can add up over time, but it’s important that you are able to pay off the balance monthly. Credit cards can have very high interest charges. As long as you are not overspending, getting money back on purchases can be one of the easiest ways to save money that people don’t even realize they’re doing!

Credit cards can really help out when emergencies arise because they provide financial freedom when cash isn’t always available. However, too many people grow dependent on their credit card and overspend because of the convenience factor.

Look for a credit card with no fees, a low interest rate, and a reward program that benefits you. Cash back or grocery or gas rewards are preferable to travel rewards for most people because they can be used regularly.

Taxes

Unfortunately, Canada and the United States are two countries that have not joined those whose governments submit taxes automatically. However, there is an easy way to file your taxes online and on time – TurboTax. And it’s 100% free. There are options within the program to pay for assistance, but you have the option to use the user-friendly program to complete your taxes for free. It guides you through the process one step at a time. I like that it shows you your return in the side panel as you go so you can see the effect that each change has.

Financial Literacy is a Lifelong Skill

When it comes to financial literacy, you can’t learn enough. Financial literacy is knowledge and understanding of financial principles that will help you make informed financial decisions in the present and future.

In Canada, we have great financial options which are designed to help us save money for the future by giving us tax incentives (e.g., RRSPs). But with all of these financial products on the market it’s hard to know how or when you should use them. And that’s where financial literacy comes in. The more financial knowledge you have, the better able you will be to make savvy financial decisions for yourself or your family. Everyone can benefit from financial literacy; whether it’s learning about saving, investing or borrowing money, being financially literate is important because sound financial planning leads to a healthy lifestyle.