Personal Finance Exam Review

risk

*expected vs. realized return* - investors want the largest return possible, however this is subject to constraints. consider the chance that the actual return will be difference than the expected.

insurance

contract represented by a policy. the policyholder will receive financial protection/reimbursement against losses from their insurance company. (ex. house, car)

wills

legal document made to provide instructions on how the deceased’s property and custody should be handled. a trustee or executor is named by the individual to ensure fulfillment of the intentions

call options/warrant

types of securities contract. claims that holder has the right to buy (call) or sell (warrant) a stated number of shares of stock within a pre-defined period & price.

coupon rate (t-bills/bonds)

interest rate an investor earns on their bonds; nominal yield paid by a fixed-income security. annual coupon payments paid by the issuer that is relative to the bond’s face/par value.

coupon t-bills

sold at a discount meaning you buy t-bills for a price less than their par/face value.

par/face value

the amount the issuer/gov’t pays you when your investment matures

coupon bonds

different than t-bills. issuer will pay interest semi-annually

derivative securities

contracts for buying and selling. this type of security has dependence on the value of another variable or underlying asset(s) (ex. commodity/stocks). VERY RISKY

capital

what can you leverage in case you cannot pay off the debt? usually valuable assets (real estate, savings, investments)

capacity

what financial position are you in that you can are actually able to pay off debt? takes into consideration your job stability and salary, other loan payments, other expenses & dependents

TFSA Definition

“Tax Free Savings Account” - a registered tax-advantaged account that helps you earn money, tax free. you are able to hold qualified investments like cash, stocks, bonds, and mutual funds in this

How can you withdraw from your TFSA?

You can withdraw contributions anytime, including interest, capital gains, and dividends that were earned, without paying any taxes or reporting the withdrawals as income

TFSA Pros

tax-free compounding, no withdrawal barriers, ability to share contribution room with a spouse, contribution room is the same (regardless of income), contribution room returns the next year, no mandatory withdrawals, withdrawals won’t impact gov’t benefits, no tax upon death

TFSA Cons

no barrier to withdrawals can cause implication if you have retirement savings in the account (can be ‘raided’), no income-tax reduction, no protection from creditors, penalties if you go over the contribution limit

RRSP Definition

“Registered Retirement Savings Plan” registered with Canadian government in which you can contribute to for retirement purposes. Contributions are ‘tax-advantaged’ (exempt from being taxed in the year the contribution is made)

RRSP Maximum contribution per year

18% of your gross income

How can RRSP money grow?

Investment income earned from RRSP can grow tax-deferred as long as the money remains in the account until withdrawn. Also tax-deductible, deducted from current year’s tax return, reducing total tax you pay

RRSP Pros

certain withdrawals can be made without paying tax (2 programs: Home Buyers Plan and LifeLong Learning Program), withdrawals can be made at any age, protected from creditors, tax free compounding, tax deductible, potential for lower lifetime tax rate

RRSP Cons

Withdrawals considered ordinary income - gets taxed at your marginal tax rate, withdrawals will impact income tested benefits, contribution room is scarce and based on income, less flexibility to share contribution room (spouses cannot contribute to each others’)

RESP Definition

“Registered Education Savings Plan” - contract between individual (subscriber) and person/organization (promoter)

How does an RESP Work?

Under contract, the subscriber names the beneficiaries (future student), agreeing to make contributions for them, while the promotor agrees to pay education assistance payments. each beneficiary must be connected by blood or adoption to the subscriber

RESP Pros

gov’t contributions (lifetime max per beneficiary is $7,200), earnings from plan accumulate tax-free and taxes aren’t due until money is withdrawn, if beneficiary does not use funds, contributor gets money back tax-free.

RESP Cons

Withdrawn earnings that aren’t used to pay for education incur a 20% penalty & income taxes must be paid, if gov’t contributed money isn’t used after 36 years they get it back, if subscriber passes away before beneficiary can use funds, the funds may not necessarily help the beneficiary

SMART Goals

Specific, Measurable, Attainable, Referred to Regularly, Time-Defined

Personal/Financial Goals Should be

realistic, specific, timeframe, describe action

barriers to financial goals

amount of money you currently have, lack of planning to pay for wants, risks

Miscues of Life

divorce, health problems, unemployment, financial losses

steps of financial planning process

define current, define goal, identify barriers, develop plan, implement plan, regularly review/revise

balance sheet (definitions & sections)

financial snapshot of you at a point in time. ALPE: assets, liability, personal equity

income statment

shows your income and expenses over a period of time

what is income

any method of making money (ex. job, investments)

What is a CFP?

Certified Financial Planner - help individuals to manage their finances (i.e. retirement, investing, education, insurance, taxes)

CFP Fiduciary Duty

A Certified Financial Planner must make decision with their client’s best interests in mind

Fee Only CFP

provides advice and plans but does not execute the plan

Commission only CFP

free advice, but person is expected to buy services and products

Fee & Commission CFP

provides a fee for advice and sells services/products for commission

what is budgeting

a plan on how to allocate you or your family’s income over a set period of time, highly recommended

what are variable expenses and example

expenses that can change month to month typically due to consumption habits (ex, gas bill)

fixed expenses & example

expenses that stay the same month to month (ex. property taxes)

SIN

Social Insurance Number - 9 digits that you need to work in Canada or have access to gov’t programs, authorized for income tax purposes, NOT an ID card. DO NOT give it out unless they are your employer or when you file your tax retun

Pay Stub

shows how much income earned over a specified period, shows how much the employer deducted to contribute to Canada Pension Plan (CPP) or Employment insurance (EI)

tax deductible meaning

expense than a taxpayer/business subtracts from gross income while completing a tax form. reduces taxable income → amount of taxes owed. any legitimate item you can claim on your taxes that lowers your taxable income

what is your disposable income and how to calculate

‘take home money’ or net pay (gross - expenses = disposable)

income tax

deductions from employee earnings, calculated by referring to marginal tax rate. no annual limit on total amount deducted in a year

What is EI

Employment Insurance - deducted from pay if employed in insurable employment

What is a CPP

Canadian Pension Plan - one of 3 levels of canadian gov’ts retirement system

marginal tax rate

under this, taxpayers are most often divided into tax brackets/ranges, determining the rate applied to the taxable income of the tax filer

gross income

sum of all wages, salaries, profits, interest payments, etc before any deductions or taxes

T4

Information slip that includes the income paid by employer in a given year, how much was deducted

pension plan

an employee benefit that commits the employer to make regular contributions to the company’s set aside money that funds eligible employees after they retire

what is an roi

a return on investing is a metric used to understand the profitability of an investment. it compares how much you paid and how much you earn on an investment

liquidity

how fast an asset can be converted to cash, the quicker it is, the more liquid it is

major investment vehicles

real estate, stocks, shares in mf/etf

what is a trust

a legal relationship in which the holder of a right gives it to another to keep and use it solely for their benefit

what is TVM

Time Value of Money - any time you compare the value of money of two points in time, you are working on a tvm problem

FVn

Future Value: amount of $

PVn

The amount of $ you have now or in the present

what is r in TVM problems

the interest rate, sometimes referred to as i

what is N in TVM problems

the number of periods the interest rate with compound

FVIFA

future value interest factor of an annuity where interest rate = r and number of time periods = n

FVA

future value of an annuity

PVIFA

present value interest factor of an annuity where interest rate = r and number of time periods = n

describe a chequing account

used for everyday transactions, such as debit card purchases, paying bills, etc.

describe a savings account

used to put money aside for a project, ex. vacation or car, or saved for a rainy day

overdraft

occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank gives it to you anyways. you basically borrow money from the bank after your balance reaches 0 and there is interest on the loan and typically a fee per overdraft

overdraft protection

financial product that allows you to cover the amount of the transaction when you go into overdraft

credit

contractual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date, usually with interest.

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also refers to the creditworthiness (amount a consumer or business has available to borrow) or history of an individual or company

advantages of credit

elaborate and explain each: convenience , using other people’s money, emergencies, getting something you cannot afford now, take advantage of sales, establishes a credit history

disadvantages of credit

credit almost always costs money, becoming a habit (encouraging overspending), overuse of credit → poor credit record, lack of comparison shopping, reduces future buying power, extra fees add to total cost

loan

something that is borrowed, especially a sum of money that is expected to be paid back with interest

installment loan

merchandise and services are paid for in 2+ scheduled payments of a set amount (interest included). repayment plan is in the form of a conditional sales contract based upon fulfilling a number of named conditions

credit score

number from 300-850 that depicts a consumer’s creditworthiness (higher the score, better the borrow looks). based on credit history - number open accounts, total debt, repayment history. lenders use this to evaluate the trust that the borrower will pay off their debt

line of credit

flexible loan from a financial institution that consists of a defined amount of money that you can access as needed and repay immediately or overtime. interest is charged as soon as money is borrowed

interest

monetary charge for the privilege of borrowing money

auto loans

allows you to borrow from a lender and use to purchase a car, paid off in fixed installments over a fixed period

leases

contractual agreement calling for the used to pay the owner for the use of an asset between the leaser and leasee

leasing benefits

lower payments and paying less tax, covered by warranty, shorter terms → driving a new vehicle sooner, drive in luxury for less, have options sooner vs obligations later

down payments

when using a mortgage to purchase a home, you need a downpayment

what is the minimum downpayment in canada for properties up to $500k

5%, however some lenders may require more

what is the minimum downpayment in canada for properties over $500k

5% for the first 500k and 10% for the remaining portion

what is depreciation

method of allocating the cost of a tangible asset over its useful life, accounting for its decline in value. basically as something becomes worth less over time

what is residual value? what is it also referred to as?

salvage value; estimated value of a fixed asset at the end of its lease term or useful life. leaser uses this as one primary method to determine ho much the leasee pays in periodic lease payments

annual fees

a sum paid every year that you’re signed up for certain credit cards

minimum payments

amount you pay each month on your credit card balance. min payment will be either a flat dollar amount, usually $10, plus any interest and fees

grace period in regards to credit cards

set length of time after the due date during which payment may be made without penalty

rewards of credit cards

points, miles, cashback

mortgage

type of loan often used to buy a home or property

fixed vs variable mortgage rate

u should know this tbh

term

refers to the time period of an investment, asset, contract, etc.

closing costs

fees and expenses paid when securing a loan for your home beyond downpayment

property tax & 2 components

levy based on assessed value of property; municipal and education

open mortgage vs closed mortgage

open: make extra payments at any time, ability to pay off before end of term without any extra chrages. interest rate is usually higher than closed. available only for short terms (6mo-1yr)

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closed: can make extra payments, normally with limitations. lower interest rates than open. if you want to change mortgage agreement (ex. to take adv of lower interest rates), you usually have to pay a prepayment charge

estate planning

act of preparing for the transfer of a person’s wealth/assets after their death (includes assets, life insurance, pensions, real estate, cars, etc.)

executor

the individual appointed by the (now) deceased to carry out the will

investment

asset or item acquired with the goal of generating income and appreciation

why are investments important

important to understand that all individual have wealth of some kind and most make an investment decision at some point in their lives

financial assets

paper/electronic claims on some issuer (i.e. fed/prov gov’t or a corporation)

real assets

physical assets such as gold or real estate

Why is the liquidity of a marketable security an important thing for investors to consider?

Most of these are very liquidable which means that they can be converted to cash extremely quickly. easily and cheaply traded. touch on emergencies