BEP2O: Financial Literacy Test

1. Core Topics to Review

Budgeting and Income Management

• Types of Income: Gross income, disposable income, discretionary income.

  • Gross income: Your total earnings. 

    •  in the form of a paycheque - made up of hourly wages, salary, commission and bonuses

    • Can also be pension, capital gains, rental income or self-employment income.

  • Disposable income: Amount of money left after paying tax. This is the money available for investing, saving or spending on essential/non-essential purchases. 

  • Disposable income = gross income - income tax

  • Discretionary income: The money you can spend freely. The money left after paying for essential goods. 

  • Discretionary income =  disposable income - essential expenses 

• Importance of Budgeting: How budgeting helps manage finances and achieve goals.

  • Budgeting helps you to anticipate money in and out, allowing you to  set priorities so that you can achieve your financial goals. It helps to create financial stability.

  • Helps prepare for emergencies,splurgin on special occasions and big ticket items, future investments (education, buying a home, etc.), preparing for retirement 

• Active vs. Passive Income: Definitions and examples (e.g., salary vs. rental income).

  • Active income is the income earned from operating a business, having a job, etc. 

  • Passive income is the money created by an asset. This is money earned from investments, interest, and/or rental properties. 

• Tips for Avoiding Impulse Purchases: Strategies like creating budgets and comparison shopping.

  • Make a shopping list that identifies your needs and wants

  • Create a budget and stick to it

  • Wait 24 hours before making a large purchase to ensure it’s something you want. 

  • Avoiding shopping when you are in emotional distress. 

Savings and Investment Tools

• Tax-Free Savings Account (TFSA):

  • Purpose and benefits.

    • Created by the government of canada to encourage Canadians to save money. Money invested is included in income tax, but when withdrawn there’s no tax. 

  • Annual contribution limits.

    • $7,000 in 2024

• Registered Education Savings Plan (RESP):

  • Purpose, tax advantages, and government contributions.

    • Helps Canadian parents pay for their child’s post-secondary education. Money contributed to this account is done before tax (deducted from income tax). 

    • Government contributes additional money. For every $1.00, the government gives $0.20 up to a max of $500 for each child. In order to get the maximum benefit, parents would have to contribute $2,500 each year. 

• Registered Retirement Savings Plan (RRSP):

  • How it helps save for retirement with tax-deferred growth.

    • Helps Canadians save for retirement. Taxes don’t have to be paid on what’s earned in the account, only on withdrawals. Lowers income tax. Money in RRSP can be used for other things, but is still taxed on withdrawal. 

• GICs and Bonds:

  • Difference between fixed-income investments and equity investments.

    • Fixed income investments are investments that have a set interest rate and guarantee the value of the investment won't drop. The advantage is the low risk but the disadvantage is that the interest rates are low. 

      • GIC's are when you agree to lend the bank your money for a specified period of time and you ear interest.

      • Bonds are when you provide a loan to a business or the government to help them carry out their operations. 

        • Bond issuer pays you interest over the course of the bonds term before paying you back in full at the bond's maturity date. 

    • Equity investments provide some percentage of a company. Includes stocks, mutual funds, and exchange traded funds. These investments provide the highest return for investors but are riskier in the short term. 

• Stocks:

  • Understanding terms like blue-chip stocks, market capitalization, and risk.

    • Market capitalization refers to the ever-changing value of a company on the stock exchange (price per share x the number of outstanding shares)

    • A company worth 10 million selling for $100 each would have a market capitalization of $1 billion. 

    • Blue chip stocks: stocks that are issued by financially stable institutions that are well established with a strong record of growth. 

    • Penny Stocks: These stocks trade for under $1.00 per share, issued by companies with little financial history, they are more risky. 

    • Return on Investment measures the performance of an investment in a percentage 

      • ROI = ((revenue - investment cost)/(investment cost)) x 100

      • The Rule of 72 is a formula to calculate how long it will take for an investment with a fixed interest rate to double. Divide ROI by 72 = the years it will take to double

The Cost of Debt

• Good vs. Bad Debt:

  • Examples and how they affect financial well-being.

    • Good debt: used for investments that appreciate over time or contribute to financial growth and generate a return on investment. 

    • Bad debt: consumable items that depreciate in value. They provide short term gratification but no lasting value or income. 

• Credit Scores:

  • What they are, factors affecting them, and why they matter.

    • Credit is your ability to take on debt and pay it off. In Canada, this score ranges from 300-900, with a score of 650 being good. 

    • Credit scores are important because they allow you to apply for a home, job, and rent a home/apartment. 

    • There are 5 factors that impact credit scores: Payment history (35%), Credit Utilization (30%), LEngth of History (15%), Credit Mix (10%), New Credit/Inquiries (10%). 

    • Credit Mix is the variety of credit types you have (credit cards,loans, mortgages, etc.)

    • New Credit/Inquiries is how often you apply for a loan. 

• Simple vs. Compound Interest:

  • How to calculate each and their implications for borrowing and saving.

    • Simple interest grows linearly over a period of time. 

      • I=  P(1 + rt)

    • Compound interest is based on the principal plus any previous interest. 

      • I = P(1+r)ᵗ

Risk and Investment Portfolios

• Risk Tolerance:

  • High, medium, and low-risk investments and when they are appropriate.

• Portfolio Diversification:

  • Balancing fixed-income and equity investments to meet goals.