Personal Finance in Canada: Everything You Need to Know

It is often difficult to make financial decisions. Every day, you have to make choices that will impact your financial future, for better or for worse. From daily purchases, like a morning coffee at Starbucks or Tim Hortons, to more significant decisions like buying your first home or investment choices for your children’s education savings plan. At almost every stage of your life, effective management of your personal finances is essential for your long-term financial success.

In this article, we cover the pillars of personal finance in Canada, such as budgeting, saving, investing, and credit reports.

Personal finance is a general term that refers to an individual’s management of their financial resources. Some aspects of personal finance include:

• Budgeting
• Banking services
• Investments
• Credit report and score
• Insurance
• Mortgage loans
• Retirement financial planning
• Estate planning
• Etc.

Although each component is important, they don’t work as well alone. As the old adage says, “the whole is greater than the sum of its parts.” In other words, each component, from budgeting to retirement planning, plays a key role in your financial success.

Personal finance goals should involve maximizing your hard-earned money to achieve your objectives. For example, saving for your children’s education, building an emergency fund, or saving for a down payment for your first home.

In contemporary society, personal finance is essential to understand and use to your advantage. Here are a few reasons why:

• Daily Needs: Your quality of life is often influenced by your ability to manage your financial resources. The principles of personal finance will better equip you to meet your daily needs without sacrificing your well-being.
• Financial Freedom: Financial freedom is the ability to do what you want financially, when you want, and how you want. Sound management of personal finances plays a major role in achieving your financial freedom.

At this stage, having a solid understanding of your personal finances allows you to progress faster!

Believe it or not, we all inherited our personal finance philosophy from our upbringing. The way you were raised around money will significantly impact how you manage your personal finances.

Some of you received appropriate teachings on personal finance, such as saving and investing. Conversely, others may have adopted bad financial habits, like living beyond their means and carrying debt.

The key is to understand that you can change this reality! But first, you need to understand your money philosophy. For example, here are some principles people choose to adhere to:

• Avoid debt
• Spend less than you earn
• Favour experiences over material goods
• Believing that money is the source of happiness
• Living comfortably

It’s important to note that your money philosophy will evolve over time. For example, when you have children. In short, be flexible and adapt to these new values.

Healthy financial habits apply every day. Review your spending habits and differentiate between needs and wants. For example, if you need new clothes (need), you don’t necessarily need designer clothes (want). In short, consume responsibly and intentionally.

Establishing a solid budget can help you achieve your short-term and long-term financial goals. Account for your monthly income and expenses and analyze which ones you can reduce. Then, set aside money for saving and investing. There are several budgeting methods, each with a unique approach to help you live within your means. For example:

• 50/30/20 Rule: This approach involves dividing your income into three categories: 50% for your essential expenses, 30% for your personal wants, and 20% for savings. Divide your net income according to these percentages to get a clear view of these 3 spending categories.
• Zero-Based Budget: This approach involves assigning every dollar received to a specific task, such as rent, groceries, bill payments, etc. Once all your expenses are allocated to their respective amounts, add savings and retirement. And, of course, personal activities! This way, you ensure that your income minus your expenses equals zero.
• Envelope System: This approach is similar to a zero-based budget, except you primarily operate with cash. You withdraw your money from the ATM and place it into envelopes for each spending category. This way, you won’t exceed your budget, and you can physically see how your money decreases after each purchase.

Money makes the world go round. One of the basic concepts of personal finance is your ability to make your money grow through various means. There are several ways to earn money, including:

• Employment Income: The income you receive from your full-time job will change as you spend more time in your position. To ensure this, you can improve your skills to get a raise or a promotion.
• Business Income: Owning a business offers many advantages. You benefit from tax advantages, and your market value determines your compensation. There are no limits to being a business owner.
• Side Hustle: Side hustles are jobs you do outside of your main employment. If you have a passion, there might be an area where you can monetize your skills!

The general rule when earning income is to “pay yourself first.” Saving is a fundamental pillar because it requires you to set aside money to help you achieve your financial goals. To start, consider saving your money in savings accounts, depending on your objectives:

• Daily savings account
• High-interest savings account (HISA)
• Tax-Free Savings Account (TFSA)
• First Home Savings Account (FHSA)

Thus, your money can grow with interest income. It’s important to set a goal for your savings. For example: an emergency fund (equivalent to 3 to 6 months of expenses), savings for a vacation, or a down payment for your first home.

Now that you understand how to save money, you need to move on to another even more important step: investing. Indeed, investing is one of the most important basic concepts of personal finance.

Investing is the process of buying assets that generate profit or income. When it comes to investing, there is a wide range of asset classes to consider:

• Cash and cash equivalents
• Fixed-income assets
• Investments in stocks or exchange-traded funds
• Real estate

Once you understand these asset classes, you can then decide on your investment strategy. For assets like stocks or exchange-traded funds, you need to open a brokerage account, such as Wealthsimple, Questrade, CIBC Investor’s Edge, National Bank Direct Brokerage, or Qtrade Direct Investing. That being said, it’s important to know your investor profile before you start investing in this asset class.

There are two things that cannot be avoided in life: death and taxes. To that, we could add personal finance obligations.

Paying taxes is a civic duty, but you can still optimize your tax situation. How? By learning about tax benefits, deductions, and tax credits. This way, you ensure you pay a fair amount. As a Canadian, you can also take advantage of the tax-sheltered accounts mentioned previously.

For example, with an RRSP, you can receive a significant tax refund and even increase your non-taxable family benefits (if you have children). Additionally, you may become eligible for certain additional tax credits, as your taxable income will be lower. With a TFSA, you don’t get a tax refund. But the returns and gains are unlimited… and tax-free.

Your credit report and score are important for several aspects of personal finance. Indeed, managing your credit can help you obtain funds for a home purchase, to start a business, and much more. On the other hand, bad credit can have serious repercussions on your financial options.

When used correctly, credit cards can be an incredibly powerful tool. However, they have a downside. If you are unable to repay your purchases, you accumulate high-interest consumer debt. Here are some basic tips to help you get started:

• Pay off your entire credit card balance on time
• Do not exceed 30% of your credit limit
• Check your credit report regularly

Want to learn more about credit scores? Check out these guides:

Managing your debt can have significant positive effects on your financial journey. This is essential for young adults and older individuals alike.

When it comes to debt, there is good debt and bad debt:

• Good debts: Examples of good debt include student loans, buying a home and getting a loan to start a business.
• Bad Debt: This includes credit card debt, car loans, payday loans, and personal loans for buying consumer goods.

It’s worth noting that good debt can easily become bad debt if you are over-indebted. For example, if your student loans don’t allow you to get a job in your field of study, your debt remains and accrues interest.

You should limit your bad debt and repay your good debt if necessary. When you are debt-free, you increase your cash flow to create healthier finances.

Insurance is protection against a foreseeable loss. When an insurance company insures you, it agrees to protect you if the insurable event occurs.

Everyone, at some point, will have insurance needs. Whether it’s to help your spouse or family in case of death, critical illness, short-term or long-term disability. But also, for home insurance and car insurance.

Furthermore, to compare insurance premiums, use our home insurance comparator, our car insurance comparator, and our travel insurance comparator.

Retirement financial planning is essential in managing your personal finances. You should start planning for retirement and saving as early as possible. This way, you can accumulate enough money to maintain the same lifestyle in retirement.

In Canada, there are many sources of retirement income you can access, including:

• Registered Retirement Savings Plan (RRSP): A savings plan designed to help you save for retirement. The RRSP offers tax advantages. It is a tax-deferred account, which means you reduce your taxable income when you contribute to it. Thus, you get a tax refund. Then, you will pay taxes in retirement, when your marginal tax rate is generally lower.
• Old Age Security (OAS): A monthly benefit paid to Canadians over 65 years of age. If you are a Canadian citizen and have lived in Canada for at least 10 years, you may be entitled to this benefit, whether you have worked or not.
• Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) for residents of Quebec: A monthly benefit paid to Canadians who have contributed to it during their working lives. The typical period for accessing this benefit is between 60 and 72 years of age.
• Employer Pension Plan: If your employer offers a pension plan, for example, a defined benefit pension plan, you will be entitled to an annuity during your retirement.
• Other Personal Savings: This can include a TFSA, non-registered investments, GICs, rental properties, or other.

Now that you know the basics of personal finance, it’s the understanding and implementation that comes into play.

Financial literacy is the ability to understand financial concepts in order to have better control over your finances. When you have financial knowledge, you know how to make your relationship with money beneficial for your long-term success.

Your financial knowledge is constantly evolving. Here are some ways to increase your financial knowledge:

Blogs are an excellent way to break down complex information into small pieces. You can read a blog virtually anywhere. Reading it is usually quite quick, depending on its length. For example:

• EducFinance
• Retraite101
• ElleInvestit (Instagram page)
• Jeune retraité
• L’argent ne dort jamais (Facebook group)

The internet is full of free, accessible, and value-driven courses you can access. A good starting point is to check your library to see what’s currently offered. There are also free online courses on personal finance:

• McGill University’s free online Personal Finance Essentials course (available in both English and French)
• UQTR MOOC “La littératie financière et fiscale ouverte à tous” (available in French only)

Here are some of the best personal finance books :

• Les millionnaires ne sont pas ceux que vous croyez and De zéro à millionnaire : Investir en bourse sans souffrir – Nicolas Bérubé
• En as-tu vraiment besoin ? and Liberté 45 – Pierre-Yves McSween
• La retraite à 40 ans – Jean-Sébastien Pilotte (Le jeune retraité)
• Elle investit : Bâtir sa richesse grâce à la bourse – Karman Kong
• Ça coûte encore plus cher, être un adulte! – Béatrice Bernard-Poulin
• Rich Dad Poor Dad – Robert T Kiyosaki
• The psychology of money – Morgan Housel
• A rich barber – David Chilton

If you need help, don’t hesitate to consult a financial professional:

• Financial advisor at your bank
• Independent financial planner
• Accountant or tax specialist
• ACEF (Association coopérative d’économie familiale)
• Etc.

These can help you with your personal finances. Specifically, avoiding costly mistakes, helping you establish a strategy to repay your debts as quickly as possible, etc.

In summary, the personal finance concepts discussed in this article are essential for achieving your financial goals. Your financial education is critical, as you will have to make many choices throughout your life: buying a first home, starting a business, saving and investing for your retirement, etc. If needed, consult a financial professional.