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Everything you must know about Personal finance in Canada

To the point

This article will break down each component of personal finance in Canada so that you can maximize your money and live life on your terms.

Making financial decisions can be overwhelming. Each day, we must make choices that will impact our financial future for better or for worse. From the smallest everyday purchases of Tim Horton’s coffee to decisions on which investment vehicles to save for our children’s education.

At almost every stop in life, personal finance and how we manage it are incredibly important for our long-term financial success.

What is personal finance?

Personal finance is an all-encompassing term that refers to an individual’s management of their financial resources. Some of the aspects of personal finance include: “budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning.”

While each component is important, they do not function as well on their own. Like the old adage says, “the whole is greater than the sum of their parts” in other words, each component, from investing to retirement planning, plays a role in your overall financial picture.

Personal finance goals should be to maximize your hard-earned money to reach your goals, such as saving for your children’s education, setting an emergency fund, or buying a house.

Why is personal finance important?

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

Manage your daily needs: Our quality of life is often impacted by our ability to manage our financial resources. Personal finance principles will allow us to be better equipped to meet our everyday needs without sacrificing our well-being in the process.

Greater financial freedom: Financial freedom is the ability to financially do what you want, when you want, and how you want. Personal finance plays a major role in ensuring our financial freedom to live life on our terms.

Changing Canada: The Canadian financial landscape changing. Since the pandemic, not only are we facing a generational shift in places like the workplace, but Canadian wealth has also increased by a whopping 2 trillion (yes, with a T).

At this point, not having a solid understanding of your personal finances is keeping you on the outs!

Understanding your money philosophy

Believe it or not, we have all inherited a personal finance philosophy from our upbringing. The way you were raised around money will significantly impact the way you deal with your personal finances.

For some, there were proper teachings of personal finance strategies around things like saving and investing. At the same time, others may have learned habits like borrowing too much debt or making unnecessary purchases.

The key is to understand that you CAN change that reality but should first understand your money philosophy. Here is an example of some principles people choose to live by:

  • Never get into debt; always buy with cash
  • Always spend less than you earn
  • Experiences over material goods
  • Money is the source of happiness
  • Live comfortably

It is important to note that your money philosophy will change as your life progresses. Be flexible and adapt to these new values. This is where things get fun!

9 Pillars of personal finance in Canada

1- Budgeting

Building a solid budget can help you tackle your short to long-term financial goals. You will account for your monthly expenses and set money aside for savings and investments. There are several budgeting methods to consider, each taking unique approaches to help you live within your means.

Here are a few that you could consider using:

50/30/20

Popularized by U.S. Senator Elizabeth Warren, this method distributes:

  • 50% of your after-tax income towards needs
  • 30% towards wants
  • 20% towards savings and debt repayment

Zero-based budgeting

Zero-based budgeting assigns every dollar to a task. Each dollar you receive should be given a specific duty such as paying bills, saving, etc., for a total amount of 0.

Envelope system

This method is similar to the zero-based budget, except you are dealing primarily in cash. It can be an excellent starter for those who want to have a basic way to manage funds.

2- Making money

Money makes the world go round. A pillar of personal finance would be your ability to grow your money through a variety of different means.

There are a couple of ways you could make money, including:

Employment income

The income you make from your full-time job/jobs will change as you spend more time at your position. To make sure you grow this, you can improve your skills for a raise or move up within the ranks.

Business income

Being a business owner has a wide range of benefits. You have tax advantages, and your value to the market determines how much you make. There is no limit to being a business owner.

Side hustle

Side hustles are the jobs you do outside of your main gig. If you have a passion, there could be a field for you to monetize your skill!

3- Saving money

The general rule of thumb when you receive income is to pay yourself first. Saving is a foundational pillar because it requires you to put money aside to help execute many of your financial goals. Canadians have experienced this firsthand too. Last year, Canadians saved 14.8% of their income, or roughly $5,000. Granted, this may look different as we get back to pre-pandemic levels, but it gives you an idea of why people save under certain circumstances.

To get started, you should consider saving your money in several tax-sheltered accounts, including:

  • High-yield savings account (HISA)
  • Tax-free savings account (TFSA)
  • Everyday Savings Account

Depending on the account you choose, you may be able to garner interest to help grow your money while it sits. It is also important that you set a goal aside for your saving. Common examples include saving 3-6 months income for an emergency fund, saving for a down payment or saving for a vacation.

4- Investing

Once you have learned the art of saving, you should move on to an important step in the personal finance pillar – investing. Investing is the process of buying assets with the expectation of generating a profit or an income. In investing, there is a broad range of asset classes to consider.

  • Cash and cash equivalents
  • Fixed-income security
  • Equity investments
  • Real estate and tangible assets

Once you familiarize yourself with a particular asset class, you can then decide how you will invest. For assets like stocks, you can use Robo advisor apps like WealthSimple. The beauty of making purchases on these platforms is that they take away the pressure from investing and make it an automated experience.

5- Taxes

There are 3 things you can’t avoid in life: death, taxes, and not paying attention to your personal finances.

While there is a civic duty to paying taxes, you can always find out about benefits and deductions to make sure you are paying a fair amount. As a Canadian reader, you can also take advantage of the tax-sheltered accounts mention earlier to help shelter any gains you made on your investments from taxation. Take the TFSA, for example. You can contribute up to $6,000 a year tax-free, but the gains are unlimited!

With proper research and a competent accountant, you will be able to maximize your tax benefits and contribute what you owe.

6- Credit cards

When used correctly, credit cards can be an incredibly powerful tool. Managing your credit can help you obtain funds for various asset-producing activities like buying a home, securing funds for a business, and much more. On the flip side, having poor credit can severely impact your financial options.

However, there is a downside to credit cards, and the fact that non-mortgage debts are at $23,800 for the average Canadian is nothing to glaze over. Some basic tips to get you started include:

  • Paying off your balance in full and on time
  • Spending no more the 30% of your credit card limit
  • Checking your credit report at least once a year

Think you want to learn more about credit cards? We have an article that goes into depth on credit card usage.

7- Paying off debt

Managing your debt can have significant positives in your financial life. When it comes to debt, there can be good debt and bad debt. Examples of good debt include student loans, buying a house, getting a business loan.

Bad debt includes credit card debt, car loans, and payday loans. It should be noted that good debt can easily become bad debt if you are over-leveraged. For example, if your student loans do not yield employment in your field of study, your debt sits and grows in interest.

You must limit your bad debt and pay off your good debt as needed. When you have less bad debt, you increase your cash flow to create healthier finances.

8- Insurance

Insurance is protection against a foreseeable loss. When an insurance company insures you, they agree to protect you if the insurable event happens.

Everyone at some point will need insurance. Whether it is to help your family in case of death, critical illness, auto or home insurance.

9- Retirement

After years of working, you will eventually have to live off your retirement income. Starting to plan for retirement young can help you get fast-tracked to living a comfortable life in your golden years. There are many retirement income sources you may have access to upon retirement, including:

Registered Retirement Saving Plan (RRSP): The RRSP is a savings and investment vehicle designed to help you save for retirement. The account has tax benefits as it is tax-deferred, meaning that you will reduce your income with each contribution and only pay taxes when you withdraw from the account. This is ideal for high-income earners, especially as they can limit the number of tax obligations during their working years.

Old Age Security (OAS): The OAS is a monthly benefit given to Canadians over the age of 65. If you are a Canadian citizen and have lived in Canada for at least 10 years, you may be eligible for this benefit regardless of whether you worked or not.

Canada Pension Plan (CPP): The CPP (or QPP in Quebec) is a monthly benefit provided to Canadians who have contributed to it over their working life. The typical timeframe to access this benefit is between the ages of 60 to 70 years old.

You may also have an employer-sponsored plan that will help fund your retirement. There may be some great incentives to join this plan if you do, as your employer may sometimes partially or fully match the amount you contribute.

Financial Literacy: How it plays into your financial plan

Now that we know the tools and strategies needed for personal finance, understanding and implementation are where financial literacy comes into play.

Financial literacy is the ability to understand financial concepts so that you have greater control over your finances. When you are financially literate, you know how to your relationship with money to be beneficial to your long-term success.

Your financial literacy is constantly changing. Here are a few ways to make sure you are increasing your financial knowledge on any given topic:

Blogs and Facebook groups

Blogs are a great way to break down complex information into bite-sized pieces. You can read a blog practically anywhere and should generally take no more than 5-10 minutes to read, depending on the word length.

With that said, check on Ratesopedia.com our personal finance topics and improve your knowledge one article at a time!

Online courses

The internet is full of free, accessible, and value-driven courses that you can access. A great place to start is to check your library to see what is currently being offered or if your goal is more specific, there are some courses with a fee available.

Podcasts

If you are someone that is on the go and just want to get knowledge through audio, you can listen to podcasts that will give you the same amount of information. Much like blogs, you can listen to them while you’re getting ready, working, or even exercising.

Conclusion

Each personal finance pillar comes with a varying degree of complexity and guidelines but is crucial to meeting your financial goals. To help maximize your economic potential, your financial literacy must complement the strategies you seek to implement in your complete plan. While many of these can be handled on your own, some may require the help of certified professionals.

Let us know what you think! Was this helpful to your personal finance journey?

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