Personal Finance For Canadians For Dummies E-Book

Eric Tyson

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch

Seitenzahl: 957

Veröffentlichungsjahr: 2024

Beschreibung

Gain financial literacy and get expert advice—tailor made for the provinces

Personal Finance For Canadians For Dummies is a comprehensive guide and reference that helps you get smart about money, taking unique Canadian laws and opportunities into account. The clear, jargon-free explanations in this book will lead you to financial savvy. Understand how your earnings inform your budget, when to spend vs when to borrow, how to invest wisely, and how to protect your assets. You’ll also learn best practices for managing your money with an eye toward Canadian tax laws, retirement plans, education savings, and pension plans. With the sound advice you’ll find inside, you’ll soon see your loonies turn into toonies!

• Improve your financial literacy and establish realistic goals
• Reduce your spending, set a budget, save for the future, and manage debt
• Minimize your tax bill and work out the differences among retirement and savings plans
• Invest in stocks or real estate to protect and grow your assets in the long term

This is the perfect Dummies guide for Canadians looking for advice on how to best manage their finances.

Leseprobe

Personal Finance For Canadians For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Personal Finance For Canadians For Dummies Cheat Sheet” in the Search box.

Table of Contents

Cover

Title Page

Copyright

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond the Book

Where to Go from Here

Part 1: Getting Started with Personal Finance

Chapter 1: Embracing Financial Literacy

What Being Financially Literate Means

Talking Money at Home

Identifying Unreliable Sources of Information

Jumping over Real and Imaginary Hurdles to Financial Success

Chapter 2: Establishing a Financial Foundation

Your Cash Flow: Money In, Money Out

Utilizing Transaction and Investment Accounts

Budgeting to Boost Your Savings

Understanding and Improving Your Credit Score

Chapter 3: Measuring Your Financial Health

Avoiding Common Money Mistakes

Determining Your Financial Net Worth

Examining Your Credit Score and Reports

Evaluating Bad Debt and Good Debt

Analyzing Your Savings

Evaluating Your Investment Knowledge

Assessing Your Insurance Savvy

Chapter 4: Establishing and Achieving Financial Goals

Creating Your Own Definition of Wealth

Prioritizing Your Savings Goals

Building Emergency Reserves

Saving to Buy a Home or Business

Funding Kids’ Educational Expenses

Saving for Big Purchases

Preparing for Retirement/Financial Independence

Part 2: Spending Less, Saving More

Chapter 5: Managing Where Your Money Goes

Examining Overspending

Assessing Your Spending

Chapter 6: Dealing with Debt

Using Savings to Reduce Your Consumer Debt

Decreasing Debt When You Lack Savings

Turning to Credit-Counselling Agencies

Filing Bankruptcy

Considering a Consumer Proposal: An Alternative to Bankruptcy

Stopping the Spending/Consumer Debt Cycle

Chapter 7: Reducing Your Spending

Unlocking the Keys to Successful Spending

Reducing Your Spending

Chapter 8: Trimming Your Taxes

Understanding Your Tax Return

Trimming Employment Income Taxes

Increasing Your Deductions

Making the Most of Tax Credits

Reducing Investment Income Taxes

Enlisting Education Tax Breaks

Getting Help from Tax Resources

Dealing with an Audit

Chapter 9: Making the Most of Registered Retirement Savings Plans

Understanding How RRSPs Work

Maximizing Your RRSP’s Growth

Examining the Contribution Rules

Types of Registered Retirement Savings Plans

Taking Money Out of Your Plan before Retirement

Closing Down Your RRSP

Part 3: Building Wealth through Investing

Chapter 10: Considering Important Investment Concepts

Establishing Your Goals

Understanding The Two Basic Types of Investments

Shunning Gambling and Get-Rich-Quick Vehicles

Understanding Investment Returns

Sizing Investment Risks

Diversifying Your Investments

Acknowledging Differences among Investment Firms

Analyzing Experts Who Predict the Future

Some Final Advice

Chapter 11: Understanding Your Investment Choices

Slow and Steady Investment: Bonds

Building Wealth with Ownership Vehicles

Off the Beaten Path: Investment Odds and Ends

Chapter 12: Investing in Funds

Understanding the Benefits of Mutual Funds and Exchange-Traded Funds

Exploring Various Fund Types

Selecting the Best Funds

Deciphering Your Fund’s Performance

Evaluating and Selling Your Funds

Chapter 13: Investing in RRSPs and Retirement Plans

Allocating Your Money in Retirement Plans

Transferring Retirement Plans

Chapter 14: Investing Outside Tax-Sheltered Retirement Plans

Getting Started

Taking Advantage of Tax-Free Savings Accounts

A Great New Way of Saving for a Home

Understanding Registered Disability Savings Plans

Understanding Taxes on Your Investments

Fortifying Your Emergency Reserves

Investing for the Longer Term (Several Years or Decades)

Chapter 15: Investing for Educational Expenses

Strategizing to Pay for Educational Expenses

Strategies for Saving for Education Expenses

Obtaining Loans, Grants, and Scholarships

Investing in Educational Funds

Chapter 16: Investing in Real Estate: Your Home and Beyond

Deciding Whether to Buy or Rent

Financing Your Home

Finding the Right Property

Working with Real Estate Agents

Putting Your Deal Together

After You Buy

Part 4: Insurance: Protecting What You Have

Chapter 17: Insurance: Getting What You Need at the Best Price

Discovering Our Three Laws of Buying Insurance

Dealing with Insurance Problems

Chapter 18: Insurance on You: Life, Disability, Long-Term Care, and Medical

Providing for Your Loved Ones: Life Insurance

Preparing for the Unpredictable: Disability Insurance

Looking at Long-Term Care Insurance

Travel Medical Insurance

Chapter 19: Covering Your Assets

Your Home

Auto Insurance 101

Protecting against Mega-Liability: Umbrella Insurance

Planning Your Estate

Part 5: Where to Go for More Help

Chapter 20: Working with Financial Planners

Surveying Your Options

Deciding Whether You Should Hire a Financial Planner

Finding a Good Financial Planner

Interviewing Financial Advisors: Asking the Right Questions

Chapter 21: Using Technology to Manage Your Money

Surveying Software, Apps, and Websites

Accomplishing Money Tasks on Your Computer, Tablet, or Smartphone

Part 6: The Part of Tens

Chapter 22: Survival Guide for Ten Life Changes

Starting Out: Your First Job

Changing Jobs or Careers

Getting Married

Buying a Home

Having Children

Starting a Small Business

Caring for Aging Parents

Divorcing

Receiving a Windfall

Retiring

Chapter 23: Ten Tactics to Thwart Identity Theft and Fraud

Save Phone Discussions for Friends Only

Never Respond to Emails and Texts Soliciting Information

Review Your Monthly Financial Statements

Secure All Receipts

Close Unnecessary Credit Accounts

Regularly Review Your Credit Reports

Safeguard your SIN

Keep Personal Info Off Your Cheques

Protect Your Computer and Files

Protect Your Mail

Index

About the Authors

Connect with Dummies

End User License Agreement

List of Tables

Chapter 3

TABLE 3-1 Your Financial Assets

TABLE 3-2 Your Financial Liabilities

TABLE 3-3 Your Net Worth

TABLE 3-4 Your Savings Rate over the Past Year

Chapter 4

TABLE 4-1 Canada Pension Plan: Pensions and Benefits Monthly Amounts (January–De...

TABLE 4-2 OAS Maximum Payments and Income Thresholds

TABLE 4-3 Guaranteed Income Supplement Amounts (January–March 2024)

TABLE 4-4 OAS Allowance and Allowance for the Survivor: Maximum Payments and Inc...

TABLE 4-5 Retirement Planning Worksheet

TABLE 4-6 Growth Multiplier

Chapter 5

TABLE 5-1 Detailing Your Spending

Chapter 8

TABLE 8-1 Approximate Marginal Taxes on $70,000 of Income in 2024

TABLE 8-2 Federal Tax Brackets for 2024

TABLE 8-3 Approximate Combined Federal and Provincial Income Tax Brackets and Ra...

TABLE 8-4 Approximate Effective Tax Rates on Capital Gains for 2024

Chapter 9

TABLE 9-1 Short-Term Benefits of Tax-Deductible RRSP Contributions

TABLE 9-2 Long-Term Payoff of Tax-Favoured RRSP Contributions

TABLE 9-3 The Money-Earning Potential of Starting an RRSP When You’re Young

TABLE 9-4 The Payoff from Profitable Investing: How a $5,000 Annual Contribution...

TABLE 9-5 Minimum RRIF Withdrawals

Chapter 10

TABLE 10-1 Reduction in Purchasing Power Due to Inflation

TABLE 10-2 The Difference a Few Percent Makes

TABLE 10-3 Stocks versus Bonds

TABLE 10-4 Allocating Long-Term Money

TABLE 10-5 Investment Sales Commissions

Chapter 13

TABLE 13-1 Allocating Company RPP Investments

Chapter 14

TABLE 14-1 Approximate Effective Tax Rates on Capital Gains for 2024

Chapter 15

TABLE 15-1 How Much to Save for University or College

Chapter 16

TABLE 16-1 The Approximate Maximum You Can Borrow

TABLE 16-2 Monthly Expenses: Renting versus Owning

TABLE 16-3 Your Monthly Mortgage Payment Multiplier

TABLE 16-4 Cost of Owning versus Renting over 30 Years

Chapter 18

TABLE 18-1 Life-Insurance Calculation

Chapter 20

TABLE 20-1 Financial Product Commissions

List of Illustrations

Chapter 3

FIGURE 3-1: Lenders use credit scores to estimate how likely people are to defa...

Chapter 7

FIGURE 7-1: Reducing your spending can yield large investment sums.

Chapter 10

FIGURE 10-1: Value of $10,000 invested from 1928 to 1937.

FIGURE 10-2: Value of $10,000 invested from 1947 to 1956.

FIGURE 10-3: Value of $10,000 invested from 1972 to 1980.

Guide

Cover

Table of Contents

Title Page

Copyright

Begin Reading

Index

About the Author

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Personal Finance For Canadians For Dummies®, 7th Edition

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright © 2024 by Eric Tyson & Tony Martin. All rights reserved, including rights for text and data mining and training of artificial technologies or similar technologies.

Media and software compilation copyright © 2024 by Eric Tyson & Tony Martin, Inc. All rights reserved, including rights for text and data mining and training of artificial technologies or similar technologies.

Published simultaneously in Canada

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Introduction

You’re probably not a personal finance expert, for good reason. Historically, Personal Finance 101 hasn’t been offered in schools — not in high school, university, or even graduate programs. Thankfully, a small but growing number of schools are offering personal-finance-type courses. Of course, every school should.

However, even if you got some financial education and acquired some financial knowledge over the years, you’re likely a busy person who doesn’t have enough hours in the day to get everything done. So, you want to know how to diagnose your financial situation efficiently (and painlessly) to determine what you should do next. Unfortunately, after figuring out which financial strategies make sense for you, choosing specific financial products in the marketplace is often overwhelming. You have literally thousands of investment, insurance, and loan options to choose from. Talk about information overload!

To further complicate matters, you probably hear about most products through advertising that can be misleading, if not downright false. Of course, some ethical and outstanding firms advertise, but so do those that are more interested in converting your hard-earned income and savings into their short-term profits. And they may not be here tomorrow when you need them.

Perhaps you’ve ventured online and been attracted to the promise of “free” advice. Unfortunately, discerning the expertise and background (and even identity) of those behind various blogs and websites is too often impossible. And, as we discuss in this book, conflicts of interest (many of which aren’t clearly disclosed) abound online.

Despite the development of new media and new financial products and services, folks keep making the same common financial mistakes — procrastinating and lack of planning, wasteful spending, falling prey to financial salespeople and pitches, failing to do sufficient research before making important financial decisions, and so on. This book can keep you from falling into the same traps and get you going on the best paths.

As unfair as it may seem, numerous pitfalls await you when you seek help for your financial problems. The world is filled with biased and bad financial advice. We both constantly see and hear about the consequences of poor advice. All too often, financial advice ignores the big picture and focuses narrowly on investing. Because money is not an end in itself but a part of your whole life, this book helps connect your financial goals and challenges to the rest of your life. You need a broad understanding of personal finance that includes all areas of your financial life: spending, taxes, saving and investing, insurance, and planning for major goals like buying a home, someday running your own business, investing for your future, retiring, and so on.

Even if you understand the financial basics, thinking about your finances in a holistic way can be difficult. Sometimes you’re too close to the situation to be objective. Your finances may reflect the history of your life more than they reflect a comprehensive plan for your future.

You want to know the best places to go for your circumstances, so this book contains specific, tried, and proven recommendations. We also suggest where to turn next if you need more information and help.

About This Book

The book you hold in your hands reflects hard work and brings you the freshest material for addressing your personal financial quandaries. Here are some of the updates we’ve made to the book in this edition:

Complete coverage of the latest tax laws and rules and how best to take advantage of tax changes in 2018 and beyond affecting individuals, families, investors, and small businesses

Expanded and updated coverage of the best ways to shop online (and its changing dangers) and from retail stores

The latest changes and rules for Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs), and Tax-Free Savings Accounts (TFSAs), and how best to take advantage of them

Updated investment recommendations for exchange-traded funds, mutual funds, international investments, real estate, and more

The latest information on government assistance programs, the Canada Pension Plan and Quebec Pension Plan, and Old Age Security, and what all this means in terms of how you should prepare for and live in retirement

Revised recommendations for where to get the best insurance deals

Coverage of the best personal finance apps

Expanded and updated coverage of how to use and make sense of the news and financial resources (especially online)

Aside from being packed with updated information, another great feature of this book is that you can read it from cover to cover if you want, or you can read each chapter and part without having to read what comes before or after. Handy cross-references direct you to other places in the book for more details on a particular subject. If you like, you can skip the sidebars (shaded boxes) and text marked with the Technical Stuff icon; that info is interesting but not essential.

Foolish Assumptions

In writing this book, we made some assumptions about you, dear reader:

You want expert advice about important financial topics (such as paying off and reducing the cost of debt, planning for major goals, making wise investments), and you want answers quickly.

You want a crash course in personal finance, and you’re looking for a book you can read to help solidify major financial concepts and get you thinking about your finances in a more comprehensive way.

This book is basic enough to help novices get their arms around thorny financial issues. But it also challenges advanced readers to think about their finances in a new way and identify areas for improvement.

Icons Used in This Book

The icons in this book help you find particular kinds of information that may be useful to you.

The Tip icon highlights ways to make the most of your money, as well as the best financial products in the areas of investments, insurance, and so on. When you see this icon, you’re sure to find a moneysaving strategy or a product that can help you reach your goals.

The Remember icon points out information that you’ll definitely want to remember.

The Warning icon marks things to avoid and points out common mistakes people make when managing their finances. We also use the Warning icon to alert you to scams and scoundrels who prey on the unsuspecting.

The Technical Stuff icon appears beside discussions that aren’t critical if you just want to understand basic concepts and get answers to your financial questions. You can safely ignore these paragraphs, but reading them can help deepen and enhance your personal financial knowledge.

Beyond the Book

In addition to what you’re reading right now, this product also comes with a free access-anywhere Cheat Sheet that includes debt reduction strategies, more information on RRSPs, and tips for improving your credit score. To get this Cheat Sheet, simply go to www.dummies.com and type Personal Finance For Canadians For Dummies Cheat Sheet in the Search box.

Where to Go from Here

This book is organized so you can go wherever you want to find complete information. Want advice on investing strategies, for example? Go to Part 3 for that. You can check out the table of contents to find broad categories of information and a chapter-by-chapter rundown of what this book offers, or you can look up a specific topic in the index.

If you’re not sure where you want to go, you may want to start at the beginning with Part 1. It gives you all the basic info you need to assess your financial situation and points to places where you can find more detailed information for improving it.

Part 1

Getting Started with Personal Finance

IN THIS PART …

Understand your level of financial literacy.

Grasp the building blocks that form your financial foundation.

Assess your current personal financial health.

Set and accomplish personal and financial goals.

Chapter 1

Embracing Financial Literacy

IN THIS CHAPTER

Defining what financial literacy includes and means

Looking at what your parents and others taught you about money

Questioning reliability and objectivity

Overcoming real and imagined barriers to financial success

A continuing stream of studies has indicated that many Canadians are, by and large, financially illiterate. The vast majority of survey respondents have “failing” scores — meaning that they often struggled just to answer half of the questions correctly.

We know from our many, many years of work as personal financial teachers, trainers, writers, and commentators that many folks do indeed have significant gaps in their personal financial knowledge. Though more folks have greater access today to more information than in prior generations, the financial world has grown more complicated, and there are more choices, and pitfalls, than ever before.

Unfortunately, most Canadians don’t know how to manage their personal finances because they were never taught how to do so. Their parents may have avoided discussing money in front of them, and most high schools, colleges, and universities lack courses that equip students with this vital, lifelong-needed skill.

Some people are fortunate enough to learn the keys to financial success at home, from knowledgeable friends, and from the best expert-written books like this one. Others either never discover important personal finance concepts or they learn them the hard way — by making lots of costly mistakes. People who lack knowledge make more mistakes, and the more financial errors you commit, the more money passes through your hands and out of your life. In addition to the enormous financial costs, you experience the emotional toll of not feeling in control of your finances. Increased stress and anxiety go hand in hand with not mastering your money.

This chapter examines what topics fall under the heading of “financial literacy” and where people find out about finances, and it helps you decide whether your current level of knowledge is holding you back. You can find out how to improve your financial literacy and take responsibility for your finances, putting you in charge and reducing your anxiety about money. After all, you have more important things to worry about, like what’s for dinner.

What Being Financially Literate Means

We start with the basics. What exactly are we talking about when it comes to being literate in personal finance? Following are the three key subjects to become acquainted with:

Managing your everyday transactions:

We cover accounting for money in the short term that passes through your hands and your transaction accounts.

Investing for the long term:

We discuss the best ways to invest money for better returns and longer-term purposes.

Protecting your money:

We provide an overview on the generally less popular but highly important topic of protecting your income and assets with insurance.

In addition to these major topic areas, the field of personal finance includes plenty of jargon. As you read this book, you'll become familiar with the terminology, which will boost your confidence and your decision-making skills.

Starting with the basics: Budgeting and transaction accounts

If you’re like most people, as you earn money, much of it too quickly passes through your hands or, more specifically, into and out of your transaction accounts. As you surely know, a hefty chunk of money you earn is siphoned off to federal and provincial taxes. What’s left is used to pay your monthly living expenses, such as housing, food, utilities, clothing, and hopefully some entertainment and recreation. Chapter 2 delves into the different kinds of transaction accounts and how to use them.

Managing your monthly living expenses (including taxes) and budget and establishing and working toward financial goals take time and effort. Parts 1 and 2 help you accomplish these important tasks.

Making your money work for you: Investing

When you’re spending less than you earn and are able to add some more money to your savings each month, you will have the pleasant but challenging problem of deciding where and when to invest your savings. Or maybe you already have additional money you want to invest so it will work harder for you.

The world of investments is complicated and filled with pitfalls. That contributes to some folks leaving their excess money sitting in their everyday — and low-interest — transaction accounts by default. While you could do worse (by losing money in poor investments), you can certainly do better — and you probably actually need to do better in order to accomplish your financial goals. Part 3 covers all things investing and helps you master that important task.

Protecting your income and assets: Insurance

When you’re earning money and have some assets (for example, a car, house, and so forth), insurance protects you against both the loss of that income and the loss of — or damage to — your assets. If others are dependent upon your employment income, you likely need some life insurance. Even without dependents, you probably rely on your own income and thus should have adequate disability insurance.

Assets like a car and home require sufficient insurance protection. And, as your investments and net worth grow, having some excess liability insurance to protect that makes sense as well. See Part 4 for the important details on insurance.

Talking Money at Home

We were both fortunate — our parents taught us a lot of things that have been invaluable throughout our lives, and among those were sound principles for earning, spending, and saving money. Our parents had to know how to do these things because they were raising large families, often on one modest income. They knew the importance of making the most of what you have, and of passing that vital skill on to your kids.

However, most parents’ financial knowledge has some significant gaps. Many people have observed firsthand the struggles of parents dealing with making decisions about everything from buying and financing a home to handling retirement money after being laid off to helping to support their own parents.

In many families, money is a taboo subject — parents don’t level with their kids about the limitations, realities, and details of their budgets. Some parents believe that dealing with money is an adult issue and that children should be insulated from it so they can enjoy being kids. Others readily admit the many holes in their financial knowledge and thus don’t feel comfortable teaching their kids about personal finance. In too many families, kids hear about money only when disagreements and financial crises bubble to the surface. Thus begins the harmful cycle of children having negative associations with money and financial management.

In other cases, parents, with the best of intentions, do try to teach their children about personal finance, but they end up passing on a harmful combination of wrong assumptions, incorrect principles, and bad money-management habits. You may have picked up from a parent, for example, that buying things is a good way to cheer yourself up. Or you may have witnessed a family member maniacally chasing get-rich-quick business and investment ideas. Now, we’re not saying that you shouldn’t listen to your parents. But in the area of personal finance, as in any other area, poor family advice and modelling can be problematic.

Think about where — or if — your parents learned about money management, and then consider whether they had the time, energy, or inclination to research their options before making their decisions. For example, if they didn’t do enough research or had faulty information, your parents may mistakenly have thought that banks were the best places to invest money, or that buying stocks was like going to Las Vegas. (You can find the best places to invest your money in Part 3 of this book.)

In still other cases, the parents have the right approach, but the kids do the opposite out of rebellion. For example, if your parents spent money carefully and thoughtfully, and often made you feel denied, you may find yourself doing the opposite, buying yourself gifts the moment any extra cash comes your way.

Although you can’t change what the educational system and your parents did or didn’t teach you about personal finances, you now have the ability to find out what you need to know to manage your finances.

If you have children of your own, don’t underestimate their potential or send them out into the world without the skills they need to be productive and happy adults. Buy them some good financial books when they head off to university or begin their first job.

PERSONAL FINANCE AT SCHOOL

In schools, the main problem with personal finance education is the lack of classes, not that kids already know the information or that the skills are too complex for children to understand.

Nancy Donovan teaches personal finance to her fifth-grade math class as a way to illustrate how math can be used in the real world. “Students choose a career, find jobs, and figure out what their taxes and take-home paycheques will be. They also have to rent apartments and figure out a monthly budget,” says Donovan. “Students like it, and parents have commented to me how surprised they are by how much financial knowledge their kids can handle.” Donovan also has her students invest $10,000 (play money) and then track their investments’ performance.

Urging schools to teach the basics of personal finance is just common sense. Children need to be taught how to manage a household budget, the importance of saving money for future goals, and the consequences of overspending. Unfortunately, few schools offer in-depth classes like Donovan’s. In many cases, the financial basics aren’t taught at all.

In the minority of schools that do offer personal finance–related courses, the classes are often in economics (and an elective at that). “Archaic theory is being taught, and it doesn’t do anything for the students as far as preparing them for the real world,” says one high school principal. Having taken more than our fair share of economics courses in university, we understand the principal’s concerns.

Some people argue that teaching financial basics to children is the parents’ job. However, this well-meant sentiment is what we largely rely on now, and for all too many, it isn’t working. In some families, financial illiteracy is passed on from generation to generation.

Education takes place in the home, on the streets, and in the schools. Therefore, schools must bear some responsibility for teaching this skill. However, if you’re raising children, remember that no one cares as much as you do or has as much ability to teach the important life skill of personal money management.

Identifying Unreliable Sources of Information

Most folks know that they’re not financial geniuses. So, they set out to take control of their money matters by reading about personal finance or consulting a financial advisor.

But reading and seeking advice to find out how to manage your money can be dangerous if you’re a novice. Misinformation can come from popular and seemingly reliable information sources, as we explain in the following sections. (Because the pitfalls are numerous and the challenges significant when choosing an advisor, we devote Chapter 20 to the financial planning business and tell you what you need to know to avoid being duped and disappointed.)

The dangers of free financial content online

In addition to being able to quickly access what we want, the other major attraction of the internet is the abundance of seemingly free websites providing piles of apparently free content. Appearances, however, can be decidedly deceiving!

While there are exceptions to any rule, the fact of the matter is that the vast majority of websites purporting to provide a seemingly never-ending array of “free” content are rife with conflicts of interest and quality problems due to the following:

Advertising:

Any publication that accepts advertising has a potential conflict of interest because it may not want to publish articles that would upset its advertisers. This mindset can stand in the way of telling consumers the unvarnished truth about various products and services. For example, credit card companies aren’t very interested in advertising someplace that publishes articles highlighting the negatives of credit cards. (Check out the section “

Publishers pandering to advertisers

” later in this chapter for more on the power of advertising to influence the financial information you encounter online, on TV, and elsewhere.)

Advertorials:

Too many website owners are unwilling or unable to pay real writers for quality content and instead publish articles that are written and provided by advertisers. These pieces of “content” are known as

advertorials

or

sponsored content

and, in the worst cases, aren’t even clearly labeled as advertisements, which is precisely what they are.

Affiliate relationships:

Many companies pay “referral fees” to websites that bring in new customers. Here’s how that practice causes major conflicts of interest. On a financial website, you read a glowing review of a particular financial product or service. And the site provides a helpful link to the website of the provider of that product or service. Unbeknownst to you, when you click on that link and buy something, the seller kicks money back to the “affiliate” who reeled you in. At a minimum, such relationships should be clearly disclosed and detailed in any review.

Insufficient editorial oversight:

At most established, quality print publications, there are usually numerous editors who oversee the publication and all its articles. This structure helps ensure the accuracy of what gets into print (although bias, such as political bias, isn’t necessarily controlled). Unfortunately, the shoestring budget on which many websites operate precludes these quality-control checks and balances. Thus, sites operated by non-experts proffering advice place you at great risk.

Lack of accountability:

In part because of a lack of editorial oversight, there’s also often a lack of accountability for advice given online. This situation is especially problematic on the numerous sites that are run without disclosure of who is actually in charge of the site and/or who is writing the articles. Although such anonymity may be helpful to the site and its content providers, it’s certainly not in your best interests because it prevents you from checking out the background, qualifications, and track record of the providers.

The dangers of following financial gurus (and celebrities)

While new mediums may come as others fade, the same types of dangers continue to trip up people with their money. In this section, we highlight what you can do to protect yourself from being led astray by supposed financial gurus and celebrities.

Know who’s talking

Before you take financial advice from anyone, examine their background, including professional work experience and education credentials. This is true whether you’re getting advice from an advisor, writer, talk show host, or TV financial reporter.

If you can’t easily find such information, that’s usually a red flag. People with something to hide or a lack of something redeeming to say about themselves usually don’t promote their background.

Of course, just because someone seems to have a relatively impressive-sounding background doesn’t mean that they have your best interests in mind or have honestly presented their qualifications.

You can’t always accept stated credentials and qualifications at face value, because some people lie (witness the billions lost to hedge fund Ponzi-scheme-man Bernie Madoff). You can’t sniff out liars by the way they look, their résumé, their gender, or their age. You can, however, increase your chances of being tipped off by being skeptical (and by checking out the “Guru Watch” section of co-author Eric’s website at www.erictyson.com).

Beware celebrity endorsers

Celebrities were used big-time as endorsers in recent years in the problematic cryptocurrency space. You’ve perhaps heard of the now defunct and bankrupt offshore cryptocurrency exchange FTX, which spent hundreds of millions of dollars on advertising and paying celebrity endorsers like basketball stars Shaquille O’Neil and Stephen Curry, NFL quarterbacks Trevor Lawrence and Tom Brady, comedian Larry David, supermodel Gisele Bündchen, tennis great Naomi Osaka, baseball stars David “Big Papi” Ortiz and Shohei Ohtani, and Shark Tank’s Kevin O’Leary.

In some of the advertisements for FTX, the well-paid celebrity endorsers not only joked about not knowing much about cryptocurrencies, but then suggested that that was why they used FTX, implying that FTX was the expert. In other ads, some celebrities acted like they were calling friends to ask if they too were in to invest through FTX. Lawyers have filed a class action lawsuit against the celebrities for being bought off, failing to disclose large endorsement fees, and misleading the public to invest billions of dollars in FTX, which turned out to be nothing but a wholescale fraud.

Always remember that celebrities may have a talent that brings them fame and fortune, but they are no smarter than anyone else when it comes to their personal finances. Furthermore, and too often, they have enormous (and rarely well disclosed) conflicts of interest in what they tout.

Watch out for outrageous performance claims

You can see a number of hucksters for what they are by using common sense in reviewing some of their outrageous claims. Some sources of advice, such as the late Wade Cook’s investment seminars, lure you in by promising outrageous returns. The stock market has generated average annual returns of about 9 percent over the long term. However, Cook, a former taxi driver, promoted his seminars as an “alive, hands-on, do the deals, two-day intense course in making huge returns in the stock market. If you aren’t getting 20 percent per month, or 300 percent annualized returns on your investments,” he said, “you need to be there.” (We guess we do, as does every investment manager and individual investor we know!)

Cook’s get-rich-quick seminars, which cost more than $6,000, were so successful at attracting people that his company went public and generated annual revenues of more than $100 million. Cook’s “techniques” included trading in and out of stocks and options after short holding periods of weeks, days, or even hours. His trading strategies can best be described as techniques that are based upon technical analysis — that is, charting a stock’s price movements and volume history, and then making predictions based on those charts.

The perils of following an approach that advocates short-term trading with the allure of high profits are numerous:

You’ll rack up enormous brokerage commissions.

You won’t make big profits — quite the reverse. If you stick with this approach, you’ll underperform the market averages.

You’ll make yourself a nervous wreck. This type of trading is gambling, not investing. Get sucked up in it, and you’ll lose more than money — you may also lose the love and respect of your family and friends.

If Cook’s followers were able to indeed earn the 300 percent annual returns his seminars claimed to help you achieve, any investor starting with just $10,000 would vault to the top of the list of the world’s wealthiest people (ahead of Bill Gates and Warren Buffett) in just 11 years!

Publishers pandering to advertisers

Thousands of publications and media outlets — websites, blogs, podcasts, radio, TV, magazines, and even some newspapers still, and so on — dole out personal financial advice and perspectives. Although some of these “service providers” collect revenue from subscribers, virtually all are dependent — in some cases, fully dependent (especially the internet, radio, and TV) — on advertising dollars. Although advertising is a necessary part of capitalism, advertisers can taint and, in some cases, dictate the content of what you read, listen to, and view.

Be sure to consider how dependent a publication or media outlet is on advertising. We find that “free” publications, websites/blogs, podcasts, radio, and TV are the ones that most often create conflicts of interest by pandering to advertisers. (Almost all derive all their revenue from advertising.)

Much of what’s on the internet is advertiser-driven as well. Many of the investing sites on the internet offer advice about individual stocks. Interestingly, such sites derive much of their revenue from online brokerage firms seeking to recruit customers. (See Part 3 for more information about your best investment options.)

Keep in mind that you have virtually zero privacy on “free” websites because they make money by selling access to website visitors like you to companies and people with something to sell.

As you browse online, read various publications, watch TV, or listen to podcasts and radio, note how consumer-oriented these media are. Do you get the feeling that they’re looking out for your interests? For example, if lots of auto manufacturers advertise, does the media outlet ever tell you how to save money when shopping for a car or the importance of buying a car within your means? Or are they primarily creating an advertiser-friendly broadcast or publication?

Jumping over Real and Imaginary Hurdles to Financial Success

Perhaps you already know that you really should live within your means, buy and hold sound investments for the long term, and secure proper insurance coverage; however, you just can’t bring yourself to do these things. Everyone knows how difficult it is to break problematic habits that have been practised for many years. The temptation to spend money lurks everywhere. Ads show attractive and popular people enjoying the fruits of their labours — a new car, an exotic vacation, and a lavish home.

Maybe you felt deprived by your tightwad parents as a youngster, or maybe you’re bored with life and like the adventure of buying new things. If only you could hit it big on one or two investments, you think, you could get rich quick and do what you really want with your life. As for disasters and catastrophes, well, those things happen to other people, not to you. Besides, you’ll probably have advance warning of pending problems, so you can prepare accordingly, right?

Your emotions and temptations can get the better of you. Certainly, part of successfully managing your finances involves coming to terms with your shortcomings and the consequences of your behaviours. If you don’t, you may end up enslaved to an unsatisfactory job so you can keep feeding your spending addiction. Or you may spend more time with your investments than you do with your family and friends. Or unexpected events may leave you reeling financially; disasters and catastrophes can happen to anyone at any time.

Discovering what (or who) is holding you back

A variety of personal and emotional hurdles can get in the way of making the best financial moves. As we discuss earlier in this chapter, a lack of financial knowledge (which stems from a lack of personal financial education) can stand in the way of making good decisions.

But we’ve seen some people caught in the psychological trap of blaming something else for their financial problems. For example, some people believe that adult problems can be traced back to childhood and how they were raised.

We don’t want to disregard the negative impact particular backgrounds can have on some people’s tendency to make the wrong choices during their lives. Exploring your personal history can certainly yield clues to what makes you tick. That said, adults make choices and engage in behaviours that affect themselves as well as others. They shouldn’t blame their parents for their own inability to plan for their financial futures, live within their means, and make sound investments.

Some people also tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial (and personal) problems would melt away. Our experience working and speaking with people from diverse economic backgrounds has taught us that achieving financial success — and, more importantly, personal happiness — has much less to do with how much income a person makes but rather with what they do with what they have. We know financially wealthy people who are emotionally poor even though they have all the material goods they want. Likewise, we know people who are quite happy, content, and emotionally wealthy even though they’re struggling financially.

Most Canadians — even those who have not had an “easy” life — ought to be able to come up with numerous things to be happy about and grateful for: a family who loves them; friends who laugh at their stupid jokes; the freedom to catch a movie, play some pickleball or read a good book; or a great singing voice, a good sense of humor, or a full head of hair.

Developing good financial habits

After you understand the basic concepts and know where to buy the best financial products when you need them, you’ll soon see that managing personal finances well is not much more difficult than other things you do regularly, like tying your shoelaces and getting to work each day.

Regardless of your income, you can make your dollars stretch further if you practise good financial habits and avoid mistakes. In fact, the lower your income, the more important it is that you make the most of your income and savings (because you don’t have the luxury of falling back on your next big paycheque to bail you out).

More and more industries are subject to global competition, so you need to be on your financial toes now more than ever. Job security is waning; layoffs and retraining for new jobs are increasing. Putting in 30 years for one company and retiring with the gold watch and lifetime pension are becoming as rare as never having problems with your computer.

Speaking of company pensions, odds are increasing that you work for an employer that has you save toward your own retirement instead of providing a pension for you. Not only do you need to save the money, you also have to decide how to invest it. Chapter 13 can help you get a handle on investing in retirement plans.

Personal finance involves much more than managing and investing money. It also includes making all the pieces of your financial life fit together; it means lifting yourself out of financial illiteracy. Like planning a vacation, managing your personal finances means forming a plan for making the best use of your limited time and dollars.

Intelligent personal financial strategies have little to do with your gender, ethnicity, or marital status. All people need to manage their finances wisely. Some aspects of financial management become more or less important at different points in your life, but for the most part, the principles remain the same for everyone.

Knowing the right answers isn’t enough. You have to practise good financial habits just as you practise other good habits, such as brushing your teeth, eating a healthy diet, and getting some exercise.

What you do with your money is a quite personal and confidential matter. In this book, we try to provide guidance that can keep you in sound financial health. You don’t have to take it all — pick what works best for you and understand the pros and cons of your options. But from this day forward, please don’t make the easily avoidable mistakes or overlook the sound strategies that we discuss in this book.

Throughout your journey, we hope to challenge and even change the way you think about money and about making important personal financial decisions — and sometimes even about the meaning of life. No, we’re not philosophers, but we do know that money is connected to many other parts of our lives.

Chapter 2

Establishing a Financial Foundation

IN THIS CHAPTER

Sizing up where your money comes from and where it goes

Understanding transaction and investment accounts

Creating a budget to follow where your money goes

Taking stock of your credit history

What are the basic building blocks for establishing your financial foundation? Understanding cash flow, knowing the different types of accounts through which your money can be held and accessed, keeping yourself in line with a budget, and finding out how to build and improve your credit score.

It’s important to understand how to manage your spending and cash flow, which is the difference between your earnings and your expenditures because accomplishing a positive cash flow enables you to work toward future financial and associated personal goals.

You also should understand the different types of accounts you can choose from to receive your pay or other income, pay bills, build up savings, or invest for the future. (In Chapter 10, we explain how to find the best of these different types of accounts and get better terms and potential returns. Chequing, transaction, and savings-type accounts are offered by banks, credit unions, and other types of financial institutions. Far more financial institutions offer investment accounts, which makes choosing even more overwhelming.

Understanding how to establish a budget is also fundamental. Even though a budget may sound daunting and a sure strike to anything fun, it doesn’t have to be and, in fact, is a great way to get a leg up on your savings so you have the future funds to pay for the things you want.

Finally, you should understand how to build and improve your credit score because you will likely want or need to borrow money to accomplish important goals such as buying a home, starting a business, or paying for some higher education.

Your Cash Flow: Money In, Money Out

Every month, you have money coming in and money going out. Most folks have never had sufficient training in how to manage their personal finances and do it well. Enter this book!

Your cash flow, over a specific time period such as a week, a month, or a year, is simply the difference between your income coming in and your expenditures going out. If it’s positive — that is, your income exceeds your expenditures — you’re saving money and have more to invest. When your cash flow is negative — in other words, when your expenditures are greater than your income — you’re either burning through savings or accumulating debt.

Uncovering where your money goes

Brushing your teeth, eating a diverse and healthy diet, and exercising regularly are good habits. Spending less than you earn and saving enough to meet your future financial objectives are the financial equivalents of these habits.

Despite relatively high incomes compared with the rest of the world, some Canadians have a hard time saving a solid percentage of their incomes. Why? Often, it’s because they spend too much — sometimes far more than necessary. We don’t know the details of your personal situation, and please understand that there can be reasons somewhat beyond your control, especially in the short term, as to why your income is quickly consumed by spending. But the basic idea is to make the effort to continuously spend less than what you make.

The first step to saving more of the income that you work so hard for is to figure out where that income typically gets spent. Doing a spending analysis helps you determine where your cash is flowing. Do the spending analysis (see Chapter 5) if any of the following apply to you:

You aren’t saving enough money to meet your financial goals. (If you’re not sure whether this is the case, please see

Chapter 4

.)

You feel as though your spending is out of control, or you don’t really know where all your income goes.

You’re anticipating a significant life change (for example, marriage, leaving your job to start a business, having children, retiring, and so on).

If you’re already a good saver, you may not need to complete the spending analysis. After you save enough to accomplish your goals, we don’t see as much value in continually tracking your spending. You’ve already established the good habit — saving. Tracking exactly where you spend your money month after month is not the good habit. (You may still benefit from perusing our smarter spending recommendations in Chapter 7.)

The immediate goal of a spending analysis is to figure out where you typically spend your money. The long-range goal is to establish a good habit: maintaining a regular, automatic savings routine.

Knowing where your money is going each month is useful, and making changes in your spending behaviour and cutting out the fat so you can save more money and meet your financial goals is terrific. However, you may make yourself and those around you miserable if you’re obsessive about documenting precisely where you spend every single dollar and cent.

Saving what you need to achieve your goals is what matters most.

Sizing up your income

In addition to reining in your spending, you can boost your cash flow by finding ways to earn more money. Most folks have a regular job where they work as an employee. But you may be interested in or already running your own small business or side hustle.

Investing in your career

We don’t want to leave you with the impression that financial success means starting your own small business or buying or investing in someone else’s small business. Over the years, in our work analyzing how people manage their income and investments and from observing friends and colleagues, we’ve witnessed plenty of people succeed working for employers.

You can and should invest in your career. Following are some time-tested, proven ways to do that:

Networking:

Some people wait to network until they’ve been laid off or are really eager or desperate to change jobs. Take an interest in what others do for a living, and you’ll learn and grow from the experience, even if you choose to stay with your current employer or in your chosen field. In addition to personal networking, check out LinkedIn, the social network for business professionals.

Making sure you keep learning:

Whether it’s reading quality books or other publications or taking some night courses, find ways to build on your knowledge base.

Considering the risk in the status quo:

Many folks are resistant to change and get anxious thinking about what can go wrong when taking a new risk. When coauthor Eric knew he was ready to walk away from a six-figure job with a prestigious management consulting firm and open his own financial counselling firm, some of his relatives and friends had difficulty understanding why he’d walk away from that. That’s not to say that they didn’t have some valid concerns; they just weren’t really considering the risks inherent in his staying put and didn’t see the upside of his small-business venture.