In the Philippines, there is usually no finance to manage. For those whose financial lives have changed for the better in Canada, managing money presents a new challenge. Below is a gist of the more important aspects of managing your finances in Canada.
RRSP is a kind of savings that you use for your retirement. It is encouraged by the Canadian government because the government does not want you to be its liability in your old age.
Whatever you keep aside for your RRSP is deducted from your taxable income for the year. The limit of your RRSP savings for the year is 18% of your income (maximum $13,500). If you do not maximize your RRSP savings for the year, you can make up for it in the future.
One strategy for managing your RRSP is to put more in it as your income grows. This way, you end up in a lower income bracket. When you withdraw your RRSP savings after twenty years or so, it becomes taxable income. However, since you will be retired and probably will not have any other income, you will be in a low, if not the lowest tax bracket. More importantly, your savings would have grown substantially by then because of the power of compound interest (your interest earning interest).
There are many ways to invest – through stocks, bonds, mutual funds, and bank savings, to name a few. When you are saving in a regular bank account, you are actually losing money because the interest you earn will be less than the inflation rate.
The riskier your investment is, the bigger is the potential reward. Stocks are the riskiest investment. If the company you invested in closes shop, your stocks will be worthless. On the other hand, if the company is growing fast, the value of your stocks can multiply so many times. If the company slows its growth but earns consistently, then you earn part of its income by way of dividends.
GIC’s and bonds are safer and therefore boring. GIC’s are the Canadian government’s debt. Bonds are usually debts of corporations. The interest you earn from these depends on whether they are long-term or short-term, and the state of the economy (the mechanics of which is too complicated to explain).
If you don’t want to be bothered thinking about how you should partition your savings among many choices, buy into a mutual fund. Your money will be managed by the pros, and they will determine how your money is going to be divided into different kinds of investments. This is a process called diversification. The more diversified you are, the safer your money is.
Inform your financial adviser about your risk tolerance and how long you intend to stay invested. The younger you are and the more years you plan to stay invested, the more risk you can take. Historically, over 20 years, you are ahead if you invest more in stocks than in bonds. The other important thing to remember is to pay your high interest debt first (yes, that credit card) before you invest. It is foolish to earn 8% from your investment, while your debt takes away 24%.
Insure anything that will leave you (or your dependents) devastated when you lose it. Your most important insurance is your life insurance, especially if you have a wife and/or kids who depend on you financially. There are basically two kinds of insurance – the term and the whole life. The term is the least expensive and therefore the smarter way to be insured. Your dependents usually depend on you for only a limited period of time. After 20 years or so, they will probably be earning more money than you. You can stop being insured after you are convinced that they will be okay when you pass away.
The whole life insurance is much more expensive because there’s usually an “investment” or “dividend” component attached to it. Agents are more likely to push this kind of insurance since the insurance company gets more profit, and the agent gets more commission.
Finally, about credit cards. Use it only when absolutely necessary (like in internet purchases and emergencies) or when you are sure that you can pay off the debt within the month (and therefore not incur interest). Credit cards are so readily available and easy to use. The catch is, you pay an atrocious interest rate on your credit card debts. Avoid using cards if you can. And always live within your means!
Also, remember that money is not everything, but you know that already, don't you?
