Improving our financial literacy is an important step in dealing with this stress so I thank you for the opportunity to answer your questions. Before I start I would like to mention some resources for personal financial decision making that are readily available through USASK. The university offers free financial wellness sessions in January of each year. Sun Life also typically offers individual sessions on campus and available to meet virtually or by telephone. Links to these services are provided below. Finally, the expert staff at the pensions office, firstname.lastname@example.org, are available for your pension-related questions.
My responses to your questions are structured to give the simplest and most basic answer first, followed by an example, where appropriate, and then resources for those who wish to dig deeper.
Marie Racine, Associate-Professor of Finance, Edwards School of Business
Disclaimer: Financial wellness and literacy are of longstanding academic interest to me. My choices of resource links as suggested below are based on my decades-long search for appropriate resources and my quest for the promotion of financial literacy and wellness. Neither professional nor personal affiliation has influenced my choice of resources.
Answers were submitted on June 16, 2020.
1. For an 'average' family, which financial vehicle is better for saving for retirement, a tax-free savings account or RRSP's, and why?
If you want to invest for retirement then an RRSP is generally preferred because it gives you a tax shield at contribution and allows you to defer taxes until retirement when you are likely in a lower tax bracket. The TFSA is great if you need flexibility with your investments but the RRSP is specific to retirement savings. The following chart provides a brief comparison of the two investment vehicles.
|Investment goal||Flexible||Retirement savings|
|Contributions||No tax shield||Deductible from taxable income|
|Income earned inside plan and retained in the plan||Not taxed||Not taxed|
Does not depend on earned income
Depend on earned income
|Money withdrawn from plan||Not taxed||Taxed in year of withdrawal 3,4|
|Termination Date||None||Age 71|
1. TFSA = tax-free savings account is an account that can hold investments and the contributions and earnings on those investments, whether dividends, interest, or capital gains are not taxed when made/earned or withdrawn.
2. RRSP = registered retirement savings plan can also hold a variety of investments. Growth in the investments is not taxed until withdrawn. Contributions to an RRSP are deductible from taxable income. Withdrawals are taxed.
3. Some exceptions apply.
4. The objective of the RRSP is to encourage retirement savings so, although withdrawals can be made at any time, they are best, from a tax perspective, when your marginal tax rate is lower (i.e. after retirement).
Eg. Assume an individual makes a $100 contribution to an RRSP and has a marginal tax rate of 33%. The RRSP contribution provides a tax shield of $33 (.33*$100) which leads to a reduction in taxes of $33.
2. I am considering no longer using a financial advisor and instead investing through companies like Questrade with premade portfolios. Are their claims to be able to save you money by cutting down on fees accurate?
The generic client of a discount broker is an individual who wants to direct and monitor her/his own investment strategy and does not need assistance with investment decisions, tax, and legacy planning. The alternatives range from a full-service broker (with higher fees) to a combination of an online broker and a fee-for-service financial advisor. Choose the level of services and fees that best suits your needs.
Companies like Questrade are online or discount brokers whose basic service delivers a trading platform without providing research or advice on the transaction. Because of this structure, the transaction fees are less. When choosing an online broker consider: breadth of coverage and products, membership fees? Inactivity fees? Minimum balance required? Account opening and closing fees?
3. Is it better to pay off your credit card each month or to pay off a little at a time and the rest into a savings account?
Credit card companies charge substantially more on unpaid balances than you can earn on a savings account. Since your penalty for non-payment is much higher than what you can earn on your savings account you are wise to pay off your credit card each month.
For a simple example that ignores taxes, assume you have $100 to either deposit in your savings account that earns .05% per year or you could pay the $100 balance on your credit card and avoid paying a 20% interest charge on that balance. If you deposit the $100 into your savings account, at the end of one year you will have earned $.05. However, the cost of not paying the $100 balance on your credit card is $20 so the net outcome of the choice of saving and not paying down debt is a net cost of $19.95. This example uses realistic credit card interest and savings account rates.
4. Living with contracts has meant that I haven't felt confident enough to purchase real estate, so that makes me wonder if I will be vulnerable in retirement if I don't own a property. Should people be investing in the stock market right now, or be making more conservative investments (e.g. GICs)?
Each of the investment categories that you mention, real estate, the stock market (equities), and money market funds (GICS) has its own characteristics in terms of the expected reward and risk. For example, real estate tends to be less liquid than a GIC. The appropriate investment strategy and asset mix depends on many factors including your tolerance for risk, income security, and your stage in the life cycle. To help you assess these you might start with the free Bright Start Tool on the Sun Life (our service provider) at https://www.sunlife.ca/en/tools-and-resources/tools-and-calculators/bright-start-tool/. You do not have to log onto SunLife to use this tool.
If the financial markets appear to be bottoming, some experts will suggest it is a great time to buy equities but other experts may point out the volatility of the financial markets. The one point of agreement is the impossibility of timing the market.
You may also benefit from a discussion with a finance professional such as a CFP (certified financial planner).
5. The bank of Canada prime lending rate is at an all-time low, but with the market seeming to be rebounding it may not stay there for long. What can consumers or borrows (sic) do in order to take advantage of those low-interest rates while they exist, even if their mortgage is not up for renewal right away?
The stock market often rebounds before the economy and, as we saw this week, the stock market is still very volatile and hard to predict. In addition to the usual market uncertainties and COVID-19 complications, we have a new Bank of Canada Governor setting the Canadian prime rate.
Contact your mortgage holder to discuss the terms of your mortgage and the possibility of refinancing. Do you have a fixed or variable rate mortgage? Do you have an open, closed or convertible mortgage? What are the penalty and the administration costs for refinancing? How long do you plan to stay in the house? Although financial institutions have online mortgage calculator tools, consult with a mortgage specialist to get a comprehensive view of all the costs associated with refinancing and compare the amortization schedules and your net position under the existing and proposed scenarios to determine if it will be worth refinancing your home (see link below for a good article on refinancing).
Additional resources available to you through the University of Saskatchewan:
Employee and Family Assistance Program (EFAP)
Most financial institutions offer financial education tools on their website. In addition, McGill University offers a free online financial literacy program.
High School – 2nd year university
- Financial Empowerment: Personal Finance for Indigenous and non-Indigenous People is available for free at: https://curriculum.gov.sk.ca/webapps/moe-curriculum-BBLEARN/FullResourceList?id=488
As of Feb 6, 2020, two financial literacy courses based on this book have been made available to all Saskatchewan school divisions.
- The Canadian Foundation for Economic Education
The Manitoba Securities Commission has developed a free program, Make it Count, designed to encourage financial learning in practical situations. Designed for grades 4 to 8.
Indigenous (age 15-30)
Money Stories, Grounding Indigenous Youth in the Lessons of their Elders. A SEED (Supporting Employment and Economic Development) program, Winnipeg Inc.