Brief Summary
This video serves as a beginner's guide to financial literacy, highlighting its importance in achieving financial goals and a comfortable lifestyle. It covers key areas such as earning income, investing, saving, spending, and understanding credit. The video stresses the significance of making informed financial decisions, managing money effectively, and protecting oneself financially to build wealth and secure a better future.
- Financial literacy is crucial for making smart financial decisions.
- Multiple income streams, both active and passive, can increase financial security.
- Saving and investing are essential for reaching financial goals and building wealth.
- Understanding credit and managing debt are vital for financial well-being.
Intro
The video introduces the topic of financial literacy, questioning whether viewers learned about money in school or from their parents. It highlights the importance of understanding how to use money effectively to make sound financial choices, achieve financial goals, and live a comfortable life. The video aims to provide a beginner's guide to financial literacy, especially relevant during Financial Literacy Month in Canada.
What is Financial Literacy
Financial literacy is defined as the ability to make smart financial decisions that enable you to achieve your desired lifestyle. This includes earning income, budgeting, paying off debt, saving, investing, and protecting yourself financially. Being financially literate is crucial because it leads to better financial decisions, more money, and more effective money management. Even with a high-paying job, poor financial literacy can lead to financial struggles, while good money management skills can build wealth even with a lower income. Financial literacy helps you afford better things in life, cover emergency expenses, and approach retirement with confidence. Money is a payment for goods and services, and people trade their time for it, so being efficient with money is essential.
Earning Income
Earning income is the foundation of personal finance. Types of earned income include hourly wages, salary, commissions, tips, and bonuses. When considering a job or career, you should consider the lifestyle you want and whether the job will afford it. Also consider benefits like pension, RSP matching, union benefits, and dental plans. Assess the potential for advancement, the maximum earning potential, and the demand for the career. It's also important to consider whether you'll enjoy the job or if you're only motivated by the money. To increase income, consider multiple income streams, including earned income (9-to-5 job), profit income (business ownership), interest income (high-interest savings accounts, bonds), dividend income (shareholder payouts), rental income (renting out assets), capital gains (selling assets for a profit), and royalty income (income from intellectual property). These income sources can be active (requiring active service) or passive (generating income while you sleep).
Investing
Investing is an essential part of financial literacy. The stock market is an accessible entry point for building wealth through capital gains, dividend income, and compounding. You can invest through self-directed investing (using a brokerage account) or with a robo-advisor. With self-directed investing, consider your investor type (growth, dividend, ETF) and the markets you want to invest in. Choose a brokerage and open a cash account, TFSA (Tax-Free Savings Account), or RRSP (Registered Retirement Savings Plan), prioritising TFSA for its tax-free capital gains. Robo-advisors offer a hands-off approach, picking a portfolio based on your risk tolerance and goals. Real estate investing requires more capital but offers growth through rental income, equity building, and property value appreciation. You can also invest in REITs (Real Estate Investment Trusts) or personal/private businesses, which requires research, a business plan, and potentially self-funding.
Saving
Saving is a crucial aspect of financial literacy, as it enables you to reach financial goals and build wealth. Saving involves spending less money than you make, which can be achieved through budgeting. A budget should include needs, wants, debts, and savings/investments. Tools like the Coho prepaid Visa can help track and manage spending. Paying yourself first, by automatically transferring money into savings as soon as you get paid, is an effective saving strategy. Aim to earn the best interest rate possible on your savings to counter inflation, which erodes the buying power of your money. Savings are best reserved for emergency funds and short-term goals, while investing is more suitable for long-term goals due to its potential for better returns. An emergency fund should start with £1,000 to £2,000 and gradually build up to three to six months of living expenses, depending on factors like job security, health, and dependents.
Spending
Spending is an unavoidable part of financial life, covering necessities like housing, transportation, and food. The choice of spending method—cash, debit card, credit card, or prepaid card—impacts financial management. Cash helps avoid debt and is useful for classified ads, tips, and emergencies, but it's harder to track and can be lost or stolen. Debit cards eliminate the need to carry cash, offer budgeting tools, and allow e-transfers, but may incur monthly fees unless a certain balance is maintained. Credit cards build credit and offer rewards, but require understanding interest rates and can lead to debt if not managed carefully. Prepaid cards offer budgeting tools and cash back without the risk of debt, but don't build credit.
Credit
Credit is an important part of financial literacy. A good credit report and score enable you to get better credit cards and loans with favourable terms and interest rates. There are two types of debt: good debt (student loans, business loans, mortgages) that pays off in the long run, and bad debt (car loans, credit cards) that doesn't. Debt can be a tool to build wealth if used properly, a strategy known as leverage. Protecting yourself financially also involves having insurance (car, home, life, business) to safeguard against hardship and debt. Ensure that your cash and investment accounts are protected under CDIC and CIPF.
How to learn about financial literacy?
To learn about financial literacy, start with free resources like YouTube videos, blogs, podcasts, budget planners, and workshops. You can also buy books, courses, and programs, and seek mentors and experts. The best way to learn is to take action and practice, applying knowledge and learning from mistakes. Start learning as soon as possible, even with little to invest, to gain experience and avoid costly mistakes later. Financial literacy is crucial for achieving financial goals, gaining freedom, and making the most of your time and money.
