Personal finance can be complex. Not only can the concepts and rules be challenging, everyone’s situation is also unique: A logical money decision for one individual could be an inappropriate move for another person. And there can be a lot riding on your decisions: your retirement, your children’s education and your lifestyle may be at stake.
At each stage of life not only do your life goals shift but so too does your financial focus. At age 25, budgeting may be your most important concern. At age 50, your investing strategy may dominate your thinking. Fortunately, a greater knowledge of finances can allow people to make more informed choices.
So, before you make your next money move, here’s a chance to gauge your wisdom. We hope this will be a time to test your know-how, an opportunity to learn and motivate you to apply your knowledge to your money issues with fresh eyes.
1) What percentage of your annual income can be contributed to your Registered Retirement Savings Plan (RRSP)?
A. There is no limit
B. 18% of your income, with some exceptions1
C. 10% of your net worth
Investing in mutual funds and other investments within an RRSP can be a great method to benefit you and your family now and in the future. RRSP contributions can lower your taxable income and may even help contribute to a tax refund annually. With annual contributions over time, investments within an RRSP can provide a method of compounding savings to fund your retirement years. You can continue to contribute to an RRSP until the end of the calendar year when you reach the age of 71.
2) When do you pay tax on a withdrawal from a Tax-Free Savings Account (TFSA)?
A. It depends on your income
B. It depends on your RRSP contributions
C. It depends on the spousal contribution
D. You will not pay tax on a TFSA withdrawal
TFSAs help you manage tax in different ways: Contributions within the TFSA are not taxed annually, investments grow tax free and there is no tax on withdrawal. TFSAs represent one method of saving money for short and long-term goals. You can also benefit from a wide range of investments that can be included within a TFSA: mutual funds, Exchange-Traded Funds (ETFs), stocks, bonds and Guaranteed Investment Certificates (GICs).
3) How old does a child have to be to have a Registered Education Savings Plan (RESP) set up for them?
A. One year old
B. One year old but younger if their sibling has an RESP
C. No age minimum so long as the child has a Social Insurance Number
D. No age minimum as long as a parent has an RRSP
The fact that you can begin contributing to an RESP at year one of a child’s life means you have a number of years to contribute to your child’s education before they actually need to use the funds. The Canada Education Savings Grant is also available, to a maximum $500 annually (up to $7,200 in total). Annual contributions can be invested — they may compound over time and can offset future educational costs.
4) The most important advice a financial advisor can give you is about:
A. Retirement planning
C. Paying for a child’s post-secondary education
D. All of the above
Members of a typical household may have their hands full balancing today’s needs with tomorrow’s plans. Often, it’s a juggle between short and long-term goals: paying bills, stashing money away for a child’s education or even ensuring you’ll have an enjoyable retirement. A financial advisor can provide options around budgeting, saving and planning out your goals. With investing, a financial advisor can discuss your risk tolerance, time horizons and financial aims to see what products are right for you.
5) Which of the following financial vehicles bundle a diverse range of investments into one professionally-managed product?
B. Mutual Funds
Because of market fluctuations, it is generally prudent to hold your money in a broad range of investments so that they can cushion you against sudden losses in market value. Mutual funds invest in different mixes of assets and allow individuals to participate in diverse ranges of investments. Mutual funds are professionally managed, can suit different risk profiles and have the potential to grow to help you reach your investment goals.
6) When there is economic uncertainty, avoiding the stock market is the best method to keep your money safe over the long term.
During economic uncertainty, some investors may panic and liquidate their investments in the hope they can avoid a market sell-off. In a study, TD Asset Management suggests what can happen when investors try to time the market and are on the sidelines during periods of growth: If you had missed out on 1% of the best market days between 1989 and 2019, your portfolio would provide a significantly lower performance. You can read more about, The power of staying invested.
7) The process of allocating funds to specific categories to pay bills, manage debts, save for longer-term goals or build up an emergency fund is called:
A. An investment fund
B. A budget
C. A mortgage
A budget is a method to help you manage your money and guide your spending and saving activities. A budget can indicate where your funds are coming from and when bills will be paid. You can even use online tools, such as TD MySpend, to help track your spending in real time. It can also reduce stress, give you more control over your money and show where you can cut costs or save more.
8) Fact check: At age 60, you must withdraw your investments from your TFSA.
A. Yes, correct
B. No, but you must withdraw 7% per year
C. No, there is no age limit on when you need to withdraw funds
D. No, but you must make an entire withdrawal at age 65
One of the valuable aspects about TFSAs is that there is no age maximum when you must stop contributing. As well, you never lose contribution room if you don’t add to your TFSA one year. In fact, even if you make a withdrawal, that withdrawal amount will be added back to your TFSA contribution room at the beginning of the following year.
Financial literacy is a skill that can provide immediate benefits. Knowing how best to utilize registered accounts like RRSPs, TFSAs, and RESPs can ease some of the anxiety around long-term financial goals such as retirement or saving for a child’s education. But putting all your financial responsibilities and wishes together can be complex: A discussion with a financial advisor can provide you with suitable recommendations that match your unique situation.
- Your annual contribution limit is related to how much you earn. For 2021, the RRSP contribution limit is 18% of your previous year’s earned income, up to the maximum amount of $27,830 (a number set each year by the government), plus previous unused contribution room less any pension adjustments ↩