FLGRPart 2: Making Sound Financial Decisions

Introduction

In this part, you will be exploring the following financial literacy concepts:

financial goals
saving
spending
savings accounts
types of investments
investment risk and timelines

These concepts will help you manage your money and make well-informed decisions that reflect your personal experiences, beliefs, values, and choices.

It’s important to recognize that everyone’s financial situation is different. Be sure to focus on what works best for you rather than comparing yourself to others.

Financial goals

What does it mean to save and how is this different from investing? Should your decision to save or invest change depending on your financial goal?

We will explore different ways someone might meet their financial goals using saving and/or investing! First, consider the following scenario about setting a financial goal.

Gurpreet is a member of his school’s Art Club and has started painting with watercolours. The club is planning a year-end art show, and Gurpreet would like to display his artwork. He is also hoping to purchase additional art supplies and equipment in the future.

At the next meeting, he tells the Art Club supervisor that he wants to buy a watercolour set to use at home. She suggests setting a financial goal to help him save for it. Gurpreet isn’t sure what steps he should take to set that goal.

Take a moment to think about the steps Gurpreet would need to take to set a financial goal.

Press the following tab to compare your thinking to the suggested answer.

Gurpreet would need to decide what watercolour set to buy to determine how much money he would need to save. He would then determine how long it would take to save the required amount.

Key terms

Let’s explore how individuals can make thoughtful financial decisions by revisiting some key terms.

Saving

putting money aside for future use

Spending

paying for goods or services

Financial goal

an objective a person sets that affects how they spend or save their money

Budget

an estimate on how to manage income and expenses over a set period

Income

the money a person earns from work or receives from investments

Investing

purchasing something that is expected to increase in value or produce income

After reviewing the concepts, you may try the following optional activity to check your understanding.

Check your understanding

Savings goal

When setting a financial goal to save for an item or experience, an individual might ask themselves the following questions:

What am I saving for and why?
How much do I need to save?
Is there a specific time frame?

To help him set a financial goal to save for the watercolour set, Gurpreet needs to think about the following questions:

Why is it important to him to have this item?
How much money will he need to reach his goal?
Does he want to reach this goal within a certain timeline?

Creating a budget

A budget is a tool used to track income, expenses, and savings. A budget may need to be adjusted to meet a new saving goal. Savings goals can be small or large. The important thing to remember is that a saving goal should be realistic to an individual’s circumstances. It might mean that an individual needs to take a closer look at expenses and cut down on spending to meet the goal.

To reach his goal of buying a watercolour set, Gurpreet may need to review his budget and think about how he can realistically customize it by adjusting his spending and reducing his expenses.

When creating a budget, Gurpreet should consider the following steps:

Step 1 — Check in with himself
Step 2 — Look at his spending
Step 3 — Consider his income
Step 4 — Make a plan

Take a moment to consider why it is important for Gurpreet to follow these steps when creating a budget.

Press the following tab to compare your thinking to the suggested answer.


	Step 1 — Check in with himself	It’s natural for Gurpreet to feel unsure or confused when thinking about money. Since everyone’s situation is different, he should make choices that work best for him.
	Step 2 — Look at his spending	Gurpreet can think about what he is currently spending his money on and if those purchases are needs or wants.
	Step 3 — Consider his income	If Gurpreet is earning money, he can estimate how much he receives each week or month.
	Step 4 — Make a plan	Gurpreet can decide how he will save for his goal. This might include setting aside money regularly to purchase his watercolour set, or saving for other short-or long-term goals in the future.

Timeframe

When setting a savings goal, a person will need to decide how long it will take to achieve the goal. Is the goal a short-term, mid-term, or long-term goal?

Short-term goals are things you want soon, like art supplies or a game.
Mid-term goals are things you’ll need to save for a bit longer, like taking a special class or a fun outing with friends.
Long-term goals are things you want to have further in the future, like a car or post-secondary education.

Gurpreet knows that the Art Show is in 10 weeks and he will need two weeks before the show to work on his pieces at home. He will need to come up with a short-term goal to complete in the next eight weeks.

Finally, Gurpreet will need to decide which strategy will work best for him to meet his goal—whether he will simply save his money or consider investing it over time.

After reviewing his budget, Gurpreet decides he can reduce some of his spending and set aside $25.00 each month towards his goal.

Saving

When considering how to reach a savings goal, an individual may explore different ways to save money. One option is to open a savings account with a financial institution. A savings account allows an individual to keep their money in a secure place while earning a small amount of extra money over time.

Let’s explore how individuals can make thoughtful savings decisions by reviewing some key savings terms.

Savings account

A savings account is an account held at a financial institution that allows customers to save their money for short-term and long-term financial goals. It is an account that pays the customer interest based on the amount of money added to the account.

Interest

Interest is the money earned from an investment or the cost of borrowing money. The amount of interest is based on an interest rate. An interest rate is usually in the form of a percentage and shows how much is earned in addition to the starting (initial) amount, or how much the lender charges on top of the initial amount.

An individual may choose to explore different savings account options offered by financial institutions to support reaching their savings goal. Press the following tabs to learn more about two common options that are available in Ontario.

Youth savings account


	Rate of return (approximately)	1% per year
	Risk	Very low
	Pros	The individual’s money is very secure, and they earn a small amount of extra money over time. They can access their money at any time.
	Cons	The amount of extra money earned is very low. Interest earned on the account may be taxable. Some accounts may also have fees or limits on certain transactions.

High Interest Savings Account


	Rate of return	1%
	Risk	Very low
	Pros	An individual has easy access to their money. There is more interest earned in this account than other savings accounts. This is a good choice for short-term goals. The more money an individual adds to the account, the more interest they can earn.
	Cons	Interest rates can change so the money being earned through interest can fluctuate.

Youth savings account


	Rate of return (approximately)	1% per year
	Risk	Very low
	Pros	The individual’s money is very secure, and they earn a small amount of extra money over time. They can access their money at any time.
	Cons	The amount of extra money earned is very low. Interest earned on the account may be taxable. Some accounts may also have fees or limits on certain transactions.

High Interest Savings Account


	Rate of return	1%
	Risk	Very low
	Pros	An individual has easy access to their money. There is more interest earned in this account than other savings accounts. This is a good choice for short-term goals. The more money an individual adds to the account, the more interest they can earn.
	Cons	Interest rates can change so the money being earned through interest can fluctuate.

Investments

While savings accounts are one option for setting money aside, an individual may also choose to explore investment options to help grow their money over time.

Investment options may differ based on factors such as risk, rate of return, security, and time. Before making an investment, an individual may wish to learn about different types of investments and related financial terms.

To better understand investment choices, let’s first review some important investment terms.

Stock

A stock is a type of investment. A stock is a share or piece of a public company owned by an investor.

Bond

A bond is a type of investment. When a bond is purchased, the investor temporarily lends money to a company or government with the promise of repayment and interest.

Mutual fund

A mutual fund is a type of investment made up of stocks, bonds, etc. that is shared by many investors.

Interest

Interest is the cost of borrowing money, or the money earned from an investment. When an individual borrows money, interest will often be charged in addition to the amount borrowed. The amount of interest is based on an interest rate. An interest rate is usually in the form of a percentage and shows how much is earned in addition to the starting (initial) amount, or how much the lender charges on top of the initial amount.

Press the following tabs to explore common investment types in more detail, including the benefits and considerations associated with each.

Stocks


	Rate of return (interest)	12%
	Risk	Very high
	Pros	The market can change quickly, which means that some stocks may earn a higher rate of return and increase the value of the investment.
	Cons	The market can change quickly, which means that some stocks may lose value and decrease the amount of money invested.

Mutual funds


	Rate of return (interest)	8%
	Risk	High
	Pros	Mutual funds are generally more secure than stocks, which means that the individual will often earn money in addition to receiving their original investment back.
	Cons	Financial institutions may charge fees to manage the investment, and the rate of return is usually lower than stocks.

Bonds


	Rate of return (interest)	6%
	Risk	Medium
	Pros	Bonds are relatively secure, which means that the individual will usually receive their money back with interest.
	Cons	The rate of return is lower than stocks. The money must remain invested for a specific period of time before it can be withdrawn.

GIC


	Rate of return (interest)	2.5%
	Risk	Low
	Pros	The individual’s money is very secure, which means that they will receive their money back with interest.
	Cons	The individual cannot access their money for a set amount of time, and the interest rate is relatively low.

Stocks


	Rate of return (interest)	12%
	Risk	Very high
	Pros	The market can change quickly, which means that some stocks may earn a higher rate of return and increase the value of the investment.
	Cons	The market can change quickly, which means that some stocks may lose value and decrease the amount of money invested.

Mutual funds


	Rate of return (interest)	8%
	Risk	High
	Pros	Mutual funds are generally more secure than stocks, which means that the individual will often earn money in addition to receiving their original investment back.
	Cons	Financial institutions may charge fees to manage the investment, and the rate of return is usually lower than stocks.

Bonds


	Rate of return (interest)	6%
	Risk	Medium
	Pros	Bonds are relatively secure, which means that the individual will usually receive their money back with interest.
	Cons	The rate of return is lower than stocks. The money must remain invested for a specific period of time before it can be withdrawn.

GIC


	Rate of return (interest)	2.5%
	Risk	Low
	Pros	The individual’s money is very secure, which means that they will receive their money back with interest.
	Cons	The individual cannot access their money for a set amount of time, and the interest rate is relatively low.

After reviewing the types of investments, you may try the following optional activity to check your understanding.

Check your understanding

An important consideration

The timeline of a financial goal is an important consideration when choosing a savings or investment option.

For a short-term goal, an individual may choose a lower-risk option, such as a regular savings account, TFSA, or GIC. These options may earn interest while helping keep the money secure.

For a mid-term or long-term goal, an individual may consider options with a higher level of risk, such as bonds, mutual funds, or stocks. Over time, these investments may have the potential to earn a higher rate of return, but they may also lose value.

Before making any financial decision, it is important to consider the financial goal, conduct research, and seek information from a trusted financial professional.

Final thoughts

It is important for an individual to gather the information they need to make an informed decision about how to save for their financial goal. While one option may be the best fit for one person’s situation, another individual with a different goal or timeline may choose a different approach.

When you are making financial decisions in your own life, it is important to consider the information you have gathered about all the available options. You will then be able to choose the strategy that best supports your needs and circumstances.

Practice assessment

Complete the following practice questions to familiarize yourself with the question structure, format and layout of the Financial Literacy Graduation Requirement. Press the Check Answer button to see how you did.