FLGRPart 1: Financial Literacy Foundations

Introduction

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

earning
spending
methods of payment
credit
debt
interest and interest rates
types of taxes

These concepts will help you to manage money and make informed financial decisions, based on your own 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.

Earning, spending, and purchasing decisions

How can methods of payment affect the way an individual purchases goods and services?

We will explore how individuals can use different methods of payment and purchasing options to make informed financial decisions.

Consider the following scenario.

Yusuf enjoys building robots and solving puzzles. He earns money through tutoring and babysitting and hopes to participate in a robotics competition next year.

To prepare, he will need to purchase robotics parts, replacement components, software, and pay registration fees over time. Since these costs will not all happen at once, Yusuf wants to learn more about methods of payment, credit, debt, and interest before deciding how he will pay for future expenses.

Take a moment to think about questions Yusuf might need to consider when investigating different methods of payment and purchasing options. Why are these questions important to his decision making?

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

Yusuf may wish to consider the following questions when investigating different methods of payment and purchasing options.

What are the advantages and disadvantages of paying with cash, a debit card, a credit card, or an e-transfer? Yusuf will need to determine the advantages and disadvantages of each payment method and then compare the methods before deciding how to pay.
Do I have enough money available now to pay for this purchase without borrowing? Yusuf will need to check his savings and upcoming expenses to determine if he has enough money available to make the purchase without borrowing.
Will interest be charged if I do not repay the amount right away? If Yusuf borrows money and does not repay the full amount by the due date, he will need to pay interest. He will need to account for the increased cost compared to the original price.
If I borrow money, how long will it take me to repay the debt? Yusuf should think about how much he can afford to pay back each week or month. A longer repayment period may make payments smaller, but it could also mean paying more interest over time.
Should I save money over time and pay later, or purchase now using credit? If Yusuf saves money first, he will avoid debt and interest charges. If he uses credit, he will be able to pay for robotics parts, replacement components, software, and registration fees immediately. If he cannot repay the money on time, he will be charged interest.
Which payment option best supports my financial goals? Yusuf will need to choose a payment method that fits his budget, avoids extra costs when possible, and supports his goal of managing money responsibly.

Key terms

Let’s review some key concepts that support an individual’s ability to make thoughtful financial decisions.

Earning

receiving money in return for labour or services

Spending

paying for goods or services

Income

money earned from work or received from other sources

Expense

money spent on goods, services, activities, or other costs

Method of payment

a way to pay for goods and services, such as cash, a debit card, a credit card, or an e-transfer

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

Check your understanding

Methods of payment

When purchasing goods and services, individuals have a variety of payment methods available to them. Understanding how these methods work can help individuals make informed financial decisions and choose the option that best meets their needs and circumstances.

Some common methods of payment include:

Cash

Physical money (bills and coins) that can be used to purchase goods and services.

Debit card

A card that can be used to deduct money directly from the cardholder’s bank account.

E-transfer

A service that can be used to send and receive funds between bank accounts with another individual using email or phone number and their online banking service.

Cryptocurrency

A type of currency that exists only in digital or online form. Bitcoin is an example of cryptocurrency.

Credit card

A card that can be used to pay for goods and services by borrowing the money first and paying it back later, usually with interest applied if not paid in full or on time.

Electronic wallet

A device that has payment cards (both debit and credit) attached to one’s bank account (e.g. tapping a smart phone or watch that has apps or payment cards available).

Whether using cash, a debit card, cryptocurrency or sending an e-transfer to pay for something, you are using money that you already own. Whether using a credit card, a line of credit, a loan, or other borrowed money to pay for something, you are using money that you do not own.

After learning about different methods of payment, Yusuf begins to think about which options may be most appropriate for his future purchases. He also wants to understand how different payment choices could affect the overall cost of his purchases.

Take a moment to think about questions Yusuf might need to consider when deciding which methods of payment he will use. Why are these questions important to his decision making?

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

Yusuf may wish to consider the following questions when choosing a method of payment.

How much money do I have available right now? Yusuf needs to determine whether he can afford the purchase immediately or if he would need to borrow money.
Will this payment method add extra costs? Yusuf will need to consider that some payment methods may include interest, service fees, or late payment charges.
If I borrow the money to make the purchase, can I pay the full amount by the due date? If Yusuf uses a credit card or payment plan, he needs to consider whether he can make the payments by the due date.
Which type of payment method will help me stay within my budget? Yusuf will need to compare the types of payments. While cash or debit may help Yusuf spend only the money he already has, credit or installment payments may make it easier to overspend.
If I borrow the money to make the purchase, what happens if I miss a payment? Yusuf should consider possible consequences, such as late fees, interest charges, or a negative impact on his credit history.

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

Check your understanding

For each of the following questions, select the correct answer, then press the Check Answer button to see how you did.

After learning about different methods of payment, it is important to consider which option best supports each financial goal.

There is not always one "best" method of payment. The most appropriate choice depends on an individual’s goal, circumstances, and preferences. By comparing the available options, an individual can make an informed financial decision.

Credit and debt

Individuals do not always have enough money to pay for a purchase immediately. In these situations, they may choose to borrow money or use credit to pay for goods or services. Understanding concepts such as borrowing, credit, debt, and interest can help individuals make informed financial decisions and recognize the costs that may be associated with using borrowed money.

Borrowing

Borrowing is when a person receives money with an agreement to repay it in the future, usually with interest charged.

Debt

Debt is the amount of money that is borrowed and required to be paid back.

Credit

Credit is when a person has access to funds that belong to financial institutions, with the expectation to pay back what has been borrowed (i.e., debt), plus any additional costs of borrowing (e.g., interest).

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.

As Yusuf determines the cost of robotics parts, software, and competition fees, he begins to reflect on the options available to him to make the purchases he needs. He wonders when borrowing money might be helpful, what responsibilities come with using credit, and how debt and interest could affect his ability to reach his financial goals. Understanding these concepts can help Yusuf make informed decisions about how and when to pay for his expenses.

Take a moment to think about questions Yusuf might need to consider when deciding whether to save, borrow, or use credit to pay for robotics-related expenses. Why are these questions important to his decision making?

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

Yusuf may wish to consider the following questions when choosing to use credit or debt.

What are my responsibilities if I use credit to make purchases? Yusuf would need to determine his responsibilities when using credit. These responsibilities include repaying the money he borrowed (along with any interest or fees), borrowing within his credit limit, and monitoring his monthly statement for errors or fraud.
How long will it take me to repay the money I borrow? Yusuf would need to determine the time to repay the money. This will depend on how much he borrows, the interest rate, and how much he can pay each month.
Would it be better if I saved up money before making a purchase or use credit to purchase items sooner? Yusuf would need to decide the best choice for his situation. If he does not need to purchase items right away, it is usually better to save for items to avoid being charged interest. If he needs to purchase items right away, he could consider using credit but would need to make sure he had a clear repayment plan.
Which payment option best supports my financial goals and budget? Yusuf would need to determine the best option that fits his budget and avoids unnecessary debt. If he uses credit, he should choose the lowest-cost option and plan of how to repay it.

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

Check your understanding

Credit

Credit can provide individuals with access to funds when they need to make purchases or pay for expenses. Understanding the different forms of credit can help individuals make informed financial decisions and better understand the responsibilities that come with borrowing money.

Credit can come in different forms. Some examples include the following:

Credit card — allows an individual to make purchases by borrowing money and paying it back later
Student loan — money borrowed to help pay for post-secondary education and repaid over time
Car loan — money borrowed to purchase a vehicle and repaid over an agreed period
Mortgage — money borrowed from a financial institution to purchase a home and repaid over many years

Debt

Choosing a credit card to purchase a larger item could allow a person to purchase this item immediately but it could also create debt if the money is not paid back according to the terms of the credit card agreement.

Debt can play different roles in an individual’s financial life. In some situations, borrowing money may help someone work toward an important future goal, such as paying for post-secondary education or purchasing a home.

At the same time, borrowing money creates a responsibility to repay the amount owed. If payments are missed or the debt becomes difficult to manage, additional interest charges may increase the total amount that must be repaid. For this reason, it is important to carefully consider whether borrowing money is necessary and how it will be paid back.

Using credit responsibly and managing debt means borrowing only what can reasonably be repaid.

After learning about borrowing, credit and debt, Yusuf decides to use the money he earns from tutoring and babysitting to pay for smaller robotics purchases. He chooses this approach because it helps him avoid debt while continuing to save for larger future expenses. Yusuf feels more confident in his decision-making now and knows this knowledge will help him evaluate other payment options for larger purchases in the future.

Interest

Interest is the cost of borrowing money, or the money earned from an investment. The amount of interest is based on a percentage of the original amount.

For example, an individual who deposits money into a savings account may earn a small amount of interest on the money saved. An individual who uses credit to make a purchase may need to repay the amount borrowed plus interest.

After learning about credit, debt, and interest, Yusuf understands that the cost of borrowing money is not limited to the amount borrowed. As he plans for next year’s robotics competition, he realizes that he may need to purchase a specialized robotics kit that costs more than he has saved.

He understands that interest can increase the total cost of his purchases, which is why he plans to carefully consider his options before using credit for larger expenses. Yusuf feels more prepared to make informed financial decisions that support both his current needs and future goals.

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

Check your understanding

For each of the following questions, select the correct answer, then press the Check Answer button to see how you did.

Final thoughts

Financial decisions often involve earning income, managing expenses, choosing methods of payment, and sometimes using credit. Understanding how borrowing can lead to debt and interest charges can help individuals make responsible financial choices and plan for the future.

As you make financial decisions, take time to consider the benefits, costs, and responsibilities associated with each option. The knowledge you have gained about earning, spending, borrowing, credit, debt, and interest can help you make informed choices that support your financial goals.

Practice questions

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.