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Lifestyle Debt Debt Solutions
Whether operating a small business, or large enterprise, there is a lot at stake for Canadian entrepreneurs.
“Why do I have to go to school? I’ll never actually use any of the stuff I’m supposed to learn.”
It’s a question every parent hears in some form or another, probably several times each year. The sad thing is, the kids are probably right — at least to a certain extent. Aside from some extremely specific situations, most people will never again need to dissect a frog, analyze Shakespeare or recite the start and end dates of every war in European history.
What every person does need to know is how to manage their money properly. The sooner children learn this skill and get in the habit of viewing their finances with a skillful eye, the sooner they’ll develop a necessary lifelong habit — and the less likely they’ll be to fall victim to several common, albeit avoidable errors. That’s why financial literacy belongs in our classrooms.
Learning doesn’t just happen at school. Teaching children about money and how it works starts at home. The sooner parents can start teaching children and teens about money, the fewer mistakes they will have to learn the hard way — and the more years they’ll have to build on and apply that knowledge.
Certainly, it would help if the education system placed a greater emphasis on financial literacy. But until that happens, here are a few areas to get started at home:
A budget is a spending plan. It sets out how much money you earn, spend, and save each month.
Children need to understand that creating and sticking to a budget doesn’t mean they’re setting limits on living. In fact, just the opposite — a budget will help them live within their means, avoid the stress of money troubles, and make better choices with their money. Unfortunately, this is a lesson many adults have yet to learn.
Show your children how developing and following a budget can help them achieve their financial goals. Given its importance in creating opportunities and navigating financial challenges through all stages of their life, this is also a good time to emphasize the value of saving — both for retirement and any unexpected costs which will inevitably arise throughout their lives.
The 50/30/20 rule is a simple technique and a great introduction to budgeting at any age:
The Financial Consumer Agency of Canada (FCAC) has some great tools to help you get started.
Credit is a promise to pay. More specifically, credit is a payment arrangement between a consumer (your child) and a financial institution (their lender) which allows an individual to borrow money that is repayable at a later date.
Credit almost always has a borrowing cost attached to it (discussed in depth below) which means the amount the consumer must repay is greater than the amount they borrowed.
There are also two main categories of credit:
Typically, unsecured credit charges a higher interest rate because the lender is taking on more risk and potentially a higher recovery cost (e.g., legal fees, debt collectors, etc.) if the borrower doesn’t pay. Secured credit usually charges a lower interest rate and is therefore cheaper for borrowers, but borrowers also have much more to lose if they fall behind on payments.
There are also several different types of credit:
Lending money is an inherently risky enterprise. There’s always the possibility a borrower won’t be able to repay their debts, in which case the lender will lose money.
To offset that risk, almost all lenders (aside from perhaps family and a few close friends) charge interest — in essence a monthly percentage of the outstanding debt. The amount a consumer pays in interest for the privilege of borrowing money over and above the original debt (i.e., principal) is known as the cost of borrowing.
The amount of interest a lender will charge is determined by several factors:
A credit report is a comprehensive overview of a consumer’s borrowing history. It is created when a consumer borrows money for the first time and is continually updated throughout their lifetime.
Lenders provide information about a consumer’s credit use to the credit reporting agencies, including:
The credit rating agencies use this information to calculate a borrower’s credit rating and credit score. These are two ways of assigning an easily understandable value to a borrower’s credit report. Establishing and maintaining a positive credit rating / score is essential for a consumer to borrow money and (as we saw above) keep borrowing costs manageable.
To maintain a good credit rating, a consumer must:
Given the lack of financial literacy training in Canada’s education system, it’s possible some of the above topics will be as new to you as they are for your children — and that’s okay. There’s a lot of ground to cover, and a lot of information about debt that lenders are counting on you not knowing.
If you’re struggling with unmanageable debt for any reason, a financial fresh start is within reach. Contact your local MNP Licensed Insolvency Trustee for a Free Confidential Consultation to review your options today. Together we’ll review your financial situation and discuss a range of strategies to help you defeat your debt for good.
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