Personal Finance For Canadians For Dummies Cheat Sheet

Debt reduction 101: Strategies for Canadians

Believe it or not, there are not one, but two kinds of debt! Bad debt (consumer debt) is money that you borrow to buy things like a new car that you really can’t afford. Think of it like living on a diet of sugar and caffeine: a quick fix with little nutritional value. Getting rid of your bad debts may be even more difficult than giving up the junk foods you love, but in the long run, you’ll be financially healthier and emotionally happier.

Follow these strategies for battling your consumer debt:

• Use your savings. If you have some savings that could be used to pay off outstanding balances on a high-interest credit card or an auto loan, consider doing so. (Make sure you pay off the loans with the highest interest rates first.) Although your savings and investments may be earning decent returns, the interest you’re paying on your consumer debts is likely higher.
• Search for money you may have overlooked. Consider borrowing against your cash-value life insurance policy, selling investments held outside of registered retirement plans, borrowing against the equity in your home, and borrowing from friends and family. These are all possible solutions to dealing with consumer debt you may have not considered.
• Reduce the interest rate on your credit cards. Apply for a lower-rate credit card and transfer any outstanding balances from higher-rate cards. Be sure to check out all the terms and conditions as you hunt for a better rate. In particular, look into how much your interest rate can increase if you miss payments or make them late, and how the future interest rate is determined on cards that charge variable interest rates).
• Stop making purchases on cards that have outstanding balances. Many people don’t realize that interest starts to accumulate immediately when they carry a balance. You have no grace period (the 20 or so days you normally have to pay your balance in full without incurring interest charges) if you carry a credit card balance month to month.
• Cut up your credit cards. If you have a pattern of living beyond your means, get rid of the culprit: the credit card. If you can trust yourself, keep a separate credit card only for new purchases that you know you can absolutely pay in full each month. No one needs three, five, or ten credit cards!
• Consider credit counselling. If you’re deeply in debt, credit-counselling agencies can help work out a debt management program. Credit Counselling Canada can help you find an approved not-for-profit credit-counselling agency in your area.

RRSP basics for Canadians

For almost all Canadians, a Registered Retirement Savings Plan (RRSP) is the single best, easiest, and most efficient way to save for retirement. An RRSP also offers one of the best ways to reduce the amount of tax you pay.

The benefits of RRSPs

When you open an RRSP, you’re making a deal with the government. By “registering” your retirement savings plan, you agree to put money away for your retirement and not spend it. In return, the government gives you two valuable benefits:

• Money that you contribute to your RRSP is deductible from your taxable income. This means that any income you contribute to your savings plan is not taxed. Say you earn $50,000 a year, and contribute $5,000 to your RRSP. If you claimed that $5,000 as a deduction on your tax return, your income tax would be calculated as though you had made only $45,000 that year.
• The government lets the savings in your RRSP grow tax free. Any profits you earn on investments inside your RRSP aren’t taxed until you close your plan and withdraw the funds. When interest and earnings on investments aren’t taxed, the full value of your gains is added to the original amount. This new, larger amount then earns further gains, which again are added to, or compounded with, your existing investments. This phenomenon is called compound growth, and over time it will lead to your retirement savings growing exponentially.

Maximizing your RRSP’s growth

You can maximize the growth of your RRSP in two simple steps:

• Begin contributing as early as you can — and are eligible to — in life. The longer you have money in an RRSP, the more time your savings have to compound. Even if you’re just 25 and you have only $1,000 to spare, put it in an RRSP! If you earn an average of 10 percent a year, you’ll have an extra $45,000 in your plan when you retire at 65.
• Try to maximize your RRSP’s returns. Choosing appropriate investments is critical to maximizing the growth of your RRSP. And the more years you have before you have to collapse your plan, the larger the impact of boosting your returns by even just 1 percent or 2 percent.

Improving your credit score: Tips for Canadians

The most important actions you can take to boost your credit score in Canada (and your attractiveness to lenders) are the following:

• Obtain copies of your credit reports. You’re entitled to receive a free copy of your credit report annually from the two main credit bureaus in Canada (Equifax and TransUnion). You can obtain a credit report for free from their websites.
• Be sure your credit reports are accurate. Correct errors and be especially sure to get accounts removed if they aren’t yours and they show late payments or are in collection.
• Ask to have any late or missed payments that are more than six years old removed. Ditto for a bankruptcy more than six or seven years ago.
• Pay all your bills on time. To ensure on-time payments, sign up for automatic bill payment, which most companies (like phone and utility providers) enable you to use.
• Be loyal if it doesn’t cost you. The older the loan accounts you have open, the better for your credit rating. Closing old accounts and opening a bunch of new ones generally lowers your credit score. But don’t be loyal if it costs you! For example, if you’re carrying credit card debt at a high interest rate, it may pay to transfer that balance to a lower-rate card. If your current credit card provider refuses to match a lower rate you find elsewhere, move your balance and save yourself some money.
• Limit the number of debt accounts. The more individual loans — especially consumer loans — that you hold, and the higher the balances, the lower your credit score will be.
• Work to pay down consumer revolving debt (such as on credit cards).