According to a 2014 study conducted by Statistics Canada asking participants a series of questions about inflation, interest, and risk diversification, only 18 per cent of the women and 32 per cent of the men, all with university degrees, answered all questions correctly. Financially literate individuals were seen to be more likely to be preparing for retirement and reported having a savings plan.
To help students understand the role banks play in navigating personal finance, the Digital Enterprise Management hosted their second workshop on personal finance titled, Banks: the Good, the Bad, and the Ugly with Radha Maharaj, an instructor from the ICCIT faculty.
Maharaj discussed how banks lend out money and the various investment programs students can either participate in or learn about, including mutual funds, bonds, and money market accounts.
Maharaj stressed the importance of money to achieve our aspirations and that it is never too early to save. “Our life goals and financial goals are integrated,” the instructor added, “If you can save a few bucks today, you will become a better saver when you do have more money.”
Reiterating her suggested highlights from the last workshop, she recommended opening a Tax Free Savings Account, and to set aside $20 every week. According to Maharaj, this will train you to save your money and it may then eventually turn into a habit. The instructor also said that many people feel unsure about money because they see it as a projection of themselves.
“At times, people equate your net-worth with your self-worth and that’s where a lot of insecurities with money come from.” Maharaj said this can lead to mental health problems if someone struggles financially. Similar results, published in a report from the University of South Hampton for the Psychology Review in 2015, presented how a person with a mental health issue is three times more likely to be in debt. The trick, Maharaj said, is to use money as a tool, not a reflection.
The class explored how banks make money. Maharaj stated that banks only need to hold 10 per cent of whatever deposits they have. The bank can take that 90 per cent and lend it out at a high interest rate. The money will go to another bank and the same trend repeats.
“Eventually, that money will be worth 10 times more the amount it started as, which circulates throughout the economy, and that is how money is created.” said Maharaj.
Workshop attendees also completed a risk assessment. A risk assessment informs a financial consultant at what level of risk your profile will fit into when you make an investment. Maharaj explained it is a Canadian regulation that before investing, people must complete a risk assessment because every person’s financial profile is different.
“Someone who is single and starting their career may take more of a risk than an older or married person because they are young. And if their investment crashes, they will still have time to recover the money,” said Maharaj. According to the regulation, your investment profile must match the investment you buy.
According to the risk assessment test in the workshop, most of the group fell into the moderate risk range. Maharaj then helped students to break down what type of investments we could purchase. Investments can be in the form of shares, where a small part of a company can be bought, or mutual funds. Maharaj said that mutual funds are “a basket that has stocks, bonds, and monthly interest.” A stock is ownership or equity in a company, so when stock is bought or shared, the owner will be part ownership of that company.
A bond comes from the government and, according to the ICCIT instructor, is more secure. All bond denominations in Canada come in $1,000.
Maharaj said, “You pay for the bond and on it is the value of it, which is the money that you will always get back.” The bond also has a coupon rate which tells you the per cent of interest you can get.
When the interest rate of the market fluctuates, it affects the price of the bond. If your bond’s coupon value is below the market interest rate, it is seen as less attractive, so the bond price will fall.
As Maharaj further elaborated, “For a mutual fund, you can buy ones that have different compositions of stocks.” Mutual funds fall into different categories, such as a balanced mutual fund that has a mix of aggressive and safe stock options. Altogether, the volatility of the aggressive stocks can balance out with the security of the safe stocks. Mutual funds are run by a fund manager and each has a different investment policy.
According to Maharaj, if you are a serious investor, not every stock may necessarily be good for you depending on your financial profile, lifestyle, and time frame. “Even though it’s a good return, it may not work with your goals.”
Maharaj added that before you try any investing, you should always have some money secured in case of an emergency in the short-term.
She also stated that investing is a form of gambling. “You need to be willing to lose that money.” said Maharaj. According to her, if you decide to go on the stock market, you want to buy shares of stocks that are safe and what people will always need, such as food, water, and utilities. When you have built up a larger money base and are secure in your savings, you can go after some more aggressive stocks.
Maharaj also said you need to hold your stocks, “If you’re going to invest you need to be in it for the long run. You have to buy and hold” The longer you hold, she said, the more return you will have because the stock market oscillates with time.
Above all, Maharaj emphasized that each person’s financial goals and styles are personalized, and it is up to the student to create good spending and budget habits along with finding stocks or mutual funds that fit our financial profile, all the while knowing when to take risks or not.