There are volumes of information out there explaining every aspect of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). Articles on how to optimize your contributions to each based on your tax bracket and expected future earnings, details of the TFSA over contribution rules and penalties, why the age of 71 is a big deal for your RRSP…. and plenty more.

We like getting the facts, but this information overload isn’t much help if you are simply wondering, “what is an RRSP account?” or “what does tax-free saving really mean?”. The mountain of details available is not only confusing, it may also discourage you from investigating more — and that would be a huge mistake!

Everyone should be aware of three things about RRSPs and TFSAs:

1. They are free to open and it’s not difficult to get one.

2. The TFSA age limit is 18, but there is no minimum age for an RRSP.

3. The younger you start, the more money you are going to make.

The biggest RRSP/TFSA mistake is procrastination; it has nothing to do with the minutiae of the TFSA rules or which investment fund is best for your RRSP. Do not put off getting your TFSA and/or RRSP until you are “older” and/or “have more money” — and don’t think these accounts are just for your retirement fund. You will definitely get older, but having “more” money is a pretty vague goal and that situation many never materialize. Keep reading this article to learn the essential facts, but make sure you put your newfound knowledge into action.

While TFSA and RRSP both have "savings" in their name, they are actually designed for investing your money, not saving cash.

After you put money into a TFSA or RRSP, you should be investing it, not just letting the cash sit there. Inflation will eat away at your cash pile over the years, so you need to invest to fight back against inflation and grow your retirement investments. Fortunately, you have a lot of options for investing your money.

Most Canadians invest the money in their TFSA and RRSP in some type of funds (mutual funds or exchange-traded funds) as part of their retirement savings plan. These funds are basically a basket of different stocks, bonds, and other financial instruments — there are thousands of funds available. Some are broad-based and include many companies across multiple industries, while others focus on a particular industry or region. The risk varies greatly from one fund to the next and you will need to factor your risk tolerance into the funds you choose.

Funds are professionally managed and you need to be wary of the built-in management fee (called an MER), but they make it easy for anyone to get invested. You don’t have to pick individual stocks and you don’t need anyone to help you if you want to do it yourself. Many Canadians handle their own investments and there are number of online options to self-manage the funds you hold in your TFSA or RRSP. There are also "all-in-one funds" with varying degrees of risk that are very convenient for beginning investors. There is even a fully automated online option called a robo-advisor that continuously adjusts the funds you hold to match your financial situation and goals — all you have to do is deposit the money!

While you don’t need a financial advisor to choose investments that are right for you, you are responsible for learning the basics of investing and making sure you understand the risks involved, regardless of whether you do it yourself or seek professional advice.

No one should be discouraged from opening a TFSA and/or RRSP because they only have a "little bit" to spare, and it wouldn’t seem to make much difference.

The first argument against this belief is that building a savings habit requires the right mindset and is a skill you need to practice. No one is born with a genetic predisposition to savings. You may be influenced as a child by the savings habits (or lack of) from those around you, but getting into the habit early will get you started down a very long, profitable road due to the wonders of something called ‘compound returns’.

Investing $200/month from age 18 to 65 at a 7% return (compounded for 47 years) in your TFSA would give you $790,139 tax-free at retirement. The same $200 invested with the same 7% return from age 28 to 65 (compounded for 37 years) would yield just $384,810. Sure, you would be contributing $24,000 more over those extra 10 years, but your nest egg when you retired would be almost double.

A lot of young people get discouraged by the sheer amount you are allowed to contribute — and for good reason! If you make $60,000/year, your annual contribution maximums are $6000 for your TFSA and around $10,800 for your RSSP. That’s $16,800; a pretty big chunk of your take home pay! The good news is that your yearly contribution limits can be carried over and as you grow older (and theoretically have more disposable income) you can catch up.

There is no need to choose between and RRSP or TFSA.

As your financial situation grows and changes you can definitely benefit from having both. The main reason is that the timing and impact of the income tax benefits is very different.

In short, you delay paying tax by putting money into your RRSP. When you fill out your tax return, you get to deduct the money you put into your RRSP from income — and that will result in a very noticeable reduction of your income taxes for that year. The higher your tax rate, the more you will save! However, before you go out and spend these tax savings, make a mental note that you are only delaying or deferring that tax to later in life.

Your RRSP should grow substantially over time if you are invested. However, you need to make sure your retirement budget reflects the fact that any money you plan to take out of your RRSP down the road is fully taxable in the year it is withdrawn. The primary advantage is that if you are retired, your income and associated tax rate could be substantially lower than when you were working. This will reduce the impact of taxes, but only to some degree! A lot of retirement advice focuses on maxing out your RRSP, but this could create a hefty tax bill if your retirement income is high.

If you had put the cash into a TFSA instead of an RRSP and invested it the same way, you would have the same amount of money, but you would be able to take it out and spend it tax free. You would have received no reduction in your taxes when you put the money into your TFSA, but you don’t have to pay tax on that money when you take it out of your TFSA.

An RRSP will put more money in your jeans today than a TFSA because of those immediate tax savings, but the opportunity to invest and grow tax-free money for the future in your TFSA is also very attractive. There are lots of other considerations (flexibility of withdrawals & your tax rate for example), but we will leave that debate for another article, just get one, or both accounts, and get started!

It is relatively easy to get started. The TFSA age limit is 18 but there is no minimum age to open an RRSP.

Both accounts require a social insurance number to open. You can open them in-person or online at most banks, credit unions and investment brokers. There are no fees to open one, although some institutions require a minimum balance. Both the TFSA and RRSP are a type of "registered account" and are not used for daily banking. They differ from your savings or chequing account because the cash flowing in and out is tracked to make sure you follow the rules and the tax implications can be managed.

You can put funds into an RRSP and TFSA anytime throughout the year, but there are annual limits.

For a TFSA, the amount is the same for every Canadian regardless of their income. For 2022, the maximum contribution limit is $6000. For an RRSP, you can put away up to 18% of your income up to a maximum of around $28,000.

If that sounds like way more than you can spare, the good news is that you can carryover unused contributions and catch up later. In fact, if you are over 18 and are just now eyeing your first RRSP or TFSA, you already have unused TFSA contribution room available. You may also have some RRSP contribution room as well depending on your income. You can confirm these amounts on your most recent income tax assessment. Just remember that catching up on contributions will be harder than you think and as we already mentioned, your nest egg will have less time to grow.

Although you can contribute funds anytime during the year, there are some deadlines for tax purposes. For an RRSP, you need to get the money deposited (not invested!) by the end of February in order to claim a RRSP deduction on your taxes for the preceding year. If you miss the deadline (even by a day) you will have to wait until next year to reduce your taxes. For a TFSA, the official deadline is December 31, but since the contribution limit can be used in any subsequent year and there is no tax deduction, there really is no deadline. There are also penalties for overcontributing to either your TFSA or RRSP, so make sure you understand the rules.

Even if you are not forgetful, it is a great idea to set up your bank account to automatically transfer a fixed sum every payday into your TFSA and RRSP. You can’t spend what you can’t see, and it will force you to save. You also won’t have to run around like a lunatic every year trying to find the cash and meet the contribution deadline.

The last thing to know is that TFSAs and RRSPs are not just for saving for retirement.

You can use your RRSP to save up cash for a down payment on a home and then "borrow" up to $35,000 ($70,000 for a couple) from your RRSP to purchase the home under the Home Buyers’ Plan. You do have to repay the borrowed funds over a period of years, but you do not have to pay tax when you withdraw the funds.

TFSAs offer even more flexibility with no tax due on withdrawals and you get to keep your contribution room. If you don’t know how much to save for retirement, maxing out your TFSA every year is a good place to start. If your plans change and you need that money before retirement, it is available. You do have to wait one year before you can replace any of the funds you took out so be careful, there are penalties if you run afoul of the rules!

There is a lot more that can be said about TFSAs and RRSPs but the short story is, if you don’t have one, you are seriously missing out. It’s time to get moving!

We often hear the mantra, “pay yourself first” when it comes to financial advice. This concept of automatically routing some of your salary every payday (before you can spend it!) into an investment account like a TFSA or RRSP isn’t hard to understand, but it’s hard to implement if you need every nickel just to survive until your next paycheque.

Discipline and dedication to the cause will help, but they are only part of the savings solution. The fact is that to succeed at saving in today's world, most of us will need to earn more and spend less.

It’s obvious that a higher income will help you mow down expenses and leave you with more money in your jeans at the end of the month. However, any size paycheque will go a lot farther when supplemented with restraint and monitoring to control expenses at their source... before they vacuum up your potential savings.

Making more money is often the preferred approach as cutting back on spending can be painful, but there are definitely some drawbacks. More income means more taxes and it may also lower benefits like your GST rebate or CCB benefits. If your tax rate is around 20%, an extra hour at $15 hour will have the same effect as cutting about $12 from the household budget.

Working more will also rob you of precious free time, so there are significant social costs as well. If you have to incur additional expenses such as a babysitter or dining out more because you have less time or energy to cook, those costs need to be factored in as well.

Perhaps the biggest problem with working more is the very strong tendency to spend more! This is where discipline and determination come into play — make sure you earmark that extra income for saving and keep your expenses at the current level. Making more money won’t solve your problems if you don’t monitor your expenses, make poor spending decisions, delay investment planning, and have no goals to help motivate you and measure your financial progress.

You should also look at your debt cost to see if you should be saving in the first place! If you carry a credit card debt for example, you should definitely be throwing everything you have at it instead of saving. Even with the recent rise in interest rates, you would be lucky to get 4% on cash savings — most credit cards have rates four or five times that figure. You could also invest any extra money, but you have to add in the risk factor, and you would be hard-pressed to get returns that exceed the interest rate on most credit cards.

Turning to defensive savings strategies, there are countless articles churned out every day on how to trim the household budget. They may yield some good tips that are practical for your situation. Look for easy to implement ideas like comparing grocery store prices and stocking up on bargains, collecting points or discounts on a credit card (but paying the balance in full every month!), or clipping coupons.

There is no end to the money-saving ideas and hacks, but the first step is to know your costs. You can’t kill what you can’t see, and household expenses are no exception. You need to track all your expenses for at least a month and analyze where your money is going.

You may find some low-hanging fruits like a lightly used membership you could cancel, or maybe you didn't realize how much those nights out on the town are adding up to every month. On the other hand, you may find the low-hanging fruit is long gone and that making more money is your only way forward! Make sure to track your expenses first and give yourself a realistic starting number before you dive into a more austere budget.

For life’s necessities and things we need to survive, there is no need to ward-off the temptation to spend. We can focus on straightforward techniques that work for our situation and allow us to get the items we need at the best price, whether that’s clipping coupons or visiting a few different supermarkets to get the best deals for your weekly food shopping.

However, even the tightest of budgets include some discretionary spending and that is where some alternative strategies for spending less come into play that are quite different from the simple tips and tricks we see every day.

For example, maybe your “go-to” coffee shop has a stamp-card type offer where you buy ten and get one free. Rather than focus on that future free one, maybe some other thoughts would help you skip that coffee altogether? You could try mentally calculating the cost of your take-out coffee habit into time spent working, or simply pause to ask yourself, “do I really need it, or just want it?” You could also remove the temptation altogether by making coffee at home, taking a route that doesn’t pass by the shop, or throwing away their stamp card altogether.

For discretionary spending in particular, psychology is an important aspect when it comes to controlling urges. Spending can be triggered by a number of factors that affect are psyche — advertising and social media; comparing to our friends, neighbors or colleagues; habitual behaviour; lifestyle creep; the pursuit of happiness.

While it may be possible to limit your exposure and/or do your best to ignore these types of influences, there are financial self-control strategies that can really help put the bite on spending. A lot of personal finance research has focused on these tactics and the summary below has some practical ideas you could start using today.

• Avoid tempting people, places, and activities (restaurants, malls, online browsing)
• Eliminate spending temptations (e.g. make your own coffee/meals at home)
• Use a shopping list and stick to it
• Make regular savings automatic (set up payday bank transfers)
• Set financial goals, track savings, and use a budget or conscious spending plan
• Make funds difficult to access (lock or limit credit/debit cards)
• Always consider your long-term financial goals (retirement, kid’s education, buying a home)
• Reconsider your needs versus wants — we all did without many “needs” during the pandemic!
• Use a “cooling-off” period before making a major purchase
• Rely-on others for support and self-control (spouse, partner, friend, relative)
• Convert the cost of an item into time spent working to earn that money
• Choose to pay now rather than pay later or installment options
• Use a retirement savings projections plan to understand how your current spend affects that plan.
• “Lock” your savings away using term-deposits or registered accounts like an RRSP
• Save before spending and not vice-versa
• Always consider the reasons for your financials goals (family, retirement, etc.)
• Use rewards for self-motivation (e.g. reward yourself with a take-out lunch after 20 days of brown-bagging)

At the and of the day, it doesn’t matter whether you save money through self-analysis and careful justification of spending decisions, or by picking up a sale-priced, jumbo size can of coffee and firing up the kitchen coffee maker every morning... whatever works for you!

Rising inflation and higher prices don’t appear to be a short-term trend, so now is the time to dig into your financial habits and maybe add a little anti-spending psychology to your mental money game.

Finding the cash to move from a paycheque-to-paycheque existence to a situation where you are saving and investing is becoming increasingly difficult these days. More income will certainly help, but you will also need to continuously manage your expenses and make smart buying decisions to really pile up the savings.

Research by the Financial Consumer Agency of Canada has revealed that financial worries are the leading cause of stress for Canadians, surpassing the amount of stress stemming from either relationships or their jobs. The tables have turned and rather than focus on how our job is affecting our personal life, the focus is shifting to how our personal life (especially finances) are affecting our job performance.

Some research has been done and the new isn’t good for employers. Employees dealing with financial stress are twice as likely to report poor health issues including sleep problems, headaches and other illnesses. They are also more likely to be absent, use sick leave or quit altogether; have lower morale and engagement; poor working relationships; and show lack of focus and poor decision making. For businesses, this can result in administrative and financial errors, workplace accidents, production errors and poor customer service.

The consequences of financial stress have a very real cost to your organization. A 2019 study by the Canadian Payroll Association (CPA) revealed that 46% of all Canadian employees admit to being distracted by financial stress at work causing an average 8.1% loss in productivity. Extrapolating that data to an organization of 300 people making and average of $64,000 results in almost $700,000 in lost productivity over the course of a year!

Keep in mind that the CPA study was done prior to the pandemic and does not reflect the financial stress the average Canadian is now facing due to rapidly increasing interest rates driving up mortgage and loan payments, skyrocketing prices due to inflation and supply chain constraints, and most recently, volatile financial markets.

If you need more proof of mounting financial stress, the National Payroll Institute just released survey results that show a 26% increase in the number of Canadians living paycheque-to-paycheque in just the last year. The average non-mortgage debt is now over $21,000 with the latest household debt-to-income ratio (the amount of debt to disposable income) at an all-time high of 181.7% according to the latest figure from Statistics Canada.

Many Canadians are struggling financially and the question all employers should be asking themselves is, “how much is poor financial wellness impacting the success of our business?”

While organizations across the country are bolstering employee assistance programs to improve the overall well-being of their staff, one area that has been widely ignored is the effect of financial stress in the workplace. It is very ironic that despite the intensifying focus on employee wellness, the #1 concern of employees themselves is receiving scant attention.

Many employers already provide pensions, matching RRSP contribution schemes, and various other financial benefits as part of their EAP. A financial literacy education program greatly complements these benefits by raising awareness and helping employees understand how to take full advantage of the available benefits and leverage their impact. For example, teaching employees how to invest and grow their RRSP rather than just helping out with matching contributions. A lot of Canadians are unfamiliar with even basic investing knowledge such as the effects of compound interest, investment fees, index funds and ETFs, risk management, or how to use RRSPS and TFSAs to defer/reduce taxes and grow their retirement nest egg… or help purchase their first home.

Retirement planning is another complex issue for employees. A company pension plan is a great asset to have but adding an education program to help employees make good decisions now and lay down a roadmap for retirement will give them a lot more assets down the road. Gaining the financial knowhow to manage your retirement plan and feel comfortable about your financial future will also allow employees to focus much better on the job at hand.

When you invest in the financial well-being of your employees, your business will benefit from higher productivity, better morale, lower absenteeism and turnover, and better talent attraction. A 2017 study by Sun Life Financial showed that 70% of employees feel their employer should support their employees financially and 84% would be interested in financial education programs in the workplace.

By implementing a comprehensive financial education program and not just paying lip service to the issue with a “lunch & learn” (they are just one of many tools) you demonstrate a lasting commitment to your employees and their families. Effective financial education programs for employees offer a number of training resources and options including live or virtual sessions, self-guided online programs, and options to consult and seek advice from financial professionals.

The timing of when employees need financial advice may range from imminent (i.e. they are fending off calls from bill collectors while at work) to long-term (i.e. they are unsure of how best to start planning their retirement) and companies need to be prepared to support with either of these timelines. Even your best/irreplaceable employees can get into financial difficulties (they may be creative geniuses or masters of other tasks… but miserable with money) and it is in the company’s best interest to do what you can to help them get through their financial issues.

Financial pressures have seriously mounted in 2022 and a lot of employees are turning to their employers to help out, and the first place they look is to bolster their household income with higher wages and salaries. While more income is certainly going to help, it isn’t always feasible based on the company’s financial situation. More money will also never become a long-term solution if employees continue to make poor spending decisions or overspend, fail to adequately save and invest, and put off their long-term financial/retirement planning until later in life.

There are lots of bankrupt athletes and entertainers who have clearly demonstrated that you can always spend more than you make, regardless of your income! Focusing only on the top line (income) when it comes to your finances is a common mistake. Anyone who has followed Enriched Academy knows that we teach the skill of saving and investing is much more important than the skill of earning.

Millionaire Teacher author Andrew Hallam has been a regular guest over the years in our live webinars. His book is proof that a steady income and some knowledge of basic investing principles combined with a high school English teacher’s salary can lead to early retirement and a very comfortable life post retirement.

Companies are increasingly caught in the trap of having to offer more money to keep their employees happy and stop them from bolting to the competition for slightly more salary (especially as inflation bites).  However, they should also be looking at adding proactive education measures to help improve their employees’ financial life and stop them from job shopping in the first place.

The reality is that personal finance is likely to get even more difficult and more complicated in the future and helping your employees master their financial life will pay increasingly valuable benefits to both employees and employers. If you would like to learn more about how programs from Enriched Academy can help your organization get ahead of the curve, please reach out to [email protected]

It’s RRSP (Registered Retirement Savings Plan) season again as the March 1 contribution deadline is looming. All over your news feed you can see articles popping up about what is an RRSP? how does an RRSP work? and how much to contribute to your RRSP? There is a ton of information floating around and we have outlined a few of the basics below, but you may also want to seek professional financial advice on how to take advantage of the specifics of your situation. Either way, we'd like to provide you with some important factors to consider when deciding if, and how much to contribute to your RRSP this year.   

RRSP Basics

RRSPs are a type of registered account that allow you to invest the funds you deposit into the account. Your contributions are tax deductible and investment earnings in the account can grow tax-sheltered until withdrawal, at which point they are taxed as income. The idea is that you can grow your money through investing and then withdraw the funds during retirement when your income tax rate is lower, thus putting more money into your pocket.

RRSP contributions are limited by a yearly maximum amount depending on your income, although you can carry forward unused amounts to reduce taxable income in future years. There are also limitations and possible penalties on withdrawals and overcontributions to an RRSP. Withdrawals from an RRSP prior to age 71 are subject to income tax and an additional withholding tax. A further caveat is that when you withdraw money from an RRSP, the contribution room you used to deposit that money is gone forever. One exception is the Home Buyers’ Plan, which allows you to borrow up to $35,000 tax-free from your RRSP to buy a house with no penalty — although it is a loan and must be paid back within 15 years to avoid taxes.

Unlike a Tax-Free Savings Account (TFSA) which has a minimum age of 18, there is no minimum age limit to open an RRSP, as long as you have earned income. RRSP accounts must be closed and the funds withdrawn or converted to a Registered Retirement Income Fund (RRIF) at age 71. A RRIF provides a steady stream of income since you must withdraw some of the funds on a regular basis, but you still receive tax-sheltered growth of the remaining funds. The minimum amount that must be withdrawn each year is determined by the holder's age and the value of their RRIF account, and the withdrawals are taxed as income in the year they are received.

Plan for retirement by contributing during peak earning years

Peak earnings are the years in which you earn the largest amount of income. Keep in mind that your income doesn’t just come from your employer’s paycheque or your earnings as a contractor. It’s also made up of things like rental income, some government benefits, and growth on any non-registered investments you may hold. These are the years where you can likely take the largest advantage of all the benefits of an RRSP. Typically, individuals earn less in retirement than in their peak earning years. This allows you to not only benefit from deferring tax, but also from withdrawing retirement savings in a lower tax bracket. 

How do I know my income is peaking?  

No one knows exactly what the future holds. You may get promoted, get a big raise, change careers, go down to part-time work, retire early, purchase an investment property, or a combination of the above. This means, like most things financial planning related, we need to make a best guess based on what we know today. Base your assumptions on what you have planned and what you hope and/or are working towards in the future.

If you are just starting out in the work force, or in a new career it’s likely that these aren’t your peak earning years. If you have a significant amount of experience in your industry, are in the position you expect to remain in until retirement or are focused more on work/life balance than doing anything it takes for that next promotion, you may be at or near your peak earning years. 

What happens if I contribute to my RRSP in lower earning years? 

You will still receive your RRSP contribution tax deduction and defer taxes on both the contribution and growth. However, you could be deferring tax now only to pay a higher tax rate on withdrawals from your retirement fund in the future. You’ll also be using up contribution room that would be more beneficial to use in your peak income earning years due to being in a higher tax bracket at that time.  

My income is low – What retirement savings account is best for me?  

A Tax-Free Savings Account (TFSA) is another retirement fund option. It differs from an RRSP account by offering tax-free growth, meaning you won’t pay taxes when you pull money out of this account at any time. Money withdrawn from a TFSA doesn’t count as income.

The money you contribute to this account has already been taxed and the value of the tax benefits is derived from the growth — making it really important to invest the money according to your risk tolerance and maximize the tax benefits from this account. If you’ve already utilized all your TFSA contribution room and still have additional retirement savings, you may want to consider contributing to your RRSP account and deferring the RRSP tax deduction.  

Why would I defer an RRSP deduction?  

At tax time you can select what to do with the RRSP contributions you’ve made that year – take the deduction in the current tax year or defer the deduction to a future tax year by completing schedule 7. By making the contribution now, you are still benefiting from the tax deferral on both the contribution and growth, but by deferring the deduction you can now wait and use it in year peak income earning years when you are in a higher tax bracket.  

How much can I contribute to my RRSP?

Your contribution room (deduction limit) for this year can be found by logging in to your CRA “My Account” and scrolling to the bottom of the page. Your RRSP contribution room is also indicated on your previous year’s notice of assessment. Each year’s unused contribution room is carried forward indefinitely. It increases by an additional 18% of your prior year's earnings up to an annual maximum ($29,210 for 2022). Your notice of assessment provides a detailed breakdown of the calculations used in your specific situation to arrive at your contribution room each year.  

How to open a RRSP account?  

You can open an RRSP account with a financial services institution or through a self-directed investing platform – they'll provide the option to make a lump sum deposit and/or regular contributions. If you already have an RRSP you can make additional contributions to that account. If you’re not satisfied with your current institution/planner, you can open an RRSP account with a different institution. Keep in mind that the more accounts you have open the harder it is to track/manage.

If you’re opening a new account, it’s typically easiest to transfer any other accounts you have to the new RRSP. You just need to submit a transfer form and they can take care of the transfer for you. Transferring will not impact your contribution room, but it's very important to use the transfer form and not withdraw from your RRSP and then contribute (this will have tax consequences). You’ll also want to consider your RRSP investment options and ensure the institution you select offers those options.  

What are my RRSP investment options?

An RRSP can hold “qualified” investments. Common types of qualified investments include: cash, individual stocks (if they trade on a major domestic or foreign stock exchange), government bonds, corporate bonds, savings bonds, mutual funds, index funds, exchange-traded funds (ETFs), segregated funds, mortgages & mortgage-backed securities, shares in Canadian small businesses, gold & silver.

If you’re currently holding cash in your RRSP you are losing out on the biggest advantage — tax deferred growth. You’re also losing to annual inflation! This can have a devastating impact on your retirement savings over the long term. It’s also important to note that just because an investment qualifies under the RRSP rules doesn’t mean it’s the right investment for your situation. It’s important to assess your risk tolerance and invest accordingly in a well-diversified portfolio that aligns with your goals.  

Pay back debt or add to retirement savings?  

This depends on the type of debt and your interest rate. It typically makes sense to pay down debt before investing because of the high cost of carrying that debt. It’s hard to get ahead by saving when your return on your investments is less than the interest you are paying. For example, if you invest according to your risk tolerance and your average rate of return ranges from 3% to 7%, it doesn’t make sense to pay 19% interest on a credit card balance or 8% on a line of credit.  You would get much further ahead by paying down the debt and ensuring you have a plan, so you don’t just rack it back up again!

Emotion and human behaviour can play a large role in financial decisions. It's important to research the facts, seek professional advice if your situation warrants it (preferably from someone who doesn’t benefit from selling investments), and carefully consider all the factors of your situation to make a decision that works best for you.

If you are looking for ways to better your financial situation, one of the first tasks you should be focusing on is how to build your credit score. Your credit score is a measure of your demonstrated ability to meet your loan commitments and other bills in a timely manner. It is one of the key metrics to measure your financial progress. The higher your score, the more likely a lender is to loan you money and the lower the interest rate you will receive.

What is a good credit score?

In Canada, your credit score is derived from a credit report issued by either TransUnion or Equifax and the credit score range is between 300 and 900. The Canadian average is around 650. Good credit scores over 750 offer a higher chance of loan approval, greater borrowing limits, and lower interest rates and insurance premiums. If you want to get the lowest advertised mortgage rates you are going to need a top-notch credit score. At the other end of the scale, a low credit score of under 600 may make it very difficult to get a mortgage from a Canadian bank.

Potential interest savings from an excellent credit score are huge on big-ticket items. Qualifying for a preferential rate on your mortgage could easily save you tens of thousands of dollars. For example, an excellent credit score could qualify you for a $500,000, 5-year fixed mortgage at 4.5%, while a low credit rating could see you paying near 6%. You would save $20K+ during that 5-year period! Vehicle loans offer even greater variation depending on your credit rating and are another area where a bad credit score will take a lot more money out of your pocket every month.

Understanding how to boost your credit score and building the highest score possible will open doors to many opportunities and save you money. If you are looking for a quick hit to improve your financial literacy around credit scores, take 3 minutes of your time and watch, “How Does Your Credit Score Work” on the Enriched Academy YouTube channel.

How to check your credit score?

The first thing to note is that a credit report and a credit score are not the same. Your credit report is available free online from either credit bureau in Canada (TransUnion or Equifax) and contains a summary of your credit history. Your credit report does not contain your credit score. The credit bureau determines your score using a formula based on a number of credit factors, but they don’t share that formula. Although we can guesstimate, It is impossible to know exactly how much your credit score will change based on the actions you take.

You can check and monitor your actual credit score from a number of different sources — banks, finance companies, credit unions and specialty “credit score providers” can all provide your score. They often include it free if you are an existing customer or if you are willing to register and provide an email address.

Who looks at your credit score?

Credit scores are used for a lot more these days than just whether you qualify for a loan. Insurance companies, potential employers, and landlords are just a few of the people that will often check your credit score and use it for decision making.

Employers may request a background check and a credit check before they will formally offer employment. It is legal in Canada to make this request and it is often a requirement for jobs in government, finance, and many other industries.

Landlords will often ask for a credit check before offering you a lease; even utility providers may review your credit history to decide whether or not you need to pay a security deposit to connect to their services.

If you have your eye on the perks that go with obtaining one of those premium credit cards or are looking to increase the limit on your credit card, obtain a business loan, or secure a personal line of credit, your credit score is going to be a big factor in whether or not you are successful.

What affects your credit score?

There are 5 credit score factors:

1. Payment history (35%)

This is the largest determinant of your score and the most critical factor to manage. You need to always make the minimum payments and avoid anything ever getting to the “collections” stage – this includes parking tickets, mobile phone or other utility bills, student loans, and credit cards.

2. Credit utilization (30%)

If all your credit cards are maxed out, your credit utilization rate is 100% and it indicates to potential creditors that you are overextended. Carrying some credit card debt won’t lower your score (as long as you make the payments each month) but try to keep your balance under 30% of your credit limit at all times.

3. Length of credit history (15%)

It takes time to build your credit score, so get a credit card when you turn 18, use it, and pay it off in full each month. A car loan or student loan will also help greatly with your credit history check — but only if you stay current with the payments!

4. Credit mix (10%)

Using a mix of different types of credit will increase your score. When you are young the only credit available may be a credit card, but as you grow older adding a car loan, student loan, or line of credit to the mix will help improve your score.

5. Credit application frequency (10%)

Applying for a lot of new credit in a short timeframe will negatively affect your score. Potential lenders do what is called a “hard pull” on your credit history when you apply. You want to avoid having a number of hard credit pulls in succession as it may look like you are desperately seeking more credit.

How do I fix my credit score?

Credit scores are continuously evaluated and adjusted. If you have "errored" in the past, rest assured that the damage is not permanent! There are ways to improve your credit score over time if you use credit responsibly, but it is much easier to avoid mistakes that lower your score in the first place.

The time required for your credit “indiscretions” to disappear varies. Unpaid debts may not be legally collectible after a couple of years (depends on the province) but can stay on your credit report for five or more years. If you have filed for bankruptcy, that will stay on your credit report for seven years.

If you have mended your financial ways and have reached out to your creditors and are now paying your bills on time/making the minimum payments, perhaps using a secured (pre-paid) credit card — how long does it take to improve a credit score? The answer varies widely from case to case, but you should see your credit score start to rise between four and eight months down the road — don’t expect to boost your credit score fast!

Check your credit score regularly!

If you are looking for some simple financial advice that pays huge dividends — check your credit score on a regular basis! It will allow you to track fluctuations and overall improvement, detect errors, and prevent identity fraud. Checking your own score does not form part of your credit application history and does not affect your credit score!

Errors and omissions are not uncommon in credit reports, and it is a good idea to confirm the details of your report. Both TransUnion and Equifax have a process to report mistakes and get them corrected. It can take up to six months to resolve disputes with a credit bureau as there may be some time-consuming back and forth with you, the creditor, and the bureau.

Helping you increase your credit score often falls outside the scope of services for financial advisors, even though it is one of the most critical aspects of building wealth. Although it is something you are going to have to manage yourself (or tackle it together with your financial coach), the reality is that it isn’t all that difficult.

There is a lot of confusion and plenty of urban myths when it comes to credit scores, so make sure to do your research and more importantly, pay attention to your credit score. If you see it has gone up or down significantly, you may be able to pinpoint a cause or specific action that caused the change. The worst mistake you can make is to ignore your credit score. Sooner or later you are going to need it and the better it is, the more favourable the outcome is going to be.

It’s easy to go online these days and get more free financial advice than you know what to do with. There are blogs like this one, hundreds of financial gurus on YouTube, and plenty of online tools and calculators to help us with for everything from credit card repayment to retirement planning. So why then is it so difficult for us to actually implement some of these ideas and techniques and make meaningful changes in our financial life? Are we predestined to be bad with money, or is just that our money mindset is so engrained that it blocks change and continuously holds us back? We all know that our mindset is an important part of acquiring new skills or succeeding at a given task, and when that task is managing our money, a positive money mindset is more important than ever.

How does your history with money affect your money mindset?
A person's history with money can have a significant impact on their beliefs, attitudes, and behaviors related to money. Your upbringing and early experiences with money, such as how your parents managed finances, their attitudes toward spending and saving, and any financial struggles or privileges you experienced as a child, can influence your beliefs and behaviors as an adult. For example, if you grew up in a household where money was tight, you may develop a scarcity mindset and be more frugal or risk averse. Conversely, if you grew up in a financially comfortable environment, you might have a more relaxed attitude toward spending and saving.

Exposure to financial education or the lack thereof can also impact your money mindset. If you were taught the importance of budgeting, saving, and investing from a young age, you may have a more positive and informed money mindset. On the other hand, if you never received any financial education, you might struggle with financial literacy and make less-informed decisions.

Your past financial successes and failures can shape your beliefs about your ability to manage money. If you've experienced financial setbacks or made poor financial decisions in the past, you might develop a fear of financial failure or become overly cautious. Conversely, if you've achieved financial goals or made successful investments, you may have more confidence in your financial abilities.

What role does mindset play in achieving financial goals?
Cultural and societal factors play a role in shaping your money mindset. Different cultures have varying attitudes toward money, savings, debt, and wealth. These cultural norms can influence your beliefs and behaviors regarding money and can perpetuate some damaging money myths. For example, some cultures may prioritize saving for the future, while others may emphasize conspicuous consumption and status. Your money beliefs can also be influenced by the financial behaviors and attitudes of your friends and social circle. If your peers are big spenders and prioritize material possessions, you may feel pressure to do the same. Conversely, if your friends are financially responsible and encourage savings and investments, you may adopt similar habits.

Major life events, such as a windfall inheritance, a job loss, a divorce, or a significant medical expense, can dramatically impact your money mindset. These events can lead to shifts in your financial priorities, risk tolerance, and overall outlook on money. It's essential to recognize that your money mindset is not fixed and can evolve over time. By reflecting on your financial history and identifying how it has influenced your beliefs and behaviors, you can work toward developing a healthier and more balanced approach to money management.

How can I identify and challenge my own money misbeliefs?
Analyzing and changing your relationship with money is an important step toward achieving financial well-being and making more informed financial decisions. Start by reflecting on your past and current financial behaviors, attitudes, and beliefs. Think about how your upbringing, cultural background, and life experiences have shaped your relationship with money. Consider questions such as: What are my financial goals? What are my spending habits? How do I feel about saving and investing? Am I comfortable with financial risk, or am I risk-averse?

Look for recurring patterns or behaviors in your financial history. Do you tend to overspend during certain times of the year? Do you avoid discussing money with family or friends? Recognizing these patterns can help you understand your money mindset better.

Are there any practical strategies to improve my money mindset?
Your starting point should be to identify and write down your short-term and long-term financial goals. These could include getting out of debt, saving for retirement, buying a home, or starting a business. Clearly defined goals drive motivation and direction for your financial decisions.

The next step is to create a budget and track your income and expenses. It’s tempting to focus on earning more money as the solution, but effective money management of the income you have now will have a much greater impact on your financial situation. You need to first understand where you are spending your money before you can start trying to implement solutions. If you identify unhealthy spending habits, take steps to change them. There are lots of online tools and applications to make expense tracking a simple task that requires very little time.  It also pays to invest time in learning about personal finance. There are many books, websites, podcasts, and courses available that can help you improve your financial literacy. We offer free, informative webinars every week on a variety of personal finance topics. Understanding financial concepts will instill confidence and teach you the best ways to manage money.

What are negative financial mindsets?
If you hold negative beliefs like "I'll never be good with money" or "Money is the root of all evil", challenge yourself to turn them into positive and constructive beliefs. Ensure your financial goals are realistic and achievable and break larger goals into smaller, actionable steps. Setting unrealistic goals can cause frustration and disappointment that can sap motivation.

Create a comprehensive financial plan that include ideas to budget and save money, manage debt, and start investing. This could include cutting expenses, setting up automatic savings, or seeking professional help for debt management. Make sure to regularly review your financial progress and adjust your plan as required. Recognize your achievements even if they seem small and stay motivated. You may also want to consider working with a financial coach to get you started, and don't hesitate to seek support from friends or family. Discussing your financial goals and challenges with others can provide valuable insights and encouragement.

Changing your relationship with money takes time and effort — there are no shortcuts to getting good with money. Remember that your relationship with money is a journey, and it can evolve over time with conscious effort and self-awareness. Setbacks are a natural part of the process so be patient with yourself. By regularly analyzing your financial behaviors and beliefs, and taking proactive steps to make positive changes, you can build a healthier and more sustainable relationship with money.