The Financial Advisor Guide to Money & How to Manage It
Self Study Course # 11
MANAGING YOUR MONEY
Managing money in today’s world is increasingly complicated. Not only do we
have more spending options than in the past, we now have more choices of how
to pay – cash, cheque, credit card, debit card, pre-authorized withdrawals and
through the Internet.
We all use our money in different ways, reflecting our values and priorities.
Regardless of our financial personalities, what we decide to do with our money
today will impact our lives tomorrow. That’s why taking control of our money right
now – where it comes from and where it goes – is the first step towards a secure
future.
Managing your money means paying attention to the money you have and how
you use it.
Financial Planning by its very nature is the process of arranging your financial
affairs in such a fashion as to achieve long-term goals such as wealth creation and
ultimately Estate Planning to arrange for its orderly dispersal. Various Financial
Planning strategies will provide divergent approaches to achieving these goals.
Money management deals with cash management over a relatively short period.
Cash management includes debt and credit management. Financial management
covers broader territory and such long-term issues as the growth of investments to
provide wealth creation and its dispersal. It could include such planning strategies
as mortgage elimination or funding of education.
TAKE CONTROL OF YOUR FINANCES
The World is full of Temptation
Holidays, new clothes, electronic gadgets, cars, restaurants, new furniture... and
the list goes on and on. Should you fix the roof, paint the kitchen, take the kids to
the zoo, buy the latest DVD or replace your old watch?
2
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Then there are the financial considerations – putting money into an RRSP, paying
down the mortgage or reducing credit card debt. These are just some of the
money decisions Canadians constantly face.
While it’s tempting to indulge in an extravagance – and save for the future at the
same time – it’s usually not possible.
Of course, there are credit cards, personal lines of credit and even borrowing
against the equity in your home. But for many of us, these aren’t always the best
options.
In fact, without knowing your financial worth and priorities, you may get in over
your head financially. On the other hand, an accurate financial picture allows you
to plan for the future, whether it is three months or 10 years down the road.
Handling money wisely is a talent few of us are born with. But it is a skill that can
easily be learned. The place to start is with budgeting.
The more we earn, the more we spend
The following section will deal with the professional management of your money
by way of cash flow management, budgets and the wise use of available credit.
All of us have a money handling philosophy, partially learned from our parents, our
peers, the media and our own experiences.
We all have met (or are) one of the following:
The Hoarder:
A dollar saved is a dollar earned and the more saved the better.
The Borrower:
The more credit available, the more successful we are.
The Flasher:
The more we spend on appearance the farther up the social ladder we appear.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
3
The Plunger:
Just one more scheme and I will achieve the wealth I so richly deserve, which so
far has eluded me.
The Power Broker:
Money is power, the more I have the more control I can exert.
Mr. Cool:
I have got through life this far without saving, so why should I stop spending now?
Did you see that new…?
THE MONEY MANAGEMENT PLANNING PROCESS
1. Set Money Management objectives.
2. Collect and analyze income and spending patterns.
3. Determine money management strategies.
4. Commence budget and cash flow systems.
5. Monitor cash flow.
1. Money Management Objectives
There is considerable difference between a money management objective and a
financial planning objective. A money management objective is specific, can be
measured, it is actionable, realistic and it has an end point. A well thought out
objective is the key to overall success. Successive objectives are stepping-stones
to long-term wealth creation.
Financial planning objectives on the other hand are long term by nature and are
broad scoped. Your financial planning objectives may be to pay off your mortgage
and create a secure retirement fund, while your money management objective will
require cash accumulation over a shorter period.
Money management objectives must be specific to your individual situation, create
motivation and be achievable.
4
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
If you write down your money management objectives, they might look like
this:
A. Save $6,000 by next September when my mortgage renews, to reduce the
principal.
B. Save $4,500 by January to use as a down payment on a trailer in Florida.
C. Pay off all my credit cards by year’s end.
These short-term objectives could fit into long-term retirement objectives or
investment strategies.
2. Collecting and Analyzing Information:
To provide realistic goals we must first analyze our current income and expense
patterns. To do this we use the same tools a business uses to control their
revenue and expenditures and the data obtained is used for both the financial
planning and the money management process.
The Financial Statements used include:
A. Balance Sheet
B. Statement of Net Worth
C. Statement of Lifestyle Expenditures
D. Statement of Cash Flow
A. The Balance Sheet
The Balance Sheet presents a snapshot of your financial position at the current
moment only. It at best will compare last year to this year. It usually has the
Assets listed at the top, and the liabilities following at the bottom.
Assets
Assets are properties purchased and owned by the individual or company. They
are physical and can be valued, but they do not represent all the assets. Fixed
assets, rather than reflecting current market value are most often listed at their
purchase price, less depreciation where applicable.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
5
This is known as “book value” or “carrying costs”. This is a basic accounting
concept that avoids manipulation of the asset figures and is consistent with a
conservative point of view.
Assets are listed in order of their liquidity:

Liquid

Investment

Personal
Current assets are the most liquid and are the working assets. These assets can
include cash or that which will be turned into cash within one year of the reporting
date.
Assets are known as quick current assets or regular current assets and are listed
such as cash, any shares owned as well as any Canada Savings Bonds etc.
Other assets cover a wide variety of items not expected to be converted into cash
within one year, and are not used actively to produce the company’s products.
This includes items such as:

Cash value of life insurance policies and Mortgages receivables.

Prepaid expenses or deferred charges in excess of one year.

Investments in other companies or intangible assets that can include leases,
patents, copyrights, franchises and trademarks that the individual may own.
Liabilities
Liabilities are an individual’s obligation to outsiders and represent debt, which
must be paid at some time in the future. They represent creditor’s claims on the
asset values of the individual
Liabilities are listed on the balance sheet at the current value owed, not due, plus
accumulated interest. Liabilities can be categorized as either current or long term.
The more liquid the liability, the higher it is placed in the liability section.
6
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Any liabilities such as credit card balances, mortgages, car payments etc. are
considered in this section.
Notes to the following Balance Sheet
Please note the following financial transactions and their affect:

Proceeds of the sale of the cottage used to pay off their residential mortgage.

Purchased a Ski Chalet for rental purposes, thereby acquiring a new mortgage.

Increased their RRSP contributions significantly.

Increased their personal debt – Credit Cards.
The Balance Sheet is a valuable tool for money management since it outlines the
assets and liabilities as well as details the short-term debt position.
SAMPLE BALANCE SHEET - AS AT DECEMBER 31, 2011
ASSETS
2010
2011
Liquid Assets
Cash
$5,300
Short Term Investments
$4,200
Other Liquid Investments
$1,265
Total
$10,765
Investment and Business Assets
RRSP – Harry
$28,720
RRSP – Mary
$500
Registered Pension Plan
$14,500
Canada Savings Bonds
$10,000
Common Shares
$4,500
Rental Ski Chalet
$0
Mutual Funds
32,000
Other Investments
0
Total
$90,220
Personal Assets
Residence
125,000
Furnishings
17,000
Vehicles – Two cars
21,000
Cottage
90,000
Other Personal Assets
263,000
Total Assets
$363,985
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
$3,392
0
$2,776
$ 6,168
$36,300
$6,860
$17,140
$0
$5,000
99,750
36,000
21,000
$222,050
137,500
17,000
21,000
0
185,000
$413,718
7
LIABILITIES AND NET WORTH
Short Term Obligations
Credit Cards
$3,200
Personal Loans
$3,000
Total
$6,200
Investment and Business Loans
Bank Loans
$25,000
Mortgage on Ski Chalet
0
Total
$25,000
Loans to Purchase Personal Assets
Mortgage on Residence
$70,000
Car Loans
$12,000
Mortgage on Cottage
$24,000
Total
$106,000
$5,200
$4,000
$9,200
$25,000
$72,000
$97,000
0
$9,800
0
$9,800
Estimated Deferred
Income Taxes
$18,249
$26,870
Net Worth
$208,536
$270,848
Liabilities and Net Worth
$363,985
$413,718
B. Balance Sheet is similar to a Statement of Net Worth
Once we have completed the balance sheet, the data can be used to determine a
statement of Net Worth.
Net Worth = Assets – Liabilities
The statement includes your liquid assets, equity in investments, equity in
personal assets and deferred Income taxes. It provides the clearest picture of your
current financial position.
8
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
SAMPLE STATEMENT OF NET WORTH AS AT DECEMBER 31, 2011
2010
Equity Ratio
2011
Equity Ratio
Liquidity
Liquid Assets
$10,765
$6,168
Short Term Obligation
($6,200)
($9,200)
$4,565
42%
($3,332)
(49%)
Equity in Investments
Investment Assets
Investment Loans
Equity in Personal
Assets
Personal Assets
Long Term Personal
Loans
$90,220
($25,000)
$65,220
72%
$263,000
($106,000)
$157,000
Deferred Income Taxes
NET WORTH
$222,050
($97,000)
$125,050
56%
$185,500
($9,800)
60%
($18,249)
$208,536
$175,700
95%
($26,870)
$270,848
Three ratios can be determined from this statement.
The “Equity Ratio” measures the relationship between your total Assets and
liabilities.
Equity Ratio = (Total Assets – Liabilities)
Total Assets
1) Equity Ratios for Liquidity
The equity ratio for your Liquid Assets and short-term debt provides a
measurement of your ability to pay short-term debt as required.
2) Equity Ratio for Investment Assets
The equity ratio for Investment Assets shows the extent to which you are
leveraging your investments. If you finance investments with loans, the interest
charged is tax deductible.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
9
3) Equity Ratio for Personal Finance
This ratio shows the extent to which you have borrowed to finance the purchases
of your personal assets. Interest charged for these loans are generally not tax
deductible.
C. Statement of Lifestyle Expenditures
This statement presents a clear picture of the household spending patterns that
support your lifestyle. You will note that cost of accommodation only includes rent
or in interest paid on the mortgage. It does not include the cash down payment or
principal repayments. A car purchase follows a similar pattern.
Contributions to RRSP's, increases in Credit Card Debt, Income Tax remittance
also does not appear on this statement. The value of this statement is that it
provides a tool to analyze your spending patterns and with this information,
improve your cash flow.
SAMPLE STATEMENT OF LIFESTYLE EXPENDITURES FOR THE YEAR
ENDING DECEMBER 31, 2011
2010
2011
Mortgage (Interest Only)
8,460
0
Property Taxes
1,900
1,995
Insurance
700
735
Utilities
2,300
2,415
Maintenance
1,600
1,600
Garden Upkeep
500
500
Housing Costs
15,460
7,245
Food
Household Expenses
Telephone
Personal Care
Clothing
Other
Food, Household, etc.
4,600
700
900
1,200
4,300
500
12,200
4,830
735
900
1,260
4,500
500
12,725
Car Payments (Interest
Only)
Insurance
1,400
1,100
700
770
10
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Gasoline
Maintenance
Public Transportation
Transportation
2,100
1,200
500
5,900
2,200
1,200
500
5,820
Entertainment
Eating Out
Gifts
Fees, Accounting etc.
Holidays
Other
Discretionary
1,500
1,200
1,400
1,700
1,200
5,300
12,300
1,500
1,200
1,400
1,800
2,200
0
7,100
Medical Expenses
Life and Disability Insurance
Payroll Deductions (Sundry)
Bank Charges
Credit Card Interest
Other
Miscellaneous
Basic Lifestyle
Expenditures
600
300
1,800
240
580
1,320
4,840
650
1,000
2,000
270
630
1,600
6,150
$50,700
$39,040
D. Statement of Cash Flow
This statement shows the source of Cash Flow both in and out of your accounts.
It will detail income not only from remuneration, but also income from net
investments as well as net personal assets. This statement is measured over a
distinct period, such as 3 months to 3 years. It will determine if you have any cash
left over at the end of the reporting time. Using this statement you can create a
budget.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
11
SAMPLE STATEMENT OF CASH FLOW FOR THE YEAR ENDING DECEMBER 31,
2011
2010
2011
Cash From Source of Income
Employment and self-employed
72,000
76,500
Income
Pension Income
0
0
Dividends, Interest and Rents
12,015
12,045
Totals
84,015
88,545
Cash Outlays for Expenses
Income Taxes
(17,520)
Lifestyle Expenditures
(50,700)
Interest Expense for Investments
(5,160)
Other Cash Outlays for Expenses
0
Unaccountable for Difference in
430
Cash
Total
(72,950)
Cash Flow From Income and
11,065
Expenses
Cash Flow From Net Investment Assets
RRSP – Harry
(500)
RRSP – Mary
(1,800)
Registered Pension Plan
0
Canada Savings Bonds
0
Common Shares
0
Rental Property
0
Mutual Funds
0
Other Investment
(500)
Investment Loans
0
Total
(4,500)
Cash Flow From Net Personal Assets
Residence
0
Furnishings
0
Vehicles – Two Cars
0
Cottage
0
Other Personal Assets
(500)
Loans to Purchase Personal Assets
(3,500)
Total
(4,000)
Total Cash From All Activities
12
$2,565
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
(17,104)
(39,040)
(11,640)
0
44
(67,740)
20,805
(5,815)
(1,134)
10,000
0
0
0
(20,000)
54,000
0
32,798
0
0
0
35,000
0
(96,200)
(61,200)
($7,597)
3. Determine Money Management Strategies
To improve the financial picture revealed by the four statements will probably
require some changes in money management technique and the adoption of some
basic strategies.
The following steps are simple to understand, but somewhat more difficult to
initiate.
a) Invest in Yourself First
If you remove money from income before you pay anything else, it will result in
growth in your savings investments and emergency accounts.
b) This can be arranged either by source deduction from your employer or
automatic transfer by your bank when you deposit your paycheque.
c) Track Your Expenditures
If you diligently record your daily spending habits, it will allow you to analyze
your spending habits. Once a month, sit down and review, in hindsight,
whether the expenditure was necessary or could have been saved. The
amount you are paying yourself first may be increased by the amount of the
revealed unnecessary expenditures.
d) Limit Pocket Money
Carry only the amount of cash necessary for daily purchases. This may also
extend to money that is easily accessible with your Bank or Debit Card.
Carrying large amounts of cash makes it difficult to track its dispersal.
e) Track Realistically
If your record keeping is too precise and does not allow for personal enjoyment
and personal habits, you may decide that the “Gain is not worth the Pain”. The
goal is to improve the overall picture, not the elimination of life’s small
pleasures.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
13
f) Instant Credit Use
It is practically impossible to live today without the use of Credit Cards and/or
Debit Cards. Purchases, at the stores, over the phone, by fax or by the
computer, require a guaranteed method of payment.
For many of us, since this isn’t “money” as such, it’s easy to lose track of how
much we have expended on a daily basis until the middle of the month
following. The interest charges on the unpaid balance are onerous and total
repayment may not be possible.
g) Bank Charges
Bank Charges are a necessary part of handling money, but unnecessary
charges for bounced cheques (NSF) and prolonged use of overdraft protection
can eat into the amount of cash available for personal use or investing.
h) Emergency Fund
The best prevention for avoiding financial distress is the establishment of a
buffer account we will call an Emergency Fund. It may not be an actual
savings account, but it will be easily accessible in a short-term period. It is a
good technique to have three to six months living expenses available in the
event of life’s reoccurring disasters. For most of us, this will be accomplished
with small savings over a period deposited into some form of short-term
investment. Credit is not advisable, and must be paid back and a credit line
should be used only for short duration only.
i) Take a Credit Holiday
A couple of times a year, it is wise to take a month, and not use any of your
credit devices and pay cash or do without until the following month. This
allows you to ease the month end burden of bill paying, and gives you a
chance to see what is important enough that you are willing to spend “cash” on
it.
14
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
j) Know the Income Tax Act
A good working knowledge of the Tax Act is essential to eliminating unnecessary
taxation.
4. Starting the Process
There are many ways to budget – on a day-to-day, week-to-week, or month-tomonth basis. The more detailed approach is likely to give you a more accurate
picture, but bear in mind that a monthly budget is just fine. If you get paid every
two weeks it may just be easier to let your budget follow your pay schedule.
When you create your budget, you can use a spreadsheet on your computer or
write it on a sheet of paper. We’ve provided some handy charts to help you
calculate your income and expenses. Feel free to photocopy these or make your
own charts complete with your unique categories. The quicker you get started, the
better.
Figuring out Your Income
How much money do you have to work with? Calculate your available income
based on your take-home pay (after taxes and other deductions). Remember, your
income can come from many sources – salary, tips, pensions, rental property
income, social assistance, child support, alimony, commissions or bonuses,
interest and investments. If you earn income irregularly, you need to average what
you earn to get a monthly income.
Don’t count on overtime pay as regular income. Overtime pay can seldom be
relied on consistently, so don’t include it as income in your budget. Instead use
occasional overtime to help contribute to goals.
Where Does Your Money Go?
What are your expenses? Remember that if you know exactly where your money
is going, only then can you decide if you’re spending it wisely.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
15
Consider the following for successful money management:
A. Fixed expenses
Those bills you have to pay and that tend to be the same amount month-to-month
or year-to-year. They include: rent or mortgage payments, insurance, fees for
education, car payments, furniture and appliance payments, payments on
personal loans and credit cards, taxes for self-employed workers and your savings
program.
B. Variable expenses
The amounts that varies from month to month and over which you have some
control. They include: food, clothing, utilities, transportation, long distance
telephone, club memberships, vacations, household supplies, gifts and
contributions, personal care, recreation, babysitting, pets, and money for other
miscellaneous purchases.
C. Your records
Keep well-maintained files that you can review. Include cancelled cheques, credit
card statements, receipts and ABM/debit transactions and bank books.
Cash management is a plan to handle the day-to-day administration of your cash
resources.
It is good planning to work out the details of the following:

A workable budget

The automation of bill payments

The management of cash flow from one account to others.
While these plans can be quite detailed, a simple plan that works is better than a
complex plan that requires constant attention.
16
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Cash Management Made Simple
We have already discussed the concept of “Pay yourself first” and this is a good
working motto for money management. An alternative you may want to set up a
number of special accounts that are all interconnected.
Special Accounts
Account #1 Collection account that all income is collected into.
Account #2 An investment account into which you transfer each month the “pay
yourself first” portion of your income.
Account #3 A chequing account out of which to pay the monthly bills.
Account #4 A temporary holding account (interest bearing) to hold expense
monies until needed in the near future.
Account #5 A certain amount needs to be maintained in a special Emergency
Fund Account to enable you to handle emergencies with cash, rather than to use
credit. Credit requires repayment and will add interest to the cost. This amount is
easier to accumulate with small money contributions than large cash injections.
An effective plan requires adjustments from time to time to reach your goals. If
you consistently miss your goals, you may need to re-examine your previous
analysis and assumptions. If the problem persists, you may require a more
comprehensive management plan. The problem can be intensified if you have an
irregular cash flow or if your outgo tends to be inconsistent.
A comprehensive plan will follow the first three steps, but in addition, you may
want to make a forecast in the following areas:
1) How secure is your future income?
2) What rate of return are you experiencing on your investments?
3) What major expenditures are expected?
4) What long-term replacements of major items such as the car or appliances are
foreseen?
5) What emergency funding is needed?
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
17
6) What amount of discretionary funds will be needed to reduce debt or increase
savings?
The Budget
A good budget is comprehensive, but must be simple to maintain. It is not
important whether you obtain a budget form from a stationary store or use a
computer program, either way simple is better.
5. To Know the Score, Keep the Score
Tracking your results is all-important. To meet your objectives, requires effective
monitoring of your cash management plan.
A. Simplified Management Plan
If you have met your savings goal, increase your goal using a reasonable
“yardstick” such as inflation. Currently this would indicate an average increase of
2-3%.
If you have undershot your savings goal, you should re-examine your original
premise. If you were unrealistic, you may need to make an adjustment. If you
were not, you may require comprehensive cash Management Plan.
B. Comprehensive Management Plan
To monitor a CMP requires a regular comparison (monthly or quarterly) between
expenditures and the budget. This will show discrepancies that may require readjustment or a more realistic goal.
MANAGING YOUR CREDIT
“To spend or not to spend”, that is the question.
Part of personal money management is using credit. Credit is part of virtually
everyone’s financial reality. In order to buy a home, a car, an appliance, take a
holiday or even invest, many of us must borrow. The advantage of credit is that we
can enjoy new purchases today that we don’t have to pay for until tomorrow.
18
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Just as credit can be an asset to our lifestyles, if not handled carefully it can
become a liability. Credit cards, in particular, are so convenient that we can
sometimes get out of hand with our spending. Although “putting it on plastic” feels
as if real money isn’t involved, you are spending and just postponing payment. In
fact, if you don’t pay off your balance every month, you will be charged interest on
any outstanding balance.
Credit can be good or bad. It depends on how you handle it. Before you decide on
credit, carefully consider all of the factors and weigh them against your personal
needs and values. Be sure to shop around for credit products. Only then can you
make a balanced decision.
Easily accessible credit has been one of the greatest boons of modern times as
well as being one of our greatest curses. An efficient money Management plan
will often require a detailed examination of your use of credit and your spending
habits. If budget restraints are not sufficient, Professional assistance credit
counselling may be required. Restoring, improving or repairing your credit is not
easy to do and does not happen overnight. If it is an outstanding debt, whether it
is at a Collection Agency or not, and there is a history of slow payments and you
are presently behind, the following is a fact: If you attempt to make arrangements
to repay the debt, on your own, your credit rating doesn't improve at all or reflect
any payments being made until you pay off the entire debt. Even when the debt is
paid in full, your credit rating is will be damaged for six more years, just like a
person who declared personal bankruptcy. If you have missed any payments
within the last several years or if any of your debts are in Collection you need to
arrange for repayment to guarantee that your credit rating is not ruined and does
reflect the payments you are making!
If you have an old debt that is paid in full and you have found out the hard way
about the truth of how unfairly our credit rating and scoring system works, there
are agencies and companies that can help.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
19
This restoration or repairing of credit involves the challenging of information that is
contained on a consumers personal credit profile. A legal dispute is initiated and
the overall quality and integrity of a credit report is questioned. This is done in an
effort to ensure that it is not misleading credit granters and only 100% accurate
and verifiable information is contained within it.
The Government Act that governs what is reported and recorded on a person’s
credit report is the Consumer Reporting Act. This Act clearly states that the credit
bureaus are to ensure that there is no misleading, outdated, untruthful or
erroneous information contained on a consumer’s credit report.
The poor quality of credit reports being generated is not a mystery to anyone in the
credit and financial world. The credit bureaus, creditors, collection agencies and
courts are all aware that the reports being produced fall short of what is required
by law, but they just don't feel like re-inventing the wheel yet!
When a legal dispute is logged, the credit bureau and creditors must either prove
that the information they have on file is 100% accurate or they must correct it or
remove it.
Some of the Laws and Acts that your prospects and clients can turn to are:

The Consumer Reporting Act.

The Privacy Act.

The Collection Agency Act.

The Freedom of Information Act.

The Personal Properties and Securities Act.
Credit Bureaus, media and other credit and financial related companies are doing
all they can to convince the public that no one can remove derogatory items from a
person’s credit profile. When a credit history is requested by a consumer from
Equifax Canada, the largest Canadian consumer reporting agency, a brochure
explaining certain points about your credit report and how it is recorded and been
reported is included with the report.
20
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
They have gone so far as to include some propaganda about "credit repair clinics"
and "credit doctors". Your clients and prospects should be very careful about who
they entrust their financial and credit affairs to. As with most things in life, caution
should be taken when it comes to credit. To better understand the advantages
(and disadvantages) of credit we need to examine the two major credit
systems:
1. Revolving Credit
2. Consumer Loans
1) Revolving Credit
Revolving credit is a form of credit that gives you a maximum spending limit at
your discretion. It is always available, provided you pay it back between
purchases. It is sometimes called “vendor Credit” because it is most often seen as
credit cards, department store cards or lines of credit. The borrower has an upper
limit set by the lender and is charged interest at a fixed or variable rate on the
outstanding balance. The charges may also include a service fee and usually
requires a minimum monthly payment.
These credit type cards have a high interest rate and generally do not require
assigned security.
Revolving credit is a type of demand loan and payment in full can be
demanded at any time.
Advantages:

Convenient and flexible.

Can be paid off at any time without penalty.

Minimum monthly payments.
Disadvantages:

May lead to excess use.

High interest rate on unpaid balance.

Full repayment upon demand.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
21
2) Consumer Loans
Whereas revolving credit had a great deal of flexibility and required used
discretion, Consumer Credit is fixed and rigid. It is also referred to as direct or
fixed credit.
It differs from Revolving Credit in that you must make a loan application to the
financial institution. The application must be approved for a specific purpose and
amount e.g. car loans.
Consumer loans require a set payback period with the monthly payment schedule
dependent on interest rate and number of months required. The interest rate may
be fixed or variable, depending on the contract terms.
Advantages:

Easier to control than revolving, credit.

Some choice in repayment terms.

If loan is open, balance can be paid at any time without penalty.
Disadvantages:

Requires substantial monthly payments.

Incurs high interest charges.

Once set, payback is inflexible.

If contract is closed, large penalties may apply for early repayment.
Loan Security
Sometimes your signature is enough to get credit. Other times, you may need to
offer tangible assets – real estate, stocks and bonds or durable goods such as a
car. Offering tangible security allows you to borrow more and the rate of interest
you pay may be lower. Remember that when you offer such security, you risk
losing it if you don’t meet your obligation to repay your loan. Please note that the
type of security you may offer varies with provincial legislation.
22
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Since the credit grantor runs the risk of unpaid loans defaulting, they either charge
high interest rates (revolving credit) or require security by way of collateral
(consumer loan).
Secured Loans, Chattel Mortgage and Collateral Mortgage
With a chattel mortgage you provide movable property such as a car or boat as
security. If you don’t pay the loan as agreed, the lender can legally take
possession of the property you have used as security.
The collateral mortgage is a means of using equity in real property such as a
house, as security for a loan. Equity is the difference between what you could sell
the property for and what you still owe on it. Using the equity may help you get a
better rate or a larger loan. Other forms of security include GICs, bonds or
treasury bills.
OBTAINING CREDIT
Whether it’s a credit card, a car loan, a mortgage or a line of credit you’re applying
for, there are some basic guidelines you should follow:

Know your income and expenses ahead of time and have a detailed statement
of your net worth.

Make sure you have a good credit rating.

Give yourself some time to apply before you actually need the credit. That way
you can shop around for the best rates and conditions. For instance, why not
get a pre-approved mortgage before you put in an offer on a house. That way
you will know how much you’ll be able to afford.

Read and understand credit application forms before you sign them. Don’t be
afraid to ask questions if you don’t understand something.

Provide copies of your last T-4 slip or a letter from your employer stating your
annual earnings.

Give details of any assets and their value (your home, vehicle, savings
accounts, bonds, stocks, term deposits and insurance policies).
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
23

Give details of expenses and money owed. Provide a copy of your annual
mortgage statement if you have a home; statements showing any outstanding
balances on credit cards and information on loan balances.

Try to match your borrowing to your purpose. For example, use short-term
credit for consumer goods, medium-term for vehicles and long-term for homes.
Don’t use a more expensive form of credit than is necessary.

Be realistic about the amount you want to borrow. Be willing to discuss
alternatives if the lender can’t totally accommodate you.
Credit lenders check applicants for the four C’s:
1. Credit Rating
2. Capacity
3. Collateral
4. Character
1. Credit Rating
Your credit payment history is viewed as a forecast of your future credit
performance and this is accessed through a credit bureau. This history generally
covers the last seven years. You are rated on a scale of 1 to 9. One represents a
perfect repayment history and you lose a point for each missed payment.
Your credit file may contain

A list of everyone who has checked your file.

Civil court proceedings.

Bankruptcies.

Court orders to repay funds and defaults.

Payment histories.
Your file may not contain:

Criminal proceedings.

Utility bill payments.

Bank loans.
24
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12

Student loans.

NSF cheques.

Credit card purchase items.

Opinions.
It is advisable to check your own file occasionally to verify that the information
contained is accurate. If you find credit errors, you can have them corrected or file
your version of the events. Since each inquiry shows as a credit check, shopping
for credit may look suspicious to future lenders.
2) Capacity
Your capacity to carry debt is measured by two ratios:
a) Total debt service ratio, and
b) Gross debt service
a) Total Debt Service Ratio:
TDS = Total Annual Debt Costs
Gross Annual Income
Rule #1
The upper limits of your TDS should not exceed 35 to 42% of your income. Since
the method includes all debt loads, it is more accurate than:
b) Gross Debt Service Ratio
GDS = Annual Mortgage Payments & Annual House Costs
Gross Annual Income
Annual house costs would contain:
Property taxes, heating costs and condo fees if required. Utility costs such as
telephone and electricity are not included.
Rule # 2
GDS should not exceed 25 - 32 % of your gross income.
(If property is rented, the rental income will be included in your gross income.)
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
25
3. Collateral
Lenders, to offset the risk of bad debts, require either high interest rates or
collateral. The bigger (or better) the collateral, the better (or lower) the Interest
rate that can be negotiated.
4. Character
Character to be useful in bad times needs to be established in good times.
A loan officer draws a conclusion from your personal meeting and from a
mathematical loan formula. The more solid the relationship, the more cooperation
you can expect in times of stress.
CREDIT OPTIONS – SHOP AROUND
In today’s financial world, there are many types of credit available to you. Look at
different options – some may be better suited to your needs. The following list is
an overview of what is available. Keep in mind that each one has its own benefits
and drawbacks. As with any other item or service you buy, you can control how
much you pay. Talk to your financial institution to get more details.
Credit cards
There is a great deal of choice in the credit card marketplace today. In fact, there
are hundreds of issuers of credit cards in Canada. The different cards offer a
variety of options, so it’s important to have a good understanding of their features
and costs before you sign up. Ask yourself these questions: What are the interest
rates? If you pay your balance in full each month there will be no interest charges.
If you carry a balance from month to month, then interest becomes an important
factor in choosing a credit card. The low-rate cards are an option for customers
who carry a balance on their cards. Do they charge an annual fee? Are you
looking for extras? You can get cards that range from no-frills or low-interest, to
premium cards offering such extras as affinity programs, insurance or discounts on
purchases. Other cards may have loyalty programs allowing you to collect points
towards a trip, car or other goods. You might also want to consider a different
credit option, like a line of credit.
26
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Some financial institutions offer credit cards like VISA, MasterCard and American
Express. They can be used to extend payment for the purchase of goods and
services over time. If full payment is made when due, there are no interest
charges.
However, if you take a cash advance on your credit card, you are charged interest
from the moment you make a withdrawal until the money is paid back.
Other cards include Diners Club, Carte Blanche and those issued by retailers and
other companies such as The Hudson Bay Company or Petro-Canada. Interest
charges, payment terms and credit limits vary. Some cards have loyalty programs
similar to those offered by financial institutions. When adjusting interest rates,
credit card issuers must give up to 60 days notice of credit card interest rate
changes.
Personal Line of Credit
This is a pre-set credit limit that can be used at any time as needed. Often secured
against pledged assets such as your home, it is generally offered at a lower
interest rate than a credit card. Payments can be made in fixed amounts, varying
amounts or interest only.
Overdraft Protection
For a limited period, the financial institution will cover a customer’s short-term cash
shortage in their account. In addition to offering convenience, overdraft protection
prevents a potential blemish on the customer’s credit rating by covering NSF (not
sufficient funds) cheques. There may be a monthly charge for using this service,
as well as an interest charge on the funds used.
Personal/Consumer Loans
There are many options here because the term, repayment and interest rates of
loans vary. Credit history, collateral and the financial institution offering the loan
also have a bearing.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
27
Personal loans can be obtained from banks, trust companies, credit
unions/caisses populaires (depositor-owned savings and/or lending institution),
finance companies and even life insurance companies if you have a policy. They
include instalment loans, demand loans, life insurance loans, property mortgages
and conditional sales contracts.
Term/Instalment loans
Money advanced for a specific purpose such as a car or vacation in return for
regularly scheduled payments.
These loans may be secured or unsecured and interest rates vary depending on
market conditions. Instalment loans may be fixed (the term and interest are set
and don’t change) or variable (the interest you pay varies with changes in the
prime lending rate.)
Demand loans
These are sometimes obtained from financial institutions. The rate of interest is
generally not fixed, but tied to the prime lending rate. Repayment may be required
by the lender or made by the borrower at any time.
Life insurance loans
These involve money borrowed from an insurance company against the cash
surrender value of a life insurance policy. The face value of the policy is then
reduced by the amount of the loan until it is repaid.
Residential mortgages
These are usually long-term loans primarily for the purpose of buying a home.
Financial institutions offer many repayment options designed to suit the needs of
the borrower.
28
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Reverse mortgage
Sometimes called an equity conversion or a home income plan, the reverse
mortgage is an insurance company product now being offered by many financial
institutions. Here’s how it works: you take out a mortgage on your home and the
proceeds are used to buy an annuity that provides you with an income source.
You can also opt for a lump sum payment. The income is not taxable. The
mortgage is only repaid when you sell your home. The benefit is that you continue
to live in your home. Because you have not sold your home, you benefit from the
appreciation in its value. The reverse mortgage works well for older homeowners
who need to supplement their income.
Home equity financing
You can use the equity you have built up in your home as security for your
borrowing needs. The more you’ve paid down the mortgage on your home, the
more you can borrow.
Conditional sale contracts
These loans are usually offered through retailers. When you make a purchase, a
conditional sale contract and a promissory note are signed. The contract and note
may then be sold by the retailer to a lender (financial institution). You then make
your payments to the lender.
Leasing
This is a form of term loan because you make regular payments at a rate of
interest. Unlike a loan, it’s really a long-term rental. At the end of the lease, you
don’t automatically own the product – however you may have the option to buy it
at its residual value.
PAYING FOR CREDIT
Credit is access to someone else’s money. Interest is the cost of borrowing that
money.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
29
Loan interest rates may be fixed or variable. Fixed rates remain the same for the
period covered by the loan, while variable rates change with market conditions.
The interest rate of a variable loan is usually tied to an indicator such as the bank’s
prime rate. The loan agreement states how often, when and how much rates may
change.
For instance, a variable mortgage rate amortized over 20 years with a five-year
term may have the same monthly payments for five years. The interest rate may
vary according to the bank’s prime rate on the first day of each month. These
differences will affect the principal balance – lower rates mean more of the
principal is paid off and you pay less interest, while higher rates mean the principal
is paid off more slowly because more of your monthly payment is needed to pay
interest costs.
It is important to remember that interest rates fluctuate, meaning they go up and
down over time, depending on economic conditions. When you are borrowing or
making credit purchases when interest rates are low, always keep in mind that if
interest rates could rise, your borrowing or credit costs could go up and this may
affect your ability to repay the debt. Make sure you can still afford the debt if
interest rates rise.
What the lender charges depends on many factors, including the cost of money,
the risk involved and other costs of doing business. The difference between what
the lender pays to borrow money and what the lender charges you for a loan is
called “the spread.”
This money is expected to cover operating costs and provide the lender with a
reasonable profit. The risk of non-repayment is another important factor for the
lender.
The degree of risk also helps determine the interest rate charged by the lender.
This is why interest on unsecured loans like credit cards is higher than on secured
loans like mortgages.
30
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Borrowing will cost you less in the long term if you can make extra payments of
any amount or if you can pay off your loan sooner.
SMART CREDIT USE
Once you get credit, you still need to think about how to best make it work for you.
Consider credit a tool to help you reach your goals.
As a rule:

Watch impulse buying. Ask yourself if you’d still buy an item if you were paying
cash.

Credit is still money, so compare price and value when you’re shopping for an
item.

Don’t use too many credit cards. Do you really need all of those cards?

Keep track of all credit card purchases and compare your receipts against
monthly statements.

When you’re buying a vehicle, pay attention to loan prices. Make as large a
down payment as possible and weigh the cost of borrowing against using more
of your savings for the purchase. Maybe you shouldn’t hang onto a GIC that’s
earning 3 per cent and sign up for a car loan with a rate of 8.5 per cent. That’s
not to say that you should cash in all your savings for a vehicle. You should
always maintain a financial cushion for the unexpected.

For Canadians, the biggest purchase in their lifetimes is usually a home. The
mortgage market is very competitive and it pays to shop around for the best
terms and interest rates. Explore the variety of ways to pay down your
mortgage faster – lump sum payments at renewal, shortening your
amortization period and doubling up on payments. Don’t forget, making the
largest down payment possible can take years off your mortgage. Always look
at your mortgage as a living document. Take stock at renewal time to revisit the
terms and discuss with your mortgage holder whether you’re comfortable with
those terms. Don’t be afraid to alter the arrangements to your benefit – for
instance, try to negotiate a 1/4 per cent off your mortgage rate.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
31

Be careful of co-signing or guaranteeing a loan on behalf of others. You could
end up paying off the loan if the borrower can’t make the payments.

Pay off your credit card balance in full every month. It’s a smart move. Almost
70 per cent of Canadians pay off their credit cards each month, all or most of
the time.
BUILDING A GOOD CREDIT RATING
It’s easy to do. Remember your credit rating is your financial reputation and you
want to protect it. Your credit file shows your history of borrowing and repayment.
By simply paying your bills on time, you are building a good credit rating. Without a
credit rating, few institutions will lend you money.
Governed by provincial laws, the consumer reporting agency is an organization
which collects credit information. These agencies include Equifax Canada Inc.,
Northern Credit Bureaus Inc., and TransUnion Canada. Lenders, such as retailers
and financial institutions, provide consumer reporting agencies with factual
information about how their customers pay their bills. The consumer reporting
agencies then assemble this information into a credit file on each consumer. Your
credit file will not tell you how an individual lender will rate you as a potential
customer, as each lender has its own policies for making credit granting decisions
about customers. The length of time the information is kept on your credit file
varies by the type of information. Most of your credit information remains on your
file for up to seven years.
Tips to building a good credit history:
1. Pay your bills promptly, especially credit cards.
2. Borrow only what you need and what you can afford.
3. Try to pay off loans on time and as quickly as possible. This helps your credit
rating and saves valuable interest costs.
32
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
CHECKING YOUR CREDIT HISTORY
As a consumer, it's your right to know what information is contained in your credit
file. Credit may be denied based on inaccurate or insufficient information. You
should check your file periodically, especially if you plan to apply for a large
amount of credit such as a mortgage. You can get a copy of your credit file
through one of the consumer reporting agencies in Canada free of charge.
Here are some guidelines:

Contact your local consumer reporting agency, which you can find in the yellow
pages, to find out how you can obtain a copy of your credit file. Given the
sensitivity of the information contained in your credit file, proof of identification
is necessary prior to the consumer reporting agency sending you a copy of
your credit file.

Upon receipt of your request for your credit file, it will be mailed to you free of
charge by the consumer reporting agency. Delivery could take two to three
weeks. You can also have immediate access to your credit file online for a fee.

If you notice any errors, the consumer reporting agency will investigate with the
lender and, if your credit file does contain an inaccuracy, it will be changed
immediately.

If you do not agree with the result of an investigation by the consumer reporting
agency, a brief statement explaining that you disagree will be added to your
credit file. This statement will be shown to any lenders that access your credit
file.

If an error has been corrected, the consumer reporting agency will send a
revised copy to members who have inquired about you during previous months
(as required by provincial law).
DEALING WITH A CREDIT CRISIS
Some warning signs of heading down the wrong road towards a credit problem:

Spending more than 20% of your net pay (after housing payments) on debt

Do you hopscotch payments (pay some accounts one month, other accounts
next month).
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
33

Minimum payments only on credit cards

Obtain credit from non-commercial lenders to cover debt obligations.

Uncertain as to total debt.

No emergency reserve funds.

Can’t make your minimum monthly payments on your credit cards

Take cash advances for living expenses

Aren’t sure how much you owe

Never seem to be out of debt
SOME SUGGESTED RECOVERY TIPS:

Put away all of your credit cards.

If you have several debts, consider consolidating them into one consumer loan.
You’ll save on the interest rate, especially if your debt is from credit cards.

Re-evaluate your spending habits and lifestyle.

Understand how you got into debt and stick to a plan to prevent it from
happening again. Creating a budget can help.

If slow payments are affecting your credit rating, consider contacting your
creditors to see if you can make alternative arrangements. Be honest with your
creditors. Let them know you’re having difficulty and work with them to find the
best way to meet your financial obligations.

Seek the advice of a credit counsellor if you can’t sort things out yourself.
There are many not-for-profit credit counselling agencies across Canada. An
experienced counsellor will sit down with you to look at your situation, discuss
your options and help you develop a course of action.

When you begin to recover financially, consider keeping only one credit card
and reduce your credit card limit. It will be easier to track your spending and
you won’t have the combined credit limits to tempt you to spend.
34
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
WHERE TO TURN TO FOR CREDIT COUNSELLING AND ASSISTANCE:
CREDIT COUNSELLING CANADA
www.creditcounsellingcanada.ca
British Columbia
Credit Counselling Society
Toll-free: 1-888-527-8999
Tel: 604-527-8999
Fax: 604-527-8008
E-mail: info@nomoredebts.org
website: www.nomoredebts.org
Alberta
Credit Counselling Services of Alberta
Toll-free: 1-888-294-0076 (AB only)
Calgary: Tel: 403-265-2201
Fax: 403-265-2240
Edmonton: Tel: 780-423-5265
Fax: 780-423-2791
E-mail: info@creditcounselling.com
website: www.creditcounselling.com
Saskatchewan
Provincial Mediation Board Credit Counselling
Toll-free: 1-888-215-2222
Regina: Tel: 306-787-5387
Fax: 306-787-5574
Saskatoon: Tel: 306-933-6520
Fax: 306-933-7030
website: www.saskjustice.gov.sk.ca/provmediation
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
35
Manitoba
Community Financial Counselling Services
Tel: 204-989-1900 or 1-888-573-2383
Fax: 204-989-1908
E-mail: cfcs@mts.net
website: www.creditcounsellingcanada.ca/manitoba.html
Ontario
Ontario Association of Credit Counselling Services
Toll-free: 1-888-7IN-DEBT (1-888-746-3328)
Fax: 905-945-4680
E-mail: oaccs@indebt.org
website: www.oaccs.com
Agencies are located across Ontario.
Quebec
Credit Counselling Services of Eastern Ontario
Toll free: 1-866-202-0425
E-mail: ccseo@k3c.org
Newfoundland & Labrador
Credit Counselling Service of Newfoundland and Labrador
Tel: 709-753-5812 Fax: 709-753-3390
E-mail: info@debthelpnewfoundland.com
website: www.debthelpnewfoundland.com
Prince Edward Island, Nova Scotia and New Brunswick
Credit Counselling Services of Atlantic Canada, Inc.
Toll-free: 1-888-753-2227
E-mail: ccsinfo@ccsac.com
website: www.ccsac.com
36
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Yukon
See British Columbia Credit Counselling Society
Toll-free: 1-888-527-8999
Northwest Territories
See Alberta and British Columbia
Credit Counselling Services of Alberta
Call collect: 0-403-265-2201
Credit Counselling Society
Toll-free: 1-888-527-8999
Nunavut
See British Columbia and Manitoba Credit Counselling Society
Toll-free: 1-888-527-8999
Community Financial Counselling Services
Toll-free: 1-888-573-2383
CREDIT INQUIRIES AND REPORTING AGENCIES
Equifax Canada Inc.
Credit Information Services directs you to a local credit reporting agency
Toll-free: 1-800-465-7166
E-mail: consumer.relations@equifax.com
website: www.equifax.ca
Northern Credit Bureaus Inc.
National Data Centre
Suite 1401, 1705 Playfair Drive
Ottawa, Ontario K1H 8P6
Tel: 819-762-4351 / Toll-free: 1-800-532-8784
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
37
TransUnion Canada (for residents of all provinces, except Quebec)
Consumer Relations Centre
Toll-free: 1-866-525-0262
website: www.tuc.ca
TransUnion (for residents of Quebec)
Toll-free: 1-877-713-3393
website: www.tuc.ca
Additional Online Resources for Youth
There’s something about Money – www.yourmoney.cba.ca
CBA’s interactive money management site for youth that provides information on
budgeting, credit, compound interest and much more.
The YourMoney Network – www.yourmoney.cba.ca
A one-stop online resource that offers non-commercial financial information for
youth. The YMN hosts over 50 partners which provide information from all walks of
the financial world on more than 800 resource areas.
Some Credit Terms of Reference:
Secured Loan
A loan, which is secured with collateral.
Liquid Assets
Used as collateral to secure a loan may be in the form of possessions such as a
car etc.
Lien
Applied against property to guarantee repayment of a loan.
Guarantor
Third parties who guarantees repayment of outstanding balance. May be required
for first time borrowers.
38
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Co-Signer
Same capacity as guarantor.
INTEREST
Use of credit always attracts interest (rental fee for the use of other people’s
money).
Monthly payments therefore are composed of part repayment of principal and part
interest payments. If we can repay debt and operate on a cash basis, this will
increase the money available for our other financial strategies.
The following is a comparison of $1,000 used as:
a) Investment
b) Repayment of debt
1) Canada Savings Bond
After Tax Investment in a CSB is calculated as:
(I = Interest Rule, MTR = Marginal Tax Rate)
Deposit
$1,000
Interest (2%)
MTR
After Tax Income (20 – 8)
After Tax Return
20
40%
12%
1.2%
2) Repayment of Debt
Credit card payment of I divided by (I – MTR)
(I = Interest, MTR = Marginal Tax Rate)
Balance of account
Interest charged (18%)
Equivalent Interest earned
Calculation
$1,000
$180 (Required $300 of Pre-Tax Income)
(30%) - $300
$180  (1 - 40%) = 180  60 = $300
Interest as a component of a payment in front-end loaded. Early payments are
mostly interest. Nearing completion, payments on principal will greatly reduce the
interest required.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
39
CREDIT CARD FINE PRINT
To be properly informed as to the true cost and limitations of credit requires an
understanding of the terms and conditions of the credit card agreement.
Grace Period
15 to 21 days after statement date
Non-payment
If no payment (or partial payment) is made by the due date interest is charged on
the full amount of the purchase price as of the date of purchase or posting.
Partial payments are applied against the oldest debt first. Interest is then charged
on the remaining balance, computed daily.
Interest Calculation
Bankcards charge straight interest, compounded annually, calculated daily.
Department store cards usually compound interest monthly. Different methods of
compounding result in very different true costs to the consumer.
True Cost of Credit
The law requires full disclosure as to true cost. Illustrations are provided to
illustrate the real credit charges (Interest and Service Fees) on all credit card
statements.
DEBIT CARDS
These cards are increasingly being used due to the ease of transfer of cash
because they do not involve the use of credit.
Some of the benefits are as follows:

You cannot overdraw your account

Vendors are not at risk for bad debts.
40
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
INSTALMENT LOANS
Consumer Loans (also known as direct credit or fixed credit) usually involves a
fixed sum repaid over a fixed period. They usually are obtained through banks,
trust companies, credit unions or loan companies.
The loan variables are:
Interest rate may be fixed or vary according to the prime rate.

Specified amount.

Fixed period.

Fixed monthly payments.

Payback schedule or on demand.

Interest rates fixed or variable.
Instalment Loans require a monthly payment that is a blend of principal repayment
and interest charge. As the principal is reduced over the amortization period (like a
house mortgage) the interest charged is reduced according to the amortization
schedule. This numeric table is computer generated and breaks down the
payment into principal and interest components, at the same time showing the
declining balance of the loan.
As the principal declines less of the fixed payment is required for interest and
therefore more is transferred to principal reduction.
These loans are “front end” loaded as to the interest component in the payment
schedule. Any early additional repayment of principal (if allowed) greatly reduces
the interest paid.
INSOLVENCY & BANKRUPTCY
If the debt load precipitates bankruptcy, which allows the debtor to walk away from
debts, the Federal Bankruptcy and Insolvency Act of 1992 will come into play.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
41
Do your clients and prospects really lose everything?
Under Ontario law, certain things are exempt from seizure by a trustee. (The law
varies in each province). They include:

$5,000 worth of personal possessions (clothing, jewellery, sports equipment,
etc.);

$5,000 for an automobile;

$10,000 worth of furnishings;

$10,000 worth of tools of the trade (equipment that you use to earn a living);
and

Certain types of life insurance.
Technically, everything else that they own is seized by the trustee and sold to
repay your creditors.
What about their homes?
Like Proposals, bankruptcy only deals with unsecured creditors. Unless a person
has accumulated significant equity in their home, it will probably be unaffected by
a bankruptcy. If a client owns a home make certain to advise them to discuss the
disposition of their home in detail with any trustee that they are dealing with before
they file for bankruptcy.
What about their car?
If they have clear title to their car (they haven’t pledged it as security for a loan),
and the car is worth more than $5,000, then your clients will be required to either
pay the trustee the value of the car from their post-bankruptcy earnings or the
trustee will be forced to seize and sell the car. If they have a car (or any other type
of vehicle) make certain they discuss the disposition of the car with their trustee
before bankruptcy is filed.
42
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
What do they do now?
If your client is experiencing money problems, it is recommended that they call an
accredited credit counsellor or a trustee in bankruptcy to arrange for a personal
consultation. Most trustees offer this service free of charge.
The Act declares you insolvent if:

You are not declared bankrupt.

Your credit obligations are in excess of $1,000; and are not able to meet your
obligations as they come due.

You have ceased paying your debt obligations; and have debts due and
accruing the combinations of which exceed the reliable value of your assets.
You may be declared bankrupt if you are insolvent if:
You voluntarily declare yourself bankrupt, or your creditors are successful in
forcing and receiving order against you, which forces you into bankruptcy. Since
the declaration of bankruptcy may result in the seizure of all personal assets and
possessions, it should only be used in the direst of circumstances.
PERSONAL USE ASSETS
Personal use assets are those items that are used by their owner for their personal
use.
Home Ownership
For many years, buying a home has been considered the first investment on the
road to financial security. It not only is satisfying to be able to live in your
investment, but it is also a foundational block in good security and financial
planning. It fits nicely into estate planning since it does not attract Capital Gains
Tax at the owner’s demise. There are many questions to be asked before buying
a house. Having enough down payment may not be the only financial concern that
needs to be considered.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
43
HERE ARE SOME ADDITIONAL CONSIDERATIONS TO BE USED AS
GUIDELINES:
How much can I afford?
Purchase price should not exceed 2.5 times your gross annual income.
Monthly housing costs should not exceed 30% of your gross monthly income.
Total debt payment per month including mortgage principal, interest and taxes as
well as credit repayment should not exceed 40% of gross monthly income.
Earlier in the course, we illustrated the use of:
a) Gross Service Ratio (GDSR)
GDSR = (Annual Mortgage Payment + Property Taxes & Heating)
Gross Annual Income
Guideline: GDSR should not exceed 25 – 32% of gross income.
b) Total Debt Service Ratio (TDSR)
TDSR = Annual Mortgage Payments, Property Taxes, Heating & Credit Debt
Gross Annual Income
Guideline: TDSR should not exceed 35 to 42% of your Gross Income.
A more conservative guideline would be to limit all consumer debt payments (not
including mortgage payments) to 20% of your net pay. The more important a
home is to the individual the more they may be willing to sacrifice in other areas.
Home Mortgages
Most loans require security and buying a home by arranging a mortgage is no
exception. The property purchased provides the security.
Mortgage Terminology
- The borrower is the Mortgagor
- The lender is the Mortgagee
- Funds required is Principal
- Cost of borrowing is Interest
- Amortization Period is the length of time until the mortgage is completely repaid.
44
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Before arranging a mortgage, the following information needs to be
determined:
A. The Interest Rate and how it is calculated:
The most common method in Canada is to calculate the interest rate semiannually, not in advance. This means the interest on the mortgage is due at the
end of the payment period. Semi-annually refers to the compounding period, how
often the interest is calculated during the year.
B. What term fits your personal finances?
Several factors affect the cost of the mortgage and the first one is the term of time
for which you have negotiated the interest rate. It can be anywhere from 6 months
to 10 years. Blended payments of principal and interest are made monthly during
the term, but any unpaid balance is due and must be paid in full at the end of the
term. Monthly payments are most common although it could be arranged on a bimonthly, weekly or biweekly basis, depending on the terms of the mortgage
contract.
The amount of the payment remains the same, with the extra amount paid going to
the repayment of the principal; this can make a substantial difference on the total
interest paid over the life of the contract.
C. Another factor is the Rate of Interest:
Rule of Thumb
The shorter the term, the lower the interest rate. The longer the term, the higher
the rate. The pros and cons (of short term versus long term) need to be weighed
at the decision time. Even a 1% difference in interest can make a substantial
difference.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
45
Mortgage Principal
$100.000
Terms of Contract
Semi Annually, not in advance
Amortization Period
20 years
Interest Rate
Blended Monthly
Payment
Total Interest 20 Years
4.0%
$622.52
$49,404.44
4.5%
$652.93
$56,702.40
Savings on 0.5% = $7,297.96 over 20 years.
D. Amortization Period
Interest paid for the complete period until the principal is repaid. In the early years
most of the payment goes to the interest being charged. Any strategy that
shortens the length of repayment will significantly affect the amount of interest
paid. The size of the payment is affected by the payment frequency, the interest
rate, principal owing and of course the amortization period.
An amortization schedule is a computer-generated table, which shows how much
of the payment is interest, how much is principal and how much principal remains
unpaid after each payment. Most mortgages are amortized over 25 or 30 years,
but shorter periods can be negotiated. The length of repayment greatly affects the
total amount of interest paid.
Additional Mortgage Contractual Considerations:

A fully closed mortgage means that the mortgage cannot be discharged until
the maturity of the amortization period. Early change will result in a penalty
charge.

A fully open mortgage can be discharged at any time without penalty.

A portable mortgage means you can transfer the mortgage and it can be
discharged at any time without penalty.
46
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12

Pre-payment options may include the right to an annual (anniversary date)
payment of 10 to 15% of the principal.

The right to increase the size of the monthly payments by 10 – 15%, the
excess being used to reduce the principal.

To make extra payments and/or increase the frequency of payments
(bimonthly or biweekly).
All of these options will subsequently affect the amount of the interest to be paid.
E. Mortgage Maturity
Most mortgages mature and leave no balance due. However, if a balance is due,
most mortgages become fully open and the Mortgagee has the following options:
1. Renew the mortgage for another term
Since the mortgage is open, partial payments of the principal will result in
smaller payments and/or less interest to be paid.
2. Retire your Mortgage
Pay off remaining balance. A discharge fee will be charged to de-register the
mortgage from the title of the property.
3. Re-Finance your Mortgage
The mortgage can be negotiated with a new lender that will result in new costs.
Since this is a new loan, these costs could include the following:
1. De-registration and Registration of the new mortgage.
2. A new Title search.
3. New property appraisal charges.
4. New administration charges.
These charges could amount to $1,500 to $2,000 or more.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
47
F. Conventional or High Ratio Mortgages
The last factor affecting the cost is whether the mortgage is a Conventional or a
High Ration Mortgage. This is determined by the amount of down payment. If
your down payment creates equity in the property of 25% or more (either the
purchase price or appraised value) and you meet the GDSR or TDSR
requirements, you may qualify for a conventional mortgage. If you have less than
25% equity, you may qualify for a “High Ratio” mortgage for the balance of the
mortgage. An option may be a conventional mortgage or the value of up to 75%
and a second high ratio mortgage on the balance. High Ratio and Second
Mortgages require more security in a form of mortgage payment insurance.
This insurance can be obtained through:
 The Lender

A private insurer

The Canadian Mortgage and Housing Corporation (CMHC), which is a
Government Agency.
A second mortgage, used to cover the amount in excess of the 75% of value,
attracts a higher rate due to the risk involved.
SOME ADVANTAGES OF HOME OWNERSHIP
1. Income Tax Considerations
2. Home Equity Loans
3. RRSP Home Buyers Plan
4. Home Based Business
1. Capital Gains on Principal Residence
Definitions of Principal Residence
Principal Residence designation is chosen at disposal. The Principal Residence is
the home you “normally inhabit” although this may not mean full time attendance,
but does imply occupation on a regular basis each year. You can split the
designation between two properties, if it is to your advantage.
48
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
The gain realized by an individual on a principal residence disposition is not
included in income and is therefore tax-exempt. A principal residence includes the
immediately adjacent land, generally considered to be up to one half hectare
(about 1.24 acres), which contributes to the use or enjoyment of the housing unit
as a residence.
Before 1982, individuals were able to arrange their affairs such that if they owned
two properties (e.g., a residence and a cottage), the residence could be registered
in the name of one spouse and the cottage in the name of the other. This resulted
in both husband and wife enjoying the benefit of owning two principal residences
and avoiding taxation on the disposition of either property.
For 1982 and subsequent years, a family unit has only been permitted one
principal residence for purposes of this exemption. If a couple owned two principle
residences before 1982 and still own both, they could possibly enjoy the benefit of
two principal residence exemptions on gains that had accrued up until December
31, 1981.
In addition, it is still possible to obtain the benefits of two principal residence
exemptions by transferring one of the properties (preferably one that has not
appreciated substantially in value) to a son or daughter over the age of 17 who
currently does not own a principal residence. When that property is subsequently
disposed of, the adult child may claim the principal residence exemption and avoid
taxation on disposition, provided it otherwise qualifies as their residence.
2. Home Equity Loans
Can provide a personal line of credit using the equity in the home as collateral.
This “collateral” mortgage can be a first or second mortgage and is registered the
same as a conventional mortgage. This allows you to purchase items without
applying for any additional credit.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
49
Due to the nature of the collateral, Home Equity Loans usually attract lower rates
of interest than Consumer Loans. If the loan is used for investment purposes, the
interest charged is tax deductible.
3. RRSP Home Buyers Plan (HBP)
Individuals may withdraw up to $25,000 from their RRSP to assist in acquiring an
owner-occupied home without attracting immediate taxation. The home must be
acquired by October 1 of the year following the withdrawal, which must be made
using Form T1036.
An ordinary RRSP contribution made less than 90 days before a withdrawal
cannot be deducted. Withdrawn amounts are repayable in equal annual sums
over 15 years, beginning no later than the second year following the year of
withdrawal. Repayments due in a specific year can only be made during that year
or within 60 days after the year-end. If, during a particular year an individual does
not repay the scheduled amount or repays only part of it, the unpaid portion will be
included in their income for that year.
To participate, prospective homebuyers or their spouses/common-law partners
cannot have occupied a home as a principal residence at any time from the
beginning of the fourth calendar year before the withdrawal year to 31 days before
the withdrawal. Those who wish to withdraw in 2012, for example, must not have
owned a home after 2007.
Originally, the home buyers’ plan (HBP) was designed so that participation could
occur only once and if the full limit was not used it was lost. New measures
applicable after 1998 however, provide special withdrawal rules with respect to
purchasing a home for the benefit of a disabled person who qualifies for the
disability tax credit (DTC). These rules allow for previous home ownership and
multiple withdrawals.
50
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Individuals who qualify for the DTC, as well as relatives helping to support them,
can temporarily withdraw up to $25,000 from their RRSP without tax penalty,
provided such funds are used to support the acquisition of a dwelling that is either
more accessible for the disabled individual or better suited to their care.
This provision will apply, even if the disabled individual or their relative has
participated in the HBP program in the past, provided all outstanding amounts
withdrawn from any previous participation have been repaid within the 15-year
allowable maximum.
When do you make a repayment?
Your first repayment is due the second year following the year in which you made
your withdrawals.
Each year, CRA will send you a Statement of Account with your Notice of
Assessment or Notice of Reassessment.
The statement will include:

the amount you have repaid (including any additional payments);

your balance for the HBP; and

the amount of the next repayment you should make.
You have up to 15 years to repay the amount that you withdrew under the HBP.
Generally, for each year of your repayment period, you have to repay 1/15 of the
total amount you withdrew until the full amount is repaid to your RRSPs.
For example, if you withdrew funds from your RRSP in July 2010, you must pay at
least 1/15th of the withdrawal in 2012 (or the first 60 days of 2013).
How much is your repayment?
Each year, CRA will send you a Statement of Account on your Notice of
Assessment or Notice of Reassessment.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
51
The statement will include:

the amount you have repaid (including any additional payments and amounts
you included on your tax returns because they were not repaid);

your balance for the Home Buyers' Plan (HBP); and

the amount of the next repayment you should make.
If you contribute to your RRSP and choose to repay more than the required
amount for the year by designating it as a repayment on Schedule 7, the amount
you have to repay in each of the following years will be less. If you want to
calculate the minimum amount you have to repay for the next year, divide your
balance by the number of years remaining in your repayment period.
If you contribute to your RRSP and choose to repay less than the required amount
for the year by designating it as a repayment on Schedule 7, you must include an
amount in income on line 129 of your return.
The amount you include in your income is equal to the amount you have to repay
for the year, minus the amount you chose as a repayment on Schedule 7. Do not
include in income an amount that is more than the result of this calculation.
If you do not repay the amount you have to repay for the year, you have to include
it as income on line 129 of your tax return. The amount you include on line 129 is
the minimum amount you have to repay as shown on your Home Buyers' Plan
(HBP) Statement of Account. Your HBP balance will be reduced accordingly.
You can choose to begin your repayments earlier, but your repayments period will
remain the same. Any repayments made before you are required to start your
repayments will reduce the amount you have to repay for the first year. If your
early repayments are more than the amount you have to repay for the first year,
the difference will reduce your HBP balance and your remaining repayment
amounts over the entire repayment period.
Notes
52
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Repayments do not affect your RRSP deduction limit, so even if your RRSP
deduction limit is zero, you can still contribute to your RRSPs and designate the
amount you contribute as a repayment under the HBP. An amount designated as
a repayment cannot be claimed as a deduction on your return.
Contributions that cannot be designated as repayments
Certain contributions to an RRSP cannot be used as repayments to the the Home
Buyers' Plan (HBP). You can claim a deduction for these RRSP contributions, as
usual, but you cannot designate the contribution as a repayment to either of these
plans.
You cannot designate contributions that are:

amounts you contributed to your spouse's RRSP or common-law partner's
RRSPs;

amounts your spouse or common-law partner contributed to your RRSP;

amounts you transferred directly to your RRSPs from a registered pension
plan, deferred profit-sharing plan, registered retirement income fund, the
Saskatchewan Pension Plan, or another RRSP;

amounts you deducted as a re-contribution of an excess qualifying withdrawal
that you designated to have a past service pension adjustment approved;

amounts you designated as a repayment under the Lifelong Learning Plan
(LLP) for the year;

amounts you contributed in the first 60 days of the repayment year that you
deducted on your return for the previous year or designated as a repayment for
the previous year under the HBP or LLP;

amounts you received in the repayment year, such as retiring allowances that
you transferred to your RRSP and deducted or will deduct on your return for
that year.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
53
Note
If your RRSP deduction limit for the repayment year is zero, you can still contribute
to your RRSPs and designate the amount you contributed as a repayment under
the HBP. CRA does not consider an amount you designate as a repayment under
the HBP to be an RRSP contribution. Therefore, you cannot claim a deduction for
this amount on your return.
4. Home Based Businesses can make mortgage costs tax-deductible
Interest charged for your Principal Residence Mortgage is not Tax deductible.
However, if you operate a business from your home, or rent part of your home to
others, you can tax deduct a prorated percentage of the interest charge on the
mortgage against your business income.
This percentage is calculated on:
a) Number of rooms used, or
b) The percentage of square footage utilized.
Tax Deduction Calculation
Exemption = 1 + # years as a Principal Residence after 1971 X Capital Gains
# Of Years of Ownership, after 1971
(1 represents the year in which you sell and purchase a property)
REAL ESTATE LAW AND PROPERTY OWNERSHIP
To own land means that you hold title to it and according to the law, land is the
actual surface of the ground, anything underneath, including mineral rights and all
things permanently attached such as buildings, trees and fences. The property is
in a fixed location and will exist in perpetuity. There are laws governing ownership
of the land and how the ownership is transferred at the death of the owner.
Local and Provincial laws govern the use of and types of buildings you can erect
and subdivision of property. Federal law governs the use of the airspace above
your property.
54
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
How Land is owned:
There are two forms of ownership:
1. Leasehold Estate
2. Freehold Estate
1. A Leasehold Estate
Gives you interest in the land for a specified period, such as 1 year to 100 years.
Title to the property however remains with the lessor, property owner or grantor.
The one using the property is known as the lessee or tenant.
2. A Freehold Estate
A freehold estate, gives you full title to the property for either an infinite or
indefinite period. If you own property for an infinite period, and you have paid a
fee for all present and future time, you have the right to grant all or part of your fee
simple by way of gifts, inheritance or sale.
An indefinite period means you have a Life Estate which means ownership is
limited for the duration of the life of a specified individual, yourself, the original
owner or some other party. This ownership form can apply to property (assets)
other than land.
Jointly Held Property
Property owned jointly can be held as tenants-in-common which is automatic
unless otherwise designated as Joint Tenancy.
Tenants in Common Characteristics
All parties have equal rights in the property.
Each party can sell their shares without the consent of the other parties and when
one party dies, his shares pass on to his heirs.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
55
Joint Tenancy
All parties hold ownership jointly, and when one of the parties die, their share
automatically passes on to the surviving party(s) under the right of ownership
without becoming part of the deceased estate.
Other Forms of Property Ownership
Condominiums
The purchaser of a condominium receives exclusive title to that individual unit,
plus undivided part ownership, in common with other unit owners to the common
structural elements and communal facilities. A monthly condominium fee will be
charged and the unit owner automatically becomes a member of the Condominium
Corporation.
Co-operative Housing
Requires the purchase of a share in the Co-op Organization. This equity
investment entitles the shareowner to occupy one of the units in the development.
TRANSFERRING PROPERTY OWNERSHIP
Transfer Prior to Death
If you sell your property before death, the seller (grantor) transfers their interest
in the property to the buyer (grantee) through a deed of conveyance. This
transfer of ownership (deed) is recorded in a public registry office called the Land
Registry, or at a land titles office.
In this newer method, the land titles system is responsible for examining and
approving all transfer documents. Legal Counsel is required to ensure correct
clearance and transfer of ownership. In the event of error, the title may be lost
without recompense to the grantee. If a prior creditor is not cleared, they can
order a levy execution by the sheriff, which seizes the property to settle an
outstanding debt.
56
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Transfer at Death
Will - A will can transfer Ownership to a designated beneficiary (s).
Intestate - Ownership of property will be distributed according to the intestacy laws
of the Province in which you died.
DEPRECIATING CAPTIAL ASSETS
Some personal use property will decrease in value over time, unlike real property
that will likely appreciate.
Personal Use Automobile
Since cars represent such a large part of our discretionary spending, and
depreciate over their life span (average 7 years) a close examination of methods
of purchase and ownership are warranted.
Purchase Methods
There are two main methods of ownership
A. Purchasing by cars or loan.
B. Leasing.
A. Car Loans
Most car loans have the following characteristics

Loan is amortized over 36 to 60 months.

Lender retains title to the vehicle until loan is repaid.

Car is assigned as collateral and in the event of default for non-payment may
be seized.

Loan agreement requires substantial down payment of 10 to 20% so that the
loan does not exceed the value of the depreciating asset. Typical car will
depreciate by approximately 30% per year.

Interest rate may be fixed or variable.

Interest is calculated monthly.

Payments are scheduled monthly.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
57
Typically, the loan is open as to principal repayment at any time without penalty.
Since the loan agreement covers a short duration (e.g. 36 months) changing
interest rates do not greatly affect the monthly payment. An increase of 2% from
6% to 8% on a 36-month loan of 10,000 will only increase the payment by $9.33.
However, over the loan duration this will amount to a total increase of $266.25. As
loan duration's increase, so does the total interest paid on the same amount of
loan.
This is how the financing on a $10,000 car loan would look like
MONTHS
24
36
48
60
Total Interest
Paid @ 7%
745.41
1115.76
1494.22
1880.75
Total Interest
Paid @ 8%
845.55
1218.13
1718.19
2165.92
Since the interest component of the payment schedule is largest in the early
months, the quicker you repay the principal, the smaller the amount of total
interest paid.
B. Car Leasing
A typical car lease contract is a long-term rental agreement that requires a monthly
fee.
This agreement will contain the following terms:

Usually requires a down payment, plus freight charges and taxes.

A set monthly fee.

The leasing company owns the car and the lease is either open or closed. An
open lease features a buy – back clause that allows you the right to by the car
at a scheduled rate.
58
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12

A closed lease does not permit a buy-out. The leasing company is frequently a
different organization from the dealer or manufacturer.

Maintenance of the vehicle is the responsibility of the lessee.

An annual mileage limit (e.g. 25,000 km / year)

Cancellation penalty if you cancel the lease before the termination date.
To Buy or Lease?
A car loan payment can cost $460.00 per month, whereas the same car will lease
for $300.00 per month. At the end of the loan, you own the car. At the end of the
lease, you do not.
Basic Rules

If you turn over cars every 2 to 3 years – lease it.

If you keep your car’s 5 to 7 years – buy it.
Cars and Tax Deductions
The previous illustrations were examples of the cost of providing a family car, but a
car provided by an employer or using your own car for business, has lost their tax
advantages, due to changes in regulation. In both cases, a detailed record of
business use mileage must be kept.
A car allowance is taxed as regular income for Canadian income tax purposes. If
you require the car for work and your employer gives you a form T2200 you may
be able to deduct the travel expenses
Allowable motor vehicle expenses
If you are an employee earning commission income, you can deduct expenses for
your vehicle as long as you meet the conditions outlined for commission
employees.
If you are an employee earning a salary, you can deduct expenses for your vehicle
as long as you meet the conditions outlined for salaried employees.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
59
You can deduct your motor vehicle expenses if you meet all of the following
conditions:

You were normally required to work away from your employer's place of
business or in different places.

Under your contract of employment, you had to pay your own motor vehicle
expenses.

You did not receive a non-taxable allowance for motor vehicle expenses.
Generally, an allowance is non-taxable when it is based solely on a reasonable
per-kilometre rate.
The automobile allowance rates for 2012 are 53¢ per kilometre for the first 5,000
kilometres driven; and 47¢ per kilometre driven after that.
In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per
kilometre allowed for travel.
You keep with your records a copy of Form T2200, Declaration of Conditions of
Employment, which has been completed and signed by your employer.
The types of expenses you can deduct include:

fuel (gasoline, propane, oil);

maintenance and repairs;

insurance;

licence and registration fees;

capital cost allowance;

eligible interest you paid on a loan used to buy the motor vehicle; and

eligible leasing costs.
Sometimes, your employer will include an unreasonably low allowance as income
on your T4 slip even though you do not want to claim any expenses.
60
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
When this happens, have your employer complete and sign Form T2200, or get a
letter from your employer stating that the allowance was unreasonably low. On line
229, deduct as an expense an amount equal to the allowance.
If you use a motor vehicle for both employment and personal use, you can deduct
only the percentage of expenses related to earning income. To support the
amount you can deduct, keep a record of both the total kilometres you drove and
the kilometres you drove to earn employment income. We consider driving back
and forth between home and work as personal use.
If you use more than one motor vehicle to earn employment income, calculate
each vehicle's expenses separately.
Additional Automobile Allowance Tips

Keep a log book to record your use of the automobile as well as receipts. The
log must record the total distance driven and the distance driven for work
related use.
The log must show:
1. Total number of kilometres driven
2. Total business kilometres for the year

The log can be an official trip log kept in your car or recorded in your
appointment calendar. Choose what works best for you.

Consider requesting that your employer require you to return your company car
to your employers control for periods when you will not be using it.

Driving to your place of employment is not considered business use. However,
if you are required to meet with clients or make other business stops between
your home and the office then the total travel during the day may
be considered business rather than personal use.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
61

The standby charge applies even when there are periods when you are not
using the company car. For example if you travel out of town on business or
take family vacations the standby charge will still apply for those periods unless
your employer requires you to return the car and control over its use during
these periods.
Automobile Operating Cost Benefit Tips
If the number of personal kilometres is high (but less than 50%) and the cost of the
vehicle was low then it may be more beneficial to request to apply the operating
benefit as 1/2 the standby charge.
If you employer pays all or a portion of the operating costs and your personal use
of the vehicle is more than 50%, the operating cost benefit per kilometre rate may
be higher than the actual operating costs. For example if you drove 10,000 total
kilometres (all personal) and your employer paid your insurance of $1,000, your
taxable benefit would be $2,400 in 2011 or $1,271 after tax if you are in the top
marginal bracket. If you reimburse your employer the insurance costs, the per
kilometre rate would not apply.
Government Incentives for Plug-in Electric Vehicles
Incentives for plug-in electric vehicles have been established by several national
and local governments around the world as a financial incentive for consumers to
purchase a plug-in electric vehicle. The amount of these incentives usually
depends on battery size and the vehicle all-electric range, and some countries
extend the benefits to fuel cell vehicles, and electric vehicle conversions of hybrid
electric vehicles and conventional internal combustion engine vehicles.
Ontario established a rebate between CAD $5,000 (4 kWh battery) to CAD $8,500
(17 kWh or more) (US $5,050 to US $8,650), depending on battery size, for
purchasing or leasing a new plug-in electric vehicle after July 1, 2010. The rebates
will be available to the first 10,000 applicants who qualify.
62
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
The province will also introduce green-coloured licence plates for exclusive use of
plug-in hybrids and battery electric vehicles. These unique green vehicle plates will
allow PEV owners to travel in the province's carpool lanes until 2015 regardless of
the number of passengers in the vehicle. Also, owners are eligible to use
recharging stations at GO Transit and other provincially-owned parking lots.
Quebec will offer rebates of up to CAD $8,500 (US$8,650) beginning on January
1, 2012, for the purchase of new plug-in electric vehicles equipped with a minimum
of 4 kWh batteries, and new hybrid electric vehicles are eligible for a CAD 1,000
rebate. All-electric vehicles with high-capacity battery packs will be eligible for the
full C$8,000 rebate, and incentives are reduced for low-range electric cars and
plug-in hybrids.
Quebec's government earmarked CAD $50 million (US $52.3 million) for the
program, and the maximum rebate amount is slowly reduced every year until a
maximum of CAD $3,000 in 2015, but the rebates will continue until the fund runs
out. There is also a ceiling for the maximum number of eligible vehicles - $10,000
for all-electric vehicles and plug-in hybrids, and $5,000 for conventional hybrids.
The Government of British Columbia announced the LiveSmart BC program which
will start offering rebates of up to CAD 5,000 per eligible clean energy vehicle
commencing on December 1, 2011.
The incentives will be available until March 31, 2013 or until available funding is
depleted, whichever comes first. Available funds are enough to provide incentives
for approximately 1,370 vehicles. Battery electric vehicles, fuel cell vehicles and
plug-in hybrids with battery capacity of 15.0 kWh and above are eligible for a
CAD 5,000 incentive.
Also effective December 1, 2011, rebates of up to CAD 500 per qualifying electric
vehicle charging equipment will be available to B.C. residents who have
purchased a clean energy vehicle.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
63
GLOSSARY OF TERMS THAT THE ADVISOR SHOULD BE FAMILIAR WITH
Amortization Schedule
A numeric table (usually computer generated) that shows how much principal and
interest you must pay, how often and for how long to repay a loan.
Bankrupt
You are bankrupt if you are insolvent and either you voluntarily file a petition for
bankruptcy under the Bankruptcy and Insolvency Act or your creditors are
successful in lodging a receiving order against you.
Bouncing Cheques
Writing cheques with insufficient funds in the account to cover a cheque amount.
Budget
A plan for how you are going to allocate your money.
Capital Trans-Actions
Increases or decreases in your personal, business or investment assets, such as
your contributions to a retirement savings plan or transactions that affect your debt
such as increasing the balance on your credit card or your mortgage. Capital
transactions are not included in the lifestyle expenditures.
Cash Management
The routine, day-today administration of your cash resources.
Chattel Mortgage
A document that transfers the ownership of collateral assets to your lender if you
default on your debt.
Co-signer
An individual who is equally responsible for debt with the principal debtor, whether
or not the principal debtor defaults on the loan.
64
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Collateral
Assets used to secure a loan.
Consumer Loan
A loan for a fixed amount and for a fixed purpose, usually repayable in regular
instalments (also called a direct or fixed loan).
Consumer Price Index (CPI)
An index, which measures the consumer prices, experienced by families and
individuals living in urban and rural private households. The changes in the CPI
measure price changes over time by comparing the cost of a fixed basket of
commodities.
Credit Rating
A historical record of your past credit history, maintained by a credit bureau.
Debit Card
A method of payment, but not a form of credit. Instead of extending credit, the
debit card is used to withdraw funds from the purchaser’s bank account.
Demand Loan
A form of credit where the lender has the right to require repayment in full at any
time, which he might do if he becomes nervous about your ability to repay the
loan.
Direct Costs
Actual dollars that must be spent.
Direct Loan
See Consumer Loan.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
65
Equity Ratio
The ration of nets assets (i.e. assets minus liabilities) to total assets. The equity
ratio for your liquid assets and short-term debts provides a measurement of your
ability to pay short term obligations as they become due.
Fixed Loan
See Consumer Loan.
Gross Debit Service Ratio (GDR)
The Gross Debt Service ratio is one of the formulas used to measure your ability
to carry debt.
GDR is calculated as:
(Annual Mortgage Payments + Annual Costs) /Gross Annual Income = GDS
As a rule, your GDS ratio should not exceed 25% to 32% of your gross income.
Guarantor
A third party who agrees to repay any outstanding balances on your loan if you fail
to do so. A guarantor is responsible for the debt only if the principal debtor
defaults on the loan.
Household Income
The income for a household unit typically consisting of an individual or couple’s
income plus any income children or other financial dependants generate.
Insolvent
You are insolvent if you have debt obligations in excess of $1,000 and are unable
to meet your obligations as they come due, have ceased making payments, or
have debts due and accruing, which exceed the value of your assets.
Knowledge Worker
Term coined by author and visionary, Peter Drucker.
66
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Refers to the highly skilled and experienced people who seek and create
temporary work rather than permanent jobs. The increase in the number of
knowledge workers is a result of corporate downsizing and rapid technological
change.
Lien
The legal claim of one person upon the immovable property of another person for
the payment of a debt or the satisfaction of an obligation.
Lifestyle Expenditures
The cost you incur to sustain your lifestyle, including the money you spend on
housing, food, clothing, household expenses, transportation, insurance,
entertaining and gifts. Also included are the interest charges associated with
financing a major capital purchase such as a house or a car. Lifestyle
expenditures do not include income tax expenses or any capital transactions.
Money
A medium of exchange or a measure of value that you can use to pay for goods
and services and to settle debts.
NSF
Non-sufficient funds. A cheque is considered NSF when there are insufficient
funds in the drawer’s bank account to cover the amount on the cheque.
Objective
A position or financial state you wish to achieve. Well-defined objectives are
critical to the success of any money management plan because they provide your
plan with a sense of purpose and a benchmark against which you can measure
your progress.
Personal Identification Number (PIN)
A security code known only to the bankcard holder and used to access online
financial services.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
67
Pre-authorized Chequing Arrangement (PAC)
An arrangement you can make with your bank to remove a pre-determined
amount from your account at regular intervals and place it elsewhere. PACs can
be used as a convenient means of saving.
Receiving Order
A court order made in response to a petition from your creditors that effectively
vests your property to a trustee, who will administer your estate in accordance with
the Bankruptcy and Insolvency Act.
Revolving Credit
Credit that you can use from time to time to buy various goods or services of
varying cash value (also called Vendor Credit).
RPP
A Registered Pension Plan.
Secured Loan
A loan agreement that provides the lender with some form of rights to specified
assets in the event that you default on the loan agreement.
Taxable Income
Your net income less any permitted other deductions, such as business or
investment losses carried forward from previous years.
Total Debt Service Ratio (TDS)
The Total Debt Service ratio is one of the formulas used to measure your ability to
carry debt. It is calculated as Total Annual Debt Costs  Gross Annual Income =
TDS. Generally, your TDS ratio should not exceed 35% to 42% of your gross
income.
Total Income
Includes income from all sources, before deductions.
68
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
Unsecured Loans
Loans that rely solely on your credit history, reputation and integrity to ensure
payment.
CONCLUSIONS
Managing money for your client’s and prospects may seem like a distant dream to
them, but it is something that they all want to do someday, when they have more
money and more time. In the meantime, everyone needs to manage their money
so they can reach the goals and dreams that they have set for themselves.
While the idea of money management may seem difficult, it's really not. It's simply
one more skill to be learned by your client, just like they learned to write, read or
perhaps drive a car. Believe it or not, no one is born with the skills to be a good
money manager, but everyone can learn them with the Advisors guidance and
good recommendations that you provide throughout your relationship with them.
We often live day to day, allowing the demands of the present to swallow up our
money and time. We watch the money—usually not enough—come in, and we
watch it go out. We often feel we don't have any control over it, so why should we
worry about trying to manage it?
Because managing your money can help reduce the stress in your life. It can help
give you a plan to take care of unexpected events and expenses.
Most importantly, managing your money can help your clients meet the goals that
they have set to help create the life they deserve.
We hope that in this course, we have suggested further ways to help your client
and prospects live within their means and manage debt so it doesn’t manage
them. This in turn will allow you to have access to any excess money they have to
purchase the products that you sell.
Money & How To Manage It - SSC #11
Pro-Seminars Limited © 03/12
69