Navigating the financial world may seem complicated but it is an essential part of life if you want to increase your wealth. That’s why so many people turn to reliable financial planners, like the ones trained in Centennial College’s Financial Planning program. These professionals understand the ins and outs of the Canadian financial landscape and can help you to make informed decisions about everything from tax and legal implications of certain choices to mutual funds and insurance.
But it’s also important to be familiar with some of the most common terms that you’ll hear Financial Planners use during your interactions with them. To help you wrap your brain around the lingo, we’ve compiled a list of common financial terms that everyone who wants to see his or her money grow should understand.
- Compound Interest: The interest that you earn on the amount you deposit or borrow, plus any interest you accumulate over time is compound interest. Essentially, it is “interest on interest.” If you make a deposit, compound interest will make your savings grow at a faster rate than simple interest, which is calculated on the principle amount alone. If you borrow, it will make your debt grow faster.
- Guaranteed Investment Certificates (GICs): You buy this type of debt security from banks and trust companies. GICs cannot be cashed before the specified redemption date, and pay interest at a fixed rate.
- Registered Retirement Savings Plan (RRSP): You are allowed to put money into an RRSP once a year and claim a deduction on your taxes in that year (or sometime in the future) for that contribution. That way, your contributions accumulate investment income tax-free and only when money is taken out of the RRSP, is it taxed as income. Generally, people accumulate money in their RRSP until retirement. However, first time homeowners can withdraw their RRSP tax-free and have 15 years to re-contribute all the money.
- Stocks: When you buy a “stock” in a public or private company, you are buying a share of ownership in that company. That makes you a shareholder. If a company offers 100 shares of stock and you own 10, you have 10 per cent ownership of the company. When the company does well, your investment goes up. When it does poorly, so does your stock investment.
- Mutual Funds: A mutual fund is different from a stock in that the investment you make consists of a pool of funds from multiple investors who want to invest in securities like stocks, bonds, money market accounts and other assets. Money managers who invest capital and try to create gains for the investors operate mutual funds on your behalf.
- Bonds: When you buy a bond, you’re making a debt investment because you essentially lend money to the government or a corporation for a specific period of time at a fixed interest rate. You then receive period interest payments over time and get the amount that you “loaned” at the bond’s maturity date.
- Tax-Free Savings Accounts (TFSAs): This account allows you to save money (within a yearly limit) without paying tax on your savings. It gives you the option to invest in GICs, bonds, stocks, mutual or segregated funds and other investments. Your savings and earnings grow tax-free, even when you remove money from the account.
- Diversification: Diversification is when you invest in a variety of different securities, companies, industries or locations to reduce the risk of investing. You can’t just count on the stock market or your house to make you rich because economic conditions change. Diversification spreads your money around in a smart way.
By Izabela Szydlo