Know your way around the Pythagorean theorem like a pro? Understand the philosophical backbone of the nineteenth-century gothic revival movement like the back of your hand? That’s amazing—it really, truly is. Unfortunately, both high school and university, while busy promoting Pythagoras and John Ruskin, failed to teach us about things like filing taxes, investing in our retirements, and building good credit scores. I would even argue that these little acronyms may even be more useful to understand than how long a frog’s intestinal tract is. But for some reason, practical finances have yet to come into vogue on the educational scene. Here is a quick guide to acronyms you should probably know, but don’t fully understand:
OSAP–Ontario Student Assistance Program
The softcore Canadian version of America’s student financing epidemic. Most of us have the grants, many of us have the loans, but when exactly do we need to pay them back? OSAP allows a six-month, “interest-free” grace period, however, only the part of the loan for the Ontario government is interest-free, while the federal part is not. Despite trying to call OSAP for the past week, they don’t appear to understand that our “interest-free” grace period is a hoax. What is more, a newly introduced policy is in effect meaning you only have to pay OSAP back once you are earning over $25,000 a year, which is a bit above minimum wage. Right now, the interest rate is prime + 1% for the provincial part of your loan (30%), and prime + 2.5% for the federal part (70%). The average payback period as of right now is nine-and-a-half years.
RESP–Registered Education Savings Plan
If your parents were prepared (mine clearly were not, see above), they may have made financial contributions to an RESP fund as you were growing up. When you entered university, these funds were likely withdrawn to help pay for their intended use, your post-secondary education. Their biggest benefit is likely access to the CESG, also known as the Canada Education Savings Grant. The federal government pays out a twenty to forty percent grant, depending on your income, to your parents’ yearly RESP contribution until they have reached a maximum of $2400 per year, or $7200 per child per lifetime. Don’t fret, this isn’t something you need to concern yourself with unless you’re having babies right now.
RRSP–Registered Retirement Savings Plan
This is something a bit more relevant to students, unless, of course, you’re a “live like it’s your last day” bohemian, roaming barefoot around the Vic quad. There are many complicated layers of taxes and investments to this, so I’m going to provide the most basic, accessible definition I can. Any contribution made to an RRSP (including savings accounts, GICs, mutual funds, bonds, mortgage loans, etc.) are considered “tax deductibles,” which basically means that they reduce your total payable income tax per year. When a contribution is made to an RRSP, it lowers your total income, so you pay less taxes overall. Any money made during that period in interest, capital, dividends, and foreign exchange gains, will not be taxed, even if you withdraw it. However, once you do withdraw money from your RRSP, the principal is taxed as income. If you withdraw when you retire, you pay significantly less taxes because your earning bracket is lower—you know, because you retired.
TFSA–Tax-Free Savings Account
This is another account that provides quite a few tax benefits, and like an RRSP, it may also contain investments like Mutual Funds and Stocks. However, unlike RRSPs, both the principal AND interest are not taxed. Also unlike RESPs, TFSAs are not tax-deductible, meaning that when you contribute to your TFSA, the money is still taxed as part of your regular income. There is, unfortunately, a cap on how much you can contribute depending on when you turned 18 (our government likes to regularly change the limits to make finances a little more complicated for us), but it does accumulate. If you were to open a TFSA tomorrow and you turned 18 in 2013 like I did, you can invest a total of $26,500 until 2017, when you will be able to contribute another $5500 (unless Trudeau’s government changes that again).
This is a great way to begin investment banking. Unlike stocks, they are a little more secure because you have an investment portfolio. To use a bad metaphor, mutual funds are a basket of eggs. Instead of carrying them all in one basket, however, your egg-manager places the eggs in a few different baskets: if you drop one, the other baskets will still survive. When you’re looking at your mutual funds online, you can see it fluctuate, sometimes even below your principal, but nevertheless there is a steady incline despite minor dips. You can choose the level of risk you’re comfortable with, regularly dump your money, and try your best to avoid a withdrawal until the time-goal you’ve indicated to your financial advisor has passed.
GIC–Guaranteed Investment Certificate
Another investment account, unlike stocks or mutual funds, in which there is a guaranteed return. However, the profit potential is significantly lower. You allow the bank to use your money for a set amount of time—it can be eight months or eight years, depending on the policy—and the bank makes their money by investing it in higher interest savings accounts, so you even bypass management fees. This is a great alternative to stocks for people who are frightened of the fluctuating, volatile marketplace. And when your term is over, you can place everything into a new GIC or withdraw. If you withdraw earlier than the time you initially indicated to your financial advisor, the interest rate could be lowered, and you may have to pay a penalty.
For the above two acronyms, if you are worried about the state of your finances and believe you may have to withdraw in case of an emergency, it might be best to choose a high-interest savings account instead. This way you can transfer the money to your chequing account without the potential loss.
This is all the room we have for today, folks. I suggest googling “banking basics” or maybe calling your family’s financial advisor (your parents most likely have one, just ask, you’ll be surprised) for more information, because there are dozens of terms I haven’t touched upon. Don’t panic, breathe, and best of luck on your future financial endeavours.