BUDGETING, BANKING AND
SAVING
BANKING
How do banks work?
Essentially, banks and other financial institutions
such as trust companies, caisses populaires and credit
unions provide:
- a safe place to keep your money;
- services to help you manage your money; and
- loans and mortgages.
It is important to realize that financial institutions
do not just hold your money in a safe place. They make
money by:
- investing your money, for which they pay you interest;
- lending you money, for which they charge you interest;
and
- providing you with credit, usually in the form of
a credit card. The interest rate on credit cards on
your unpaid balance is a lot higher than on a conventional
loan.
How do credit cards work?
A credit card, usually provided by a financial institution
or a business, allows you to buy things up to a certain
limit and then to pay for them over a period of time.
When you receive your credit card bill every month,
you can either pay the full amount by the due date -
in which case no interest will be charged - or pay it
over an extended period of time - in which case interest
charges will apply on a monthly basis.
What do financial institutions offer you?
- Safety. All banks and most trust companies
are regulated by the federal government to determine
whether they are financially sound. All caisses populaires
and credit unions and some trust companies are regulated
by the provinces. All deposit-taking institutions,
other than caisses populaires and credit unions, are
required to be members of the Canada Deposit Insurance
Corporation (CDIC). CDIC insures eligible deposits
to a maximum of $60,000.
- Advice. Banks tell you in advance what kind
of account, loan or mortgage you can receive. They
usually give responsible advice, but you should check
with more than one to find the accounts and services
that are best for you. You do not need to sign any
agreement until you are sure that you understand what
it means.
- Services. All financial institutions offer
packages of financial services. You should choose
the type of account that you will use most. For example,
an account that offers traveler's cheques, international
credit cards and foreign banking services may charge
extra for each of these services.
When should you borrow money?
There are many good reasons to borrow money, such as
furthering your education, opening or expanding a business
or buying a house. These are all investments that will
likely provide a good return in the long run. You might
also need a car, computer or other tools to help you
with your business.
SAVING
Why, where and how should you save money?
Most people budget to save money each month, usually
in a savings account in a bank, trust company, caisse
populaire or credit union. You can save for a number
of reasons:
- Major purchases. Before a reputable financial
institution will lend you money for a house or a car
or to start a small business, it will usually require
that you provide a down payment of up to 20 percent
of the full cost from your own savings.
- Retirement. If you contribute to a registered
retirement savings plan (RRSP), you do not have to
pay income tax on these savings until you use them.
Many people contribute to such a plan at work through
payroll deductions, especially if they do not have
a pension plan. Your bank can tell you more about
RRSP's.
- Emergencies. To some degree you can insure
against accidents, sickness and loss of income, but
it is a good idea to have savings put aside for the
unexpected. Most financial advisors suggest you try
to keep three months' salary in the bank.
- Specific longer-term family needs such as
your children's post-secondary education, which is
not free in Canada (see Fact Sheet no. 3: Education).
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