Got the basics of money tracking and managing? Great! Now it's time to take things to the next level - and see a payoff from your savings account. Here’s some intermediate information about running your finances that will help you stay one step ahead.
Secrets to Saving
On a basic level, you save by not spending as much as you make, and socking away the difference. Once you’ve got that mastered, it’s now time to maximize your savings. For that there’s a simple rule: get a higher interest rate. Nothing comes for free, though – in exchange for that higher rate, you need to give something up – usually easy access to your money or being required to keep more money in savings.
Something to consider is a high interest savings account, which could require a minimum balance (often $5,000) and will often charge you high fees to withdraw money. In exchange, you can get rates as high as 2%, compared to just 0.25% or less at today’s rates. (If you want to find out more, check here to compare savings account rates.)
Another way to get more interest is to put your money in a guaranteed income certificate (GIC). These allow you to invest your money at a set term — you can’t withdraw that money until the term is over — but you get rates as high as 2% for locking your money away for a year. Compare GIC rates here.
When you borrow money, the rules are also simple. The more reliable you are, the better your rate and term. What makes you reliable? Mainly your credit rating, which is built by borrowing money and paying your bills. Default on a loan? That’s bad for your credit rating. If you tend to be late paying your bills, that information will make it into your credit report and will impact your ability to get a loan.
Learning About Loans
As well, a lender will consider what you are borrowing and recourse if you can’t pay back the loan. It’s easy to get car loans when you buy cars new – that’s because the borrower can simply take the car from you if you don’t pay. It’s also easier to qualify for a mortgage (if you can believe it) than a small loan or even a credit card sometimes. That’s because a lender can simply take your house if you don’t pay up. And this is another reason why student loans can be so pricey: they’re given to young people who have not yet established themselves, so you pay for the fact that there’s just no guarantee you will pay this off.
This explains why mortgage rates are often lower than small loan rates, and why lines of credit rates are higher for a so-called unsecured line: that’s a line of credit that’s all by itself, not attached to a house or a business. But when you get certain mortgages that contain lines of credit, these are considered secured lines. You get a better rate, and in exchange the lender can take your house if you do not pay.
Mortgage Insurance for First Time Buyers
Need a hand when starting out in the job market? The Canada Mortgage and Housing Corporation (CMHC) offers mortgage insurance to first-time buyers who can't put down 20% on their mortgage, which is the standard amount in Canada. This is great because it allows people with as little as 5% down to buy a house. However, you pay for this service through insurance premiums.
So What's In It For Me?
Overall, the secret to better understanding your finances is to see how both sides benefit. When you invest or borrow money from a financial institution, that organization will make sure it gets something out of that transaction. Your job is to understand what that is and make sure you get something out of it too.