BBI10 - Finance
Savings and Investing
Saving involves safely putting money aside for future use. For example, depositing money into a
savings account which pays interest of 1.5%.
Money is protected against loss
Interest is paid by the financial institution
Money loses purchasing power over time due to inflation.
If the current inflation rate is 2.5% and the financial institution is paying you 2%, your
money is losing purchasing power.
1. Savings Accounts
2. Term Deposits
3. Guaranteed Investment Certificate (GICs)
4. Registered Retirement Savings Plan (RRSPs)
5. Registered Education Savings Plan
7. Tax Free Savings Account (TFSA)
Investing is using your savings to earn extra income that will grow over time.
Investments often pay a higher rate of return. (higher interest)
Investments can grow at or exceed the rate of inflation
The rate of return is not guaranteed
There is some risk of losing part or all of the money.
1. Investment in stocks/shares
2. Mutual Funds
4. Index Funds
Smart investors have a combination of savings plans and investments
An individual’s short and long-term goals and plans impact how savings and investments
The Need For a Savings Plan
Systematic or regular habit of putting money aside to reach a financial goal.
1. Emergency needs
2. Short and long-term goals
4. Future needs
Decisions you need to make:
How much to save
What you save
Where you save
Loss of family income due to death, injury, or illness
Life and health insurance does not always cover all the costs
Unexpected hardships such as getting fired or laid off from a job
Wanting to quit a job for ethical or personal reasons
How much savings do I need?
Ideally, people would be wise to have 3 - 6 months salary in savings.
If a job is lost, one’s savings would provide until a new job is likely found.
Short and Long-term Goals
Short Term Goals
Purchase of relatively inexpensive items within a short period of time
Concert tickets, bicycle, television
Purchase of more expensive items in more than a year’s time.
Car, house, post-secondary school, retirement
Security and Future Needs
Many people who plan financially for their future are happier because they spend less time
worrying about their financial future.
David Chilton’s best selling book, The Wealthy Barber, states people should pay
themselves first – take 10% of your earnings as soon as you get it and put it aside in
savings or an investment plan.
If you get into the habit of doing this, you never get used to having the money to spend in
the first place.
When trying to select which savings plan(s) to use, consider the following:
1. Rate of return (interest rate) and how interest is calculated
Interest / Rate of Return/ Yield
Interest is money received over time for letting others borrow money
Consumers borrow money from banks and pay interest in addition to paying the initial
amount borrowed, which is called the principal.
Banks pay interest to consumers who deposit money into banks, who then use it to lend to
others at a higher interest rate.
Interest is expressed as a percentage of the original investment (i.e. 2% of $)
This is called a rate of return or yield.
Interest rates are based on a one-year time period. (1 year = 12 months = 52 weeks = 365
A savings account yields an annual return of 3%.
The rate of return on the savings account is 3%.
Savings Accounts and Interest
Actual earnings on savings accounts depends on when the bank calculates and pays the
And how the bank calculates interest and may vary from bank to bank from type of savings
accounts. Interest may be calculated in one of two ways:
1. Simple Interest
2. Compound Interest
Calculating Simple Interest
Simple Interest is calculated on the amount deposited by the consumer – also called the
Simple Interest Calculation
Interest = Principal x Rate x Time
I = PxRxT
a. Simple Interest calculated annually at 2% = 2/100 = 0.02
Balance of $2000 in my bank account
I = 2000 x .02 x 12/12 = $40
b. Simple interest calculated monthly at 2% = 2/100 = 0.02
Balance of $1400 at the end of the month
I = 1400 x .02 x 1/12 = $2.33
c. Simple interest calculated weekly at 2% = 2/100 = 0.02
Balance of $1400 at the end of the week
I = 1400 x .02 x 1/52 = 0.53 cents
Interest is calculated on the principal amount plus any interest already earned.
You earn more interest in each payment period because you are earning interest on
interest as well as your principal.
The more often the interest payment is made (i.e. monthly vs. annually, or weekly vs.
monthly, or daily vs. weekly), the more your money will grow because interest is being paid
on top of interest more often
Calculating Compound Interest
If you deposit $1000 in a savings plan and leave it there for 5
years at 5% interest compounded annually, interest is
compounded as follows:
Balance at During the Year Balance at the
the end of the year
of the Year
Year 1 $1000.00 + 5% of $1000 = ? = $1050.00
+ .05 x $1000 = $50.00
Year 2 $1050 + 5% of $1050 = ? = $1102.50
+ .05 x $1050 = $52.50
Year 3 $1102.50 + 5% of $1102.50 = ? = $1157.63
+ .05 x $1102.50 = $55.13
Year 4 $1157.63 + 5% of $1157.63 = ? = $1215.51
+ .05 x $1157.63 = $57.88
Year 5 $1215.51 + 5% of $1215.51 = ? = $1276.29
+ .05 x $1215.51 = $60.78
If you deposit $1000 in a savings plan and leave it there for 5 years at 5%
interest compounded monthly, interest is compounded as follows:
Balance at During the Month Balance at the end of the
Month 1 $1000.00 + 5% of $1000 = ? = $1004.1666
+ .05 x $1000 x 1/12 = $4.166
Month 2 $1004.1666 + 5% of $1004.1666 = ? = $1008.3468
+ .05 x $1050 x 1/12 = $4.1802
Month 3 $1008.3468 + 5% of $1008.3468 = ? = $1012.5482
+ .05 x $1008.3468 x 1/12 =
Month 4 $1012.5482 + 5% of $1012.5482 = ? = $1016.7671
+ .05 x $1012.5482 x 1/12 =
Month 5 $1016.7671 + 5% of $1016.7671 = ? = $1021.0036
+ .05 x $1016.7671 x 1/12 =
If the interest is compounded once a year:
A = P(1 + r)n
P is the principal (the money you start with, your first deposit);
r is the annual rate of interest as a decimal (5% means r = 0.05);
n is the number of years you leave it on deposit – exponent n;
A is how much money you've accumulated after n years, including
If the interest is compounded q times a year:
A = P(1 + r/q)nq
Electronic Compound Interest/Future Value Calculator:
Note: Compound Interest is also referred to as Future Value.
Selecting the Savings Plan
Compare different financial institutions savings plans in order to find the one with the best
rates for you.
Some savings accounts require you to have a minimum balance in order to receive a
higher rate of interest on your account. (i.e. $4000 vs. $1000)
Some savings plans require you to leave your money with the financial institution for a
minimum number of years. The greater the principal and the longer you leave it with the
institution, the higher interest they will pay you.
Most savings plan deposits in banks, trust companies, and loan companies are protected
by the Canada Deposit Insurance Corporation (CDIC) – an agency of the federal
The financial institution pays for the insurance - not you
Depending on the province, the CDIC will insure your deposits at individual institutions up
to a maximum amount.
The Nova Scotia Credit Union Deposit Insurance Corporation insures deposits up to
The Deposit Insurance Corporation of Ontario insures deposits to $100 000 and an
additional $100 000 for each registered savings plan.
Depending on how much you have in savings, you may want to make deposits in several
Liquidity refers to how easily you can convert an item into cold hard cash quickly and
A house for example is not very liquid as it would take time to sell, whereas a chequing
account is liquid because you can withdraw the money immediately.
Should there be an emergency, it is important for investors to try to keep some of their
savings as liquid as possible.
Some savings plans are locked in for a certain amount of years and/or charge a penalty fee
for early withdrawal of money.
1. Savings Account
Interest may be calculated daily and paid at the end of each month, or
Paid on the average account balance during a specific time period; or
Paid on the minimum balance, and deposited in your account semi-annually on April 30th
and October 31st.
Interest rates vary from institution to institution
Accounts may require a minimum balance in your account at the end of each month (i.e.
Online banks often have better interest rates
Term Deposits and Guaranteed Investment Certificates (GICs)
Both are savings plans where you deposit a fixed sum of money for a specific length of time
(term), at a fixed rate of interest.
Terms may range from 30 days to 5years.
Usually, the shorter the term, the greater the deposit required and the lower the interest
The greater the deposit and the longer the term, the higher the interest rate may be.
Some GICs are locked which means you can not access the money early.
GICs that are not locked will pay a lower interest rate and may have conditions upon when
you may cash in your deposit.
Registered Retirement Savings Plan (RRSPs)
Introduced by the federal government in 1957 to encourage people to save for their
Think of an RRSP as a money box. You can chose to invest your money in a number of
things that will fit into your RRSP box.
Your RRSP may be made up of mutual funds, GICs, stocks, bonds, and index funds.
Helps you save money by allowing you to invest a portion of your annual income without
having to pay income tax on it.
Let’s say you pay 35% income tax on your income
If you decide to contribute $5000 to an RRSP over the course of a year, you will receive
from the government 35% of that $5000 on your income tax return for that year. (5000 x
0.35 = $1750)
The government has refunded you for the tax you paid on the $5000.00
The sooner you begin investing money into an RRSP, the longer time it has to grow until
Interest or rate of return is earned on your deposits over time.
Actual earnings depend on what type of investments make up your RRSP.
The government limits how much money you can contribute to your RRSP each year.
If you already contribute to a company pension plan, you will not be able to put away as
much into your RRSP.
Currently, you can invest 18% of your income up to a maximum of $22 000 a year.
Withdrawing Money from Your RRSP
When you withdraw money on your RRSP, you must pay tax on it.
You may withdraw money before retirement, but if you are working, your annual income will
likely be large enough that you may have to pay taxes in a higher income tax bracket
resulting in paying more taxes.
Since your income after retirement is usually lower than your income before your
retirement, you may fall into a lower income tax bracket.
Registered Education Savings Plan (RESP)
Anyone who wants to contribute to a child’s RESP can.
The contributor does not get a tax benefit like with an RRSP.
Child is the beneficiary because s/he will benefit from using the money for his/her future
The beneficiary must be a resident of Canada.
Income earned from these investments is tax-free until the beneficiary begins to use it to
pay for his/her future education.
Students do pay taxes on the income withdrawn from the RESP, but because students
usually make minimal income while in school, the tax actually paid is minimal to none.
Main steps in opening an RESP:
1. Get a Social Insurance Number (SIN) for yourself and for anyone you name in your RESP.
2. Apply to the Canada Revenue Agency for the Canada Child Tax Benefit if your family net
income is $74,357 or less. This form is generally provided at the hospital where your child
3. Choose the RESP provider that best meets your needs. RESP providers include most
financial institutions, such as banks or credit unions, as well as group plan dealers or
financial services providers.
4. Decide on the type of RESP you want to open. (Individual, Group, or Family Plan)
5. Decide on the type of investment that will make your money grow.
6. Put some money into your RESP.
Current Rules on Contributions to RESP
1. There is no annual limit on what one may contribute except that:
2. The lifetime contribution limit is $50 000.
3. The government will also contribute up to $500 a year to a lifetime maximum of $7 200.
The annual limit may go up to $1000 if there is unused grant from previous years.
Note: The government’s contribution to an RESP is called the Canada Education Savings Grant,
(CESG).The actual grant will depend on a number of factors. See the following site for more
Current Rules on Accessing RESP funds:
1. The students can access up to $2,500 of their income and grants for each 13-week
semester of study. Payments are referred to as Educational Assistance Payments (EAPs).
2. Usually, a qualifying educational program is a course of study that lasts at least three
weeks in a row, with at least 10 hours of instruction or work each week. A program at a
foreign educational institution must last at least 13 weeks.
3. Qualifying educational programs include apprenticeships, and programs offered by a trade
school, CEGEP, college or university.
4. RESP funds can be used for full or part-time study in a qualifying program.
5. To find out more about qualifying educational programs contact the Canada Revenue
Agency toll-free at 1-800-959-8281.
What if the child beneficiary chooses not to attend post-secondary education?
1. Since an RESP can stay open for up to 36 years, the money can be used if your child decides
to attend school later.
2. Use the money for a brother or sister who does continue education after high school
3. Transfer the money into a Registered Retirement Savings Plan (RRSP) to help you save for
4. Withdraw your personal savings, tax-free. The unused government portion returns to the
Costs of Post-Secondary Education
Student Living at Home
Years until Child Estimated Cost of Monthly Savings
Attends a Post- University Program Needed
College or Institution
2 $36 000 $1350
4 $40 000 $681
6 $44 000 $449
8 $49 000 $337
10 $54 000 $266
12 $60 000 $221
14 $66 000 $186
16 $73 000 $161
18 $80 000 $144
Calculations assume a 5% annual increase in education costs including inflation and four years of
education. It also assumes an 8% rate of return on investment savings, and the maximum
amount invested to receive the total government grant under the CESG program
Student Living AWAY from Home
Years until Child Estimated Cost of Monthly Savings
Attends a Post- University Program Needed
College or Institution
2 $66 000 $2519
4 $73 000 $1270
6 $80000 $844
8 $88 000 $632
10 $97 000 $505
12 $107 000 $420
14 $118 000 $359
16 $130 000 $311
18 $143 000 $274
Tax Free Savings Account (TFSA)
Introduced by the federal government in 2008
Allows individuals to invest and save money and not have to pay tax on any returns (i.e.
Money can be withdrawn at any time
Deposit limit of $5000 each year.
TFSA may include a savings account, GICs, stocks, bonds, and mutual funds.
Common Forms of Investments
1. Canada Savings Bonds and Canada Premium Bonds
2. Corporate Bonds
3. Mutual funds
4. Real estate
Each type of investment has a different level of risk and expected rate of return.
Level of risk varies from guaranteed to get it all your money back plus interest to losing
The safer the investment, the lower the return
The more riskier the investment, the possibility for a larger rate of return exists.
Good investors diversify their investments
Investing in many different types of investments to spread out the risk.
If one investment is performing poorly, it may be balanced out by one that is doing well
1. Canada Savings Bonds (CSB)
A loan you give to the government
The government will repay you the value of the bond plus interest.
The maturity date printed on the bond is the date when the bond becomes due and is paid
back to you.
Provincial and municipal bonds are also available, but less popular
CSB’s can be purchased at all major financial institutions, including banks and credit
Guaranteed payment by the government
Can be cashed at any time (very liquid)
No interest will be paid if it is cashed out within the first three months of purchase
Face value of the bond is the initial amount you loaned to the government.
Can be purchased through automatic payroll deductions arranged with your employer
Can be purchased for as little as $100
2. Canadian Premium Bond
Offers the same security as a CSB
Offers a higher interest rate but can only be cashed on the anniversary of the issue date
(when it was purchased) or during the 30 days after that date)
3. Corporate Bonds
Corporate bonds and shares of stock sold by business to help raise money to expand the
business or introduce new products.
Promise to repay borrowed money from investors on a certain future date, along with
Assets of the company are used as collateral to guarantee payment to the investor.
What if the bondholder /investor wants their money back before the bond’s maturity date?
Investors can sell their bonds through an investment dealer (like a real estate agent), to
other interested investors at the current market value.
Market value is what other investors would be willing to pay and may be impacted by
current company performance and the economy.
A fee would have to be paid to the investment dealer assisting in making the sale possible.
4. Real Estate
Includes land and anything attached to it like homes, cottages or apartment buildings, etc.
Generally, the value of real estate increases over time.
Supply and demand, in addition to the general state of an economy can impact the market
values of real estate.
Investors will rent out property.
The rent should cover the mortgage costs.
One day it can be sold for a higher price than it was purchased for.
Investors may continue to rent it out after it has been fully paid for through rent.
Investors may purchase a piece of property for minimal funds, fix it up and resell it at a
Items of interest people collect that may increase in value over time if it is popular, rare,
difficult to find and the demand of it exceeds the supply.
Examples may be hockey or baseball cards, comic books, art, antiques, stamps, coins, etc.
Collectors form clubs where people can meet to buy, trade, sell, and display their prized
6. Investing in Stocks
Initial Public Offering
The first time a corporations sells stocks (shares) of its company to the public to raise
money for the company.
Investors who have purchased shares of a company and have become part owners of the
Shareholders can sell their share(s) to anyone else who is interested in purchasing them.
How Investors make money on the stock market
1. Shareholders share in the profits of the company when the company pays out dividends – an
amount of money per share you own in the company.
2. Shareholders sell their shares to someone else at a higher price than what they purchased it
Parties Involved in the Stock Market
Sell shares of the company to the public to raise money for the business
Investors who have purchased shares/stocks of a public corporation.
Business where corporations sell their shares to the public and where the public goes to
buy and sell their shares to each other.
Corporations pay fees to have their company shares available to be sold at any the stock
exchanges of their choice
Examples include the Toronto Stock Exchange (TSX) and the New York Stock Exchange
Like the Real Estate companies for selling and buying shares
Businesses that are hired by corporations and individual investors to facilitate the buying
and selling of shares between two parties.
Revenue is earned by charging fees to the corporations, shareholders for facilitating the
trades and providing trading advice
One expense is the fees paid to the stock exchanges allowing their stock brokers to work at
the exchange to facilitate the trading.
Like the real estate agent for those buying and selling shares
Work for the Stock Brokerage to facilitate the buying and selling of shares between
individuals and providing trading advice.
The Initial Public Offering (IPO)
A Stock brokerage is usually hired to handle the sale of shares to the public through the
Stock Exchange(s) the corporation is registered with.
An initial price offering is made the day the market opens
For example, when Google went public in 2004, its shares were initially offered at $85.
Supply and demand for the shares will determine by how much the initial price of the share
increases or decreases.
The money collected from the initial shares being offered goes back to the corporation to
be used by the business.
Once a share is purchased, it is now out in the stock market where the shareholder can
hold or sell his/her shares to another interested buyer for an agreed price. A stock broker
may be paid a fee to make the sale and purchase between two people happen.
The Stock Exchange
The business that provides corporations a place where their shares can be bought and sold
There are thousands of stock exchanges around the world.
Corporations may sell their shares on more than one stock exchange.
Canada’s main stock exchanges include the Toronto Stock Exchange (TSX) and NASDAQ
Stock exchanges make money three ways:
1. It collect fees from stock brokers for the use of its facilities (brokerage fees)
2. Collects listing fees from the corporations who choose to sell their shares using the
particular stock exchange. ($15 000 - $150 000)
3. Sells stock information to individuals
National Association of Securities Dealers Automated Quotations
Stock exchange for high-tech stocks and emerging technologies
Largest electronic stock market in North America
Europe has its equivalent called the EASDAQ
Japan created its equivalent in 2000.
How The Stock Exchange Works
Many stocks and bonds are sold through stockbrokers and investment dealers.
These are licensed financial expertise who advise buyers on which stocks to buy and sell,
They charge a fee, or commission, which pays for the broker’s salary and for the services
their brokerage firm provides.
Person A wants to sell his/her shares of Google.
Person B wants to purchase shares of Google.
The stockbrokers hook Person A and B together to make the deal.
The price of the shares will depend on supply and demand. If more people want to buy
then sell, the price may higher than it was the previous day.
The stockbroker receives a fee or/and commission from the individuals wanting to do the
It is possible for individual investors to buy and sell their shares directly online using online
Fees are less expensive than a brokers fees.
If an investment dealer or stockbroker is not used, it is important to conduct some research
before engaging in online trades to educate yourself about what you are doing
Stock Price Information
Newspapers and Stock Exchange websites publish the following stock price information:
1. 52 week high and 52 week low
The highest and lowest price paid for the stock during the current year.
2. (High, Low)
The highest and lowest price paid for the stock the previous day.
3. Last or Close
The last, or closing price of the stock that day
The change in price from the previous day’s closing price
The number of shares traded during the most recent trading session (i.e. business day)
How do people make money in the stock market?
1. Purchase shares of a company and sell them at a higher price to another interested buyer
Example: In 2004, Google shares issued at $85 a share. In November of 2006, they were
selling at $500+ a share
If you purchased 100 shares at $85 per share and sold them for $500 per share, how much
money have you made?
Purchase price = $85 x 100 = $8 500
Selling price = $500 x 100 = $50 000
Personal Profit (Return on Your Investment )
= $50 000 - $ 8500 = $41 500
ROI = (50 000 – 8 500) / 8 500 X 100 = 488% increase
2. Shareholders receive dividends on the shares they own.
Board of Directors declare a .50 cent dividend at year end
Each shareholder will receive .50 cents for every share s/he owns in the company.
Dividends are like interest. A bank pays you a certain % of interest (i.e. 2% per year) on
the money you have in your savings account.
Dividends, however, are not guaranteed to be paid out every year, as it depends on how
profitable the company has been and what its cash flow is, and the type of share you own.
Example: You own 100 shares of Google. At the end of a business year, Google has made
a significant profit and the BOD declares a .50 cent dividend.
How much money did you make: $.50 x 100 = $50.00
General decline in the overall prices of all or most stocks on the stock market of around
Investors confidence in business performance and the economy is weak, so demand for
stocks is weak
Demand for and prices of stocks is high
Confidence in business performance and the economy is high
There is an anticipation of future price increases
An investor’s desire to purchase or sell shares on the stock market is influenced by their
overall confidence level in the future performance of the companies and the state of the
Consumer confidence is impacted by a number of any of the following factors:
Company earnings and growth prospects
News of new products or planned services or sales
News of company incidents, (i.e. lawsuits due to faulty products that have been
The general state of the economy
Types of Stock/Shares
Most common and available
Provides the right to attend the company’s annual meeting and vote on company matters
One common share/stock = 1 vote
Dividends are paid out if the company is profitable, but only after bondholders and
preferred shareholders have been paid first. If there is anything left over, common
shareholders will share in the rest.
More expensive than common stock
Paid first, before common shareholders if dividends are declared
Paid at a fixed rate which is often more than what common shareholders would receive
No voting rights
Less risk than with common shares, but less of a chance for bigger gains in years of high
profit when price of shares is less than the market value of common shares.
Blue Chip Companies
Companies with long records of regular dividend payments, stable growth patterns, and active
trading on the stock market.
Considered to be much less risky than growth companies, which reinvest company profits into
their operations rather than paying shareholder dividends.
7. Mutual Funds
It’s a pool of money from many investors that is set up and managed by an investment
company which monitors daily the stock market and business and economic news to buy
and sell shares which will yield the greatest possible return for its investors.
There are 100s of different funds each with a different focus
For example, there are real estate mutual funds, global funds, growth funds, etc.
Some mutual funds are more riskier than others
Mutual funds are regulated by law so as to guarantee a certain measure of security to
Who would be interested in investing in mutual funds? Individuals who:
don’t want to follow the stock market on a daily basis and ongoing making changes to their
are uncomfortable with large amounts of risk; and
are comfortable entrusting their investment money with individuals whose job it is to
make day-to-day trading decisions
Important facts to consider:
Due to the low risk, low return nature of mutual funds, these funds are meant to for long-
For this service and their expertise, investors will pay management fees to the investment
Additional fees may be charged for buying and selling securities
The CDIC does not guarantee against any loss
Mutual funds which do not have additional fees attached to buying and selling funds or to
move investments around to other funds.
Management fees are paid.
Why do businesses invest their money?
To use excess money wisely so it can help the company earn additional income.
Business Investment Options
1. Reinvest back into the company – i.e. update technology
2. Buy new businesses
3. Expand the current business
4. Put it in higher-rate savings account
5. Purchase treasury bills – which are short-term government bonds issued in large
denominations up to $1 million.
6. Purchase back their own company shares if the shares are perceived as undervalued.
7. Insurance companies invest some of its customers pools of money for insurance claims
into stocks and bonds.
8. Purchase the company’s competition, expanding its customer base and eliminating one of
9. Purchase a major supplier of raw materials it uses to reduce costs.
Wilson, Jack et al. The World of Business, 5th Ed., Nelson Education Ltd., Canada, 2007