This article profiles Paul, a 2-year-old with a well-paying job, a mortgage and aspirations of obtaining a Master of Business Administration (MBA) and starting a family. The article provides advice from a certified financial planner as to how Paul can effectively achieve his goals.
Appropriate Subject Area(s):
Personal finance, financial planning.
Key Questions to explore:
- What options are available for Paul to finance his MBA?
- What is an interest-free loan? Is it beneficial to pay the principal of an interest rate loan as quickly as possible?
- What is the difference between a TFSA and an RRSP? What purposes do they serve?
- What is a pension? What is the difference between a defined benefit plan and a defined contribution plan?
Difference between TFSA and RRSP: Both accounts offer tax advantages which help Canadians reach their saving goals. However, an RRSP is specifically intended for retirement savings, while a TFSA can be used to reach any savings goal. The key difference between a TFSA and an RRSP is that contributions to an RRSP are tax deductible, while contributions to a TFSA are not.
TFSA, RRSP, home buyers’ plan, pension plan, defined contribution plan, defined benefit plan, mortgage, Canada Pension Plan (CPP), Old Age Security (OAS), lifelong learning plan.
Introduction to lesson and task:
Paul is currently earning $95,000 a year, which is significantly higher than the average Canadian yearly income of $49,060. He is currently worried that he will be unable to meet his future wants, which include the following: starting a family, saving up for retirement, paying off his home buyer’s loan and earning an MBA.
With the help of Marc Henein, an investment adviser from Scotia Wealth Management, this article explores how Paul could go about attaining his wants.
Marc Henein offers the following suggestions regarding Paul’s plans:
- Paying off the home buyers’ plan loan: Mr. Henein advises Paul to delay payment of the loan until its due date, because it is an interest-free loan (a loan where the borrower does not have to pay interest on principal borrowed for a period of time). Students can read about home buyers’ plan repayment here.
- Retirement: Paul currently has $36,000 in his TFSA, $2,000 in his RRSP and $61,000 in his defined contribution pension plan at work. Mr. Henein encourages Paul to take advantage of the 50% matching program at work because this is essentially free money. This is because Paul’s company matches 50% of Paul’s contributions to his RRSP.
- MBA: Mr. Henein advises Paul to enroll in a part-time MBA program while keeping his full time job in order to ensure he has sufficient inflows of cash to cover his expenses. However, Mr. Henein advises Paul to complete the MBA program prior to starting a family. (Additional source of financing: Paul could borrow up to $20,000 from his RRSP under the lifelong learning plan. However, this is conditional on full-time enrollment in the MBA program.)
- Getting married and starting a family: Mr. Henein believes Paul will be ready to start a family in two to three years because he is currently on the right track financially.
Action (lesson plan and task):
Ask students to read the article in The Globe and Mail.
- Ask students to calculate Paul’s current net worth, using the information provided in the article. (Inform students that an individual’s net worth is derived by subtracting total liabilities from total assets.)
- Ask students to state the benefits of meeting with a financial advisor to create a financial plan.
- Inform students that financial advisors can enable their clients to make better financial decisions, by utilizing their knowledge and expertise to provide sound financial advice.
- Ask students if they know what a TFSA and an RRSP are. Ask them to differentiate between these accounts.
- Ask students if they currently have a part-time job, while they are enrolled in school. If they do, ask them to list some of the benefits and disadvantages that come with balancing the demands of work and school.
- After they have read the article, ask students to explain what an interest-free loan is. Then explain how it is different from a loan with annual interest.
- Ask students to explain why it is beneficial to make only the required minimum payment on an interest-free loan each year.
- Ask students if they know what a pension is.
- Tell them to research the difference between a defined contribution plan and a defined benefit plan. Have them present their findings to the class.
- After completing this lesson plan, students should be able to explain the benefits of financial planning.
- Ask students to schedule an appointment or a meeting with a financial advisor at their local bank, if they have one. Students should ask the financial advisors questions regarding their personal