AIESEC Conference: Financial Literacy Case Study (Draft -‐ March 28)
Meet Jessica At 22, Jessica is a month away from graduating with her BA in art history at the University of Toronto. At just 22, she’s feeling pretty confident about passing all her exams (she’s passionate about the subject) -‐ but she’s a bit more nervous about her job prospects and her financial future. She’s seen other graduates in her program struggle to find a job -‐ and like most of her peers she has student debt. She owes $26,000 -‐ slightly less than the national average $27,000 (Canadian Federation of Students). The next year is going to mean a lot of change -‐ job hunting, adapting to the workplace, and saying goodbye to the student life she’s enjoyed for the last four years. Jessica could use some advice -‐ especially around how to handle her money. She has a lot of debt to pay off and she wants to be able to save a bit of money too once she starts working. She’s hoping she can ask you questions when she needs to and that you’ll do your homework (using some of the great resources provided) to help her figure out what her next steps are. More about Jessica: Career goals: To find a job in marketing and communications -‐ she spent the summer working for a marketing firm as an intern and loved it. Top fears: She won’t be able to find a job, she won’t be able to pay off her student debt, she’ll end up living in her parent’s basement until she’s 30… Money reality: $26,000 in student debt and no savings.
Question 1 -‐ Should I join my employer’s defined contribution pension plan? Great news: after six-‐months of pounding the proverbial pavements, Jessica has landed her first job as a marketing assistant at a national agency. She’s earning a solid $35,000 a year -‐-‐ a good salary compared to what some of her friends are making, but she figures she’s going to have to make it stretch. She wants to move out of her parent’s house and get her own place in downtown Toronto -‐ and she has to start paying back her student loan. After a month on the job, the HR department is asking Jessica if she wants to join the company’s defined contribution pension plan. Her employer will match her contributions dollar for dollar. She could opt out and keep the money. What should she do? Opt in or out? Suggested toolkit: What is a DC plan? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/investing/workplace-‐pensions-‐and-‐savings-‐plans/Pages/Two-‐main-‐types-‐ of-‐pension-‐plan.aspx#.UzQ3Y9xh5Fs Are you saying no to free money? -‐ http://blog.getsmarteraboutmoney.ca/caroline-‐cakebread-‐employer-‐trying-‐to-‐give-‐ you-‐money#.UzQ3lNxh5Fs Why it’s great to start saving when you’re young -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/investing/rrsps-‐for-‐retirement/Pages/how-‐saving-‐early-‐in-‐your-‐rrsp-‐ helps-‐amy-‐and-‐amandas-‐story.aspx#.UzQ4wtxh5Fs
Question 2: Should I pay down my debt or invest? Two years into the job, Jessica is now earning a bit more money after a small raise at work. She’s been slowly paying back her student loan, making payments of $315 a month in loan repayments for her student loan. After her modest pay hike, she feels like she could pay more against her loan. But she wonders if she should save it, instead? Should she pay more toward her debt or invest? Can you suggest other ways Jessica could find money to bump up her loan payments and pay off her debt faster (or save more)? Suggested toolkit: How to get rid of debt: http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/budgeting/Pages/Get-‐rid-‐of-‐debt.aspx#.UzRGntxh5Fs 7 ways to trim your budget (and find more money!) http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/budgeting/Pages/How-‐to-‐trim-‐your-‐budget.aspx#.UzRG-‐9xh5Fs Pay down student debt or invest? http://blog.getsmarteraboutmoney.ca/paying-‐ down-‐student-‐loans-‐versus-‐saving-‐up-‐for-‐retirement#.UzRJKtxh5Fs Student debt calculator -‐ http://www.getsmarteraboutmoney.ca/tools-‐and-‐ calculators/student-‐loan/default.aspx#.UzQ8-‐txh5Fs Pay down debt or invest calculator -‐ http://www.getsmarteraboutmoney.ca/tools-‐ and-‐calculators/pay-‐down-‐debt-‐or-‐invest/pay-‐down-‐debt-‐or-‐invest.aspx
Question 3: I got a bonus! Where should I save it? Jessica has had a great few years at work. She just finished work on a huge campaign for a client -‐ it went so well she scored a bonus of $2,500. She’s decided to throw down $500 on a shopping spree (she feels like she’s earned a treat, right?). But she’s wondering what to do with the rest. Her parents told her to open an RRSP -‐ but one of her colleagues is always talking about his TSFA. She doesn’t know what they’re talking about -‐ or where she should put her money. Can you help her decide where to put her bonus (TFSA or RRSP)? Is investing right -‐ or should throw the money at her debt (based on what your learned in Question 2)? And is it time for Jessica to get some professional financial planning help? Suggested toolkit: Investing 101: http://blog.getsmarteraboutmoney.ca/emily-‐ngai-‐learning-‐to-‐invest-‐ part-‐1-‐the-‐essentials-‐to-‐earning#.UzRLRdxh5Fs RRSPs vs. TFSAs -‐ what are they? -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐money/investing/tax-‐ free-‐savings-‐accounts/Pages/Comparing-‐TFSAs-‐and-‐RRSPs.aspx#.UzQ-‐i9xh5Ft Is that money in your bank account making you poorer? http://blog.getsmarteraboutmoney.ca/caroline-‐cakebread-‐is-‐your-‐savings-‐account-‐ making-‐you-‐poorer#.UzRMRNxh5Fs How compounding makes your money grow -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/investing-‐basics/Pages/how-‐does-‐compounding-‐make-‐my-‐ money-‐grow-‐faster.aspx#.UzQ-‐4Nxh5Fs What’s a financial planner and how can they help? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/financial-‐planning/Pages/default.aspx#.UzRKlNxh5Fs
Question 4: Am I ready to own a car? Jessica’s had to do some traveling that’s related to her job -‐-‐ plus, she wants to spend two weeks over the summer driving out to the East Coast of Canada. A lot of her friends have cars -‐ she’s thinking she should buy one too. She figures at these low interest rates she could get a great deal on a lease with not much money as a down payment. She has a little bit of extra money saved in an emergency fund ($1000) -‐-‐ maybe it’s time to put it to good use and invest in some wheels! Can you help Jessica decide whether car ownership is for her? Is this a good use of her finances? Explain to her all the costs that come with owning a car (insurance, parking, maintenance). Also help Jessica decide whether buying or leasing is a good idea and whether a new or used car would be better. Also, or would she be financially better off if she simply rented cars to go longer distances? Suggested toolkit What does it really cost to own a car? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/budgeting/Pages/what-‐will-‐it-‐really-‐cost-‐to-‐own-‐a-‐ car.aspx#.U0L5Ddxh5Fs Consumer Reports on the cost of car ownership http://consumerreports.org/cro/2012/12/what-‐that-‐car-‐really-‐costs-‐to-‐ own/index.htm Is leasing a car a good option? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/planning/budgeting/Pages/is-‐leasing-‐a-‐car-‐a-‐good-‐choice-‐for-‐ me.aspx#.U0L5ONxh5Fs New or used -‐ Which is better? http://www.consumerreports.org/cro/news/2012/08/is-‐it-‐better-‐to-‐buy-‐a-‐new-‐ or-‐used-‐car/index.htm What insurance do you need? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/investing/personal-‐insurance/Pages/what-‐insurance-‐do-‐i-‐need-‐for-‐my-‐ car.aspx#.U0L5Xtxh5Fs Comparing car rentals/car sharing (suggested sites -‐ feel free to use others!) Autoshare -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐ money/investing/personal-‐insurance/Pages/what-‐insurance-‐do-‐i-‐need-‐for-‐my-‐ car.aspx#.U0L5Xtxh5Fs Budget Car Rental http://www.budget.ca/en/
Question 5: Should I become a homeowner now -‐ or keep renting? Jessica just celebrated her 30th birthday. She’s still at the same company but she’s getting restless. She’s been doing some freelance work and is thinking she might want to make a change: to quit and freelance full time. She’s also itching to travel. She’s still sharing her apartment (which she loves) and with her budget she is working to keep her living costs low. She’s also sticking to the advice you gave her and is paying down her debt and saving a bit of money! Now her parents want to help her buy her own home. They’ve told her that when she’s ready they will give her $20,000 to help her with a down payment. Question: Should Jessica take advantage of her parents’ generous gift and become a homeowner now? Or should she keep on renting? A few things you need to know for this one: • Jessica’s share of the rent = $600/month. • She can’t afford a house so she’s looking at condos in the $280,000 range -‐ maintenance fees on new condos are roughly 250 a month. • Jessica figures she can get preapproved for a mortgage at a variable rate of 3% amortized over 25 years. • One-‐bedroom condos in the same building she lives in now rent for about $1,800 a month. Suggested toolkit: Smart buying begins with knowledge -‐ http://blog.getsmarteraboutmoney.ca/smart-‐buying-‐begins-‐with-‐ knowledge#.UzRa29xh5Fs What would Felicity’s mortgage payments be if she bought (based on the details above)? http://www.getsmarteraboutmoney.ca/tools-‐and-‐calculators/Mortgage-‐ calculator/Mortgage-‐calculator.aspx#.UzRX7dxh5Fs Renting vs. Buying -‐ A Comparison -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐money/investing/real-‐ estate/Pages/renting-‐vs-‐buying.aspx#.UzRTydxh5Fs Do you know how mortgages work? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐money/investing/real-‐ estate/Pages/how-‐a-‐mortgage-‐works.aspx#.UzRVq9xh5Fs
Is Jessica eligible for government help? http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐money/investing/real-‐ estate/Pages/government-‐help-‐for-‐first-‐time-‐homebuyers.aspx#.UzRXI9xh5Fs What happens if your down payment is less than 20% -‐ http://www.getsmarteraboutmoney.ca/en/managing-‐your-‐money/investing/real-‐ estate/Pages/If-‐your-‐down-‐payment-‐is-‐less-‐than-‐twenty-‐ percent.aspx#.UzRXWNxh5Fs Buy or rent calculator -‐ http://www.getsmarteraboutmoney.ca/tools-‐and-‐ calculators/buy-‐or-‐rent-‐calculator/buy-‐or-‐rent-‐calculator.aspx#.UzRT6dxh5Fs The Globe and Mail’s Rob Carrick does some of the math here -‐ http://www.theglobeandmail.com/globe-‐investor/personal-‐ finance/mortgages/home-‐buying/the-‐real-‐cost-‐of-‐home-‐ ownership/article11668113/#dashboard/follows/ Some facts about debt loads in Canada -‐ http://www.cbc.ca/news/business/consumer-‐debt-‐snowballs-‐to-‐1-‐4t-‐1.2530528 How could rising rates affect Felicity’s mortgage payments -‐ http://www.fcac-‐ acfc.gc.ca/eng/resources/publications/budgeting/Pages/Debtchec-‐Bilandev.aspx