Summary

This article profiles a 25-year-old teacher’s savings habits, detailing her financial goals and her plan to achieve them.

Getting Started

Appropriate Subject Area(s):

Personal finance.

Key Questions to Explore:

  • Why is financial planning important?
  • What is the best way to go about financial planning?
  • What does risk tolerance mean? What factors affect risk tolerance?

New Terminology:

Defined benefit and defined contribution pension plans, RRSP.

  • A defined benefit pension plan is an employee benefit plan in which the employer commits to pay its employees a defined amount when they retired, based on the employee’s salary and years of service.
  • A defined contribution pension plan is an employee benefit plan in which the employer undertakes to contribute a specific amount each period to the fund. Since employers are responsible only for their contributions and nothing else, they do not bear the risks related to the plan; rather those risks are borne by employees. The contributions made by the employer are based on the current number of employees and their current salary levels.
  • An RRSP is a legal trust registered with the Canada Revenue Agency and used to save for retirement. RRSP contributions are tax deductible and taxes are deferred until the money is withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity.

Materials Needed:

A copy of article

Learning Activity

Introduction to lesson and task:

Helen, a 25-year old single teacher living in Alberta, earns $70,000 per year. In the near future she plans on buying a car that costs approximately $30,000 and using this car for five to eight years. That means this car will cost Helen an average of $6,000 to $3,750 per year depending on how long she owns it.

In the medium term, Helen plans on buying a home which could cost about $400,000 in 2021 (i.e. four years from today). In order to avoid CMHC mortgage insurance premiums of $15,000 over the life of the mortgage, she will be looking to make an initial payment of 20% of the principal (i.e. $80,000).

To achieve her short- and medium-term goals Helen has developed a disciplined habit of saving $1,400/month. That is almost 31% of her monthly income of $4,525. Helen effectively allocates this savings capital by using a self-directed brokerage account in her TFSA to invest these funds. The key benefit of a TFSA is that investment income earned from these accounts is not taxed.

Morgan Ulmer, the financial counsellor who is advising Helen in this article, has advised Helen to investigate the fees she is paying on her current investments and explore other investment alternatives like low-fee balanced mutual funds or index exchange-traded funds.

In the long term, Helen appears to be in a good position as she will likely be eligible for a public-service pension (defined benefit). As a result, Helen does not need an RRSP.

Action (lesson plan and task):

  • Ask your students to state their short- and long-term goals.
  • Ask them to state the percentage of their income they save (if they make any).
  • Walk them through the steps to save to meet their financial goal:
    • Step 1: Estimate the cost: the first step towards saving towards a certain financial goal is typically to research the cost of the goal.
    • Step 2: Identify sources of money to help cover the costs: the next step is then to identify the key sources of income to cover the costs. This could be through employment income or investment income.
    • Step 3: Set your savings goal: Then some calculation must be done in terms of determining the optimal amount of money to save daily, monthly, and annually.
    • Step 4: Develop your plan: Having a plan to attain a financial goal is crucial before you get started. Saving even a small amount over many years can make it much easier to pay for your child’s future education or training.
  • Based on this illustration above, engage the students in a fun activity:
    • Ask your students to identify one of their key financial goals and apply the steps listed above to create a financial plan.
    • Ask randomly-selected students to share their financial plan with the rest of the class.
    • Ask the class to evaluate each student’s financial plans and offer recommendations on how to improve it.

Consolidation of Learning:

  • Ask your students to explain the difference between a defined contribution plan and a defined benefit pension plan. Ask which is better suited to an employee’s needs.
Success

Success Criteria:

  • After completing this lesson plan, students should know the tools they need to cultivate a disciplined savings habit.

Confirming Activity:

  • Ask your students to explain the benefit of paying 20% of one’s mortgage as a down payment.