Summary

This article illustrates a young couple’s detailed plan to achieve their long- and short-term financial goals.

Getting Started

Appropriate Subject Area(s):

Personal finance, investing, retirement.

Key Questions to Explore:

  • What long- and short-term obligations do young couples/adults face?
  • What financial goals (long- and short-term) do most young couples/adults have?
  • How do young adults go about achieving these goals?
  • Which financial products do individuals utilize to achieve their goals?
  • What role do investment advisers play in assisting their clients to reach their financial goals?

New Terminology:

Investment adviser, Certified Financial Planner (CFP), RESP, RRSP, TFSA, home equity line of credit.

Definitions:

  • Investment advisor: An investment advisor refers to any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications.
  • Certified Financial Planner designation (CFP): A certification exam administered by the Certified Financial Planner Board of Standards Inc. that focuses on over 100 topics of concern to the financial planning field, such as retirement, estate, and investment planning. The CFP certification affirms an investment advisor’s expertise.
  • RRSP: An RRSP is a retirement savings plan which allows contributions from an individual and his/her spouse or common-law partner. RRSP contributions are generally tax deductible, provided that contributions are within the stipulated contribution limit.
  • TFSA: A tax free savings account is an account that does not charge taxes on any contributions, interest earned, dividends or capital gains, and can be withdrawn tax free. Contributions to a TFSA are not tax deductible and any unused room can be carried forward. A TFSA is available to individuals aged 18 and older and can be used for any purpose.
  • RESP: A Registered Education Savings Plan, or RESP, is a government-registered savings plan that helps individuals save for post-secondary education. Money deposited to the plan is not tax-deductible.
  • Home equity line of credit: A home-equity loan is a type of consumer debt which allows homeowners to borrow against their equity in their home. The loan is based on the difference between the homeowner’s equity and the home’s current market value. This form of borrowing appeals to homeowners due to the flexibility it affords, and the lower rate of interest that is charged on the loans.

Materials needed:

A copy of the article.

Learning Activity

Introduction to lesson and task:

Simon and Beth are a young couple with clear short- and long -erm financial goals. In the short term, they plan to buy a new car and renovate their newly purchased house. In the long term, they plan to save $1.6 million for retirement by the age of 60 and to comfortably afford two children and their  education.

According to Jason Pereira, an investment adviser, there is a high probability that they will achieve their long-term goals; however, it will come with some sacrifices in the short term.

This lesson plan explores Simon and Beth’s plan to attain their goals.

Action (lesson plan and task):

  • Ask your students to state some actions young adults can take to effectively utilize their tax credits or tax deductions in order to reduce their amount of tax payable.
  • Ask your students to list some events that could positive (or adversely) affect young adults’ returns on their retirement investments.
  • Ask your students to lists actions investors can take to mitigate the risks that are inherent in investing for the future.
  • Ask your students to give a surface-level description of a pension plan.
  • Ask your students to compare and contrast between an RRSP and a TFSA

RRSP

TFSA

Contributions are tax-deductible

Contributions are not tax-deductible

Withdrawals are taxable

Withdrawals are non-taxable

Contributions capped at lower of earned income and yearly contribution limit

Contribution capped at accumulated unused contributions

Age limit (age 71) for making contributions and existence of an RRSP.

No age limit; however, must be 18 or older to have a TFSA.

Potentially higher returns in the long-run due to tax-deferral and compounding of before tax income

Better flexibility in the short-run because withdrawals are non-taxable

  • Ask your students to explain why this young couple has decided that additional investments should be made through a TFSA rather than an RRSP.
  • Ask your students to describe why another couple might choose to put more money in an RRSP rather than a TFSA.
  • Ask your students to explain why Jason Pereira, the investment adviser, said not taking full advantage of all matching contributions is equivalent to leaving money on the table.

Simon and Beth are currently in a situation that many young adults face. There is a high probability, barring any unfortunate circumstances, that Simon and Beth will have a reasonably comfortable financial future when they retire; however, they will have to make numerous sacrifices in the short term. Based on this scenario, ask your students the following questions:

  • Ask your students to state actions Simon & Beth can take in the short term to free up some much needed cash flow. (postpone some of the short-term purchases like buying a new car or renovating their new apartment)
  • Ask your students to explain how Beth and Simon can supplement their income to meet short-term expenses. (home line of credit)
  • Ask your students to explain why it is important to pay down debt before investing? (Higher cost of borrowing and inherent risk associated with investing).
  • Ask your students to take a detailed look at Simon and Beth’s monthly disbursements, and suggest areas where expenses or liabilities could be reduced.

Consolidation of learning:

  • Ask students to state some benefits of meeting with investment planner to set financial goals, financial plans and implementation strategies.
Success

Success Criteria:

  • By the end of this lesson, students should be able to develop feasible short- and long-term financial goals. In addition, they should be able to differentiate between a TFSA and an RRSP.

Confirming Activity:

  • Ask students to list their long-term and short-term financial goals and state the steps they will take to achieve them.