# Grade 11 Essential Mathematics. Unit 2: Managing Your Money

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## Types of Accounts

Banks offer several types of accounts for their customers. The following are the three most popular accounts used for everyday transactions:

• savings account

• chequing account

• combination account

• electronic savings account.

Before you decide what type of account to open, you need to know how you plan to use the account.

Savings Accounts

As the name suggests, this type of account is good if you are interested in saving money because the bank pays interest. Different banks pay different interest rates for savings accounts. The interest rates may even vary for different types of savings accounts within a given bank. This type of account is recommended if you do not intend to have a lot of transactions (withdrawing money), or if you don’t need your money right away. For this reason, this account would be suitable for your budgeted monthly savings or for the money you set aside each month for your annual expenses.

Chequing Accounts

Typically, chequing accounts have lower interest rates than savings accounts, but they also have lower service charges; service charges are fees you pay for certain transactions. This is why chequing accounts are used for day-to-day spending activities. You could use this type of account for money you budget for monthly expenses and bills. Like the savings accounts, you can take out money at any time using the same means as a savings account, but you can also write cheques.

Combination Accounts

If you do not want to have multiple bank accounts, you can always open a combination account.

This account is part savings and part chequing, so it allows you to save as well as access your money on a day-to-day basis. One difference between a combination account and either a savings or a chequing account is the amount of interest you earn. The majority of these accounts earn interest only if the amount of money in the account is over a certain amount. This means that you would have to save up to \$500, for example, before you would earn any interest.

Electronic Savings Accounts

This account is a form of savings account that has become more popular in recent years, with the rise of online banking. Electronic savings (or e-savings) accounts typically earn a higher rate of

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interest than other types of savings accounts. You can only access them online, at an ATM, or in person. This means that you can withdraw or transfer money only in person, at an ATM, or by direct payment online. This type of account is ideal for your monthly 10 percent savings, as well as saving for some future purchase or activity. Other accounts that are available include tax-free savings accounts, registered education savings plans, registered retirement savings plans,

guaranteed income certificates, and many others.

SERVICE CHARGES

Service charges include any fees you pay for services provided by a bank or financial institution.

As you decide which type of account is most suitable, you should be well informed about any fees (service charges) that you will be charged. A list of service charges used by different banks is shown below:

Monthly fee: This is paid so that you can have the account.

Overdraft protection: This fee is optional, you may choose to pay this fee to protect you from other chargers if you happen to withdraw more money than you have available in your account.

Interac email money transfer fee \ Online money transfer to someone via email \ Online money transfer fee: Money transferred to someone else’s account directly. Fee for debits exceeding the monthly limit: Some accounts only allow for a certain number of free debit transactions. Once you have surpassed this number, you are charged for every additional debit transaction you make that month.

ABM transaction fee: If you withdraw money from an automated banking machine (ABM) that does not belong to your bank, you are charged a fee by the bank. These machines are in malls, movie theatres, airports, etc. You are also charged this fee if you withdraw money from a machine associated with a bank other than your own bank.

Monthly statement/bank book fee: If you request monthly statements or update your bank book using the feature on the ABM, your bank may charge you a fee.

As you can see, even if an account does not have a monthly fee, you might still have to pay service charges for your account. In addition to the fees charged by your account, there are service charges that you must pay if you use different features on an ABM. These include the following:

 Full statements and mini-statements

 Withdrawals in the United States

 Additional statement requests

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Because you never want to pay more than you have to, especially when it comes to banking, here are some tips to reduce the number of service charges that you have to pay:

 Instead of going to the bank and getting the teller to pay your bills, some banks offer a lower fee if you pay your bills at an ABM or online.

 Many financial institutions offer youth and student accounts that have lower/fewer service charges in order to entice students to join their institution.

 Before you open an account, consider how often you would use your debit card to make purchases. If you expect to use your debit card frequently, it would be wise to choose an account that offers a large number of free transactions or to choose an account with an unlimited number of transactions.

 Seniors sometimes also receive special accounts because they have been loyal to the company or because they live on their pension instead of a salary.

 Minimize the number of transactions you use (if you have a maximum number free).

When you go to the grocery store, make sure you don’t forget anything and plan ahead for the week. If you are having company over on Saturday, be sure you buy the

ingredients for dinner with the rest of your groceries so that it counts as only one transaction instead of several.

 Use your bank’s ABM whenever possible.

 Use online banking and receive online statements, because these are usually less expensive or free.

As you can see, there are many details to consider when opening a bank account. Some accounts will be more convenient than others. Also, selecting the account that is best for you may save you a lot of money. Most minors (under the age of 18) will choose to open savings accounts that are specifically for youths or students.

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## Learning Activity 2.1: Types of Bank Accounts Show your work on loose-leaf.

1. Match the bank account that would best suit each of the following people:

Shawna would like to buy a car in two years. Combination Account Ivan uses his debt card every day to pay for

lunch at school.

Savings Account

Aleena is saving to go on a trip to India, but also has to pay for shots, medicine and clothing before she leaves.

Chequing Account

2. State three avoidable service charges that you may have when you have a bank account.

Explain how you could minimize or avoid them.

3. What is the main difference between a Savings account and a chequing account? Explain why a chequing account may be a better choice for someone.

4. What makes a combination account different than savings and chequing accounts? Why would this type of account be a good choice for someone?

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## What is an RRSP?

A registered retirement savings plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for your future on a tax – sheltered basis.

An RRSP is an investment portfolio – your designated retirement savings. It can contain a

variety of investments including: RRSP savings deposits, treasury bills, GIC’s, mutual funds, and bonds.

What makes an RRSP special is that your contributions to it are tax deductable and your portfolio grows tax sheltered.

## Who Should Have an RRSP?

Every individual under 70 years old who works, files Canadian income tax return, and wants a secure retirement should consider having an RRSP.

Here’s why:

 People who earn income through their employment or self-employment, can reduce their annual tax bill while saving for their future through an RRSP

 For people who have a company pension plan, RRSP’s add extra comfort that their retirement met; for those that don’t have company pension plans, RRSP’s may be the foundation for funding retirement

 Married couples where one spouse earns more than the other they can reduce their combined income through a spousal RRSP. At retirement, an income splitting strategy can be applied to reduce overall tax when RRSP funds are withdrawn

 If you are planning on purchasing your first home or are interested in continuing your education you can contribute to an RRSP, then use these funds as a source of financing

 If you anticipate fluctuations in your income because of maternity leave, career changes, or employment interruptions, the funds in your RRSP are available to you.

## Benefits of RRSP’s

While designed specifically for a retirement vehicle, an RRSP has benefits throughout your lifetime.

By contributing to an RRSP throughout your working career, you’ll realize immediate tax benefits at a time when your income is generally highest. The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year.

The income earned in your RRSP is not taxed until it is withdrawn. While your investments sit in your RRSP their growth is tax sheltered and so the total value may grow more quickly.

By the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. Funds withdrawn at that time will benefit from this lower tax rate.

Special features of RRSP’s allow you to do further tax planning or use your RRSP to fund specific life events.

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## Rules and Regulations

It is important to understand the details regarding RRSP’s. The rules governing all RRSP’s are set out by the Federal Income Tax Act and are administered by the Canadian Revenue Agency.

Below is a summary of key aspect.

Annual Contributions

You may contribute to your RRSP until December 31 of the year in which you turn 69. The following limits and deadlines apply annually.

Maximum annual RRSP contribution limits

Year Contribution Limit 2005 \$16,500

2006 \$18,000 2007 \$19,000 2008 \$20,000 2009 \$21,000 2010 \$22,000

Your allowable RRSP contribution for the current year is the lower of:

 18% of your earned income from the previous year

 the maximum annual contribution limit for the tax year

 the remaining limit after any company sponsored pension plan contributions

Earned income includes salary or wages, alimony received, and rental income among other income sources, but does not include items such as investment income.

You’ll find the exact amount you can contribute to your RRSP for the current year on the Notice of Assessment you receive from Canada Revenue Agency after they process your previous year’s tax return.

To be eligible for an RRSP deduction in a specific tax year, you can make contributions anytime during the year, or up to 60 days into the following year.

Carry-Forwards

If you can’t make your maximum contribution one year, you can make up that portion of the contribution the next year or following years. The amount of your unused contribution limit is shown on your Notice of Assessment.

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## A Financial Plan What Is a Budget?

A budget is an estimate of future income and expenses over a given period of time, and a financial plan (setting goals that include income, spending, and savings) based on this estimate.

People create budgets to ensure that they have enough money to afford the lifestyle they have or would like. Budget goals can be short-term (such as paying off a credit card bill) or long-term (such as paying for university). No matter what goals you have, your budget should be flexible (easily adjusted). This is necessary because your situation can change quickly (you may get a promotion or lose your job, which changes your income dramatically) and the demands on your finances can also change quickly (such as your air conditioner breaking when it is 35°C outside).

Before You Get Started

There are two things you need before you can start creating your budget:

1. Know what is important to you. You need to be aware of your spending habits before you begin formulating your budget.

 Are you the type of person who likes to spend now? Would you be willing to use credit to achieve a financial goal sooner (such as going on a holiday)? Do you use some of your savings to purchase new items (upgrading your phone or buying a new car)?

 Do you like to pay off IOUs and loans as soon as possible? Is it important to you to save up for the future (such as college or buying a house)?

 What type of shopper are you? Are you a bargain hunter, or do you look for name-brand products? Do you need to have the latest and greatest, or is what you already have good enough? You should answer these questions honestly. If you do not, you may not be able to follow your budget plan, which would defeat the purpose of having a budget.

2. Decide what your financial goals are. If you cannot think of any financial goals you may have, start by making a list of life goals that you have or discuss them with someone you trust. This will aid you in setting financial goals that will let you achieve your life’s goals.

For example, if you would like to move to a place of your own in five years, then a financial goal could be to save enough money for a down payment.

In addition to knowing these two things, it is a good idea to keep track of

• how much money you earn?

• how much money you spend?

• where you spend your money?

Do this for at least a few months before you start developing your budget. It is beneficial to do this because you can see how much you are paid and where your money goes. This helps you to estimate how much you will spend on certain things next month and in the future.

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Preparing a Budget

As you can see on the budget form, the monthly budget is divided into five sections:

• Net income

• Monthly savings

• Monthly expenses

• Annual expenses

• Summary

A financial plan is a tool to help you reach your goals. If includes preparing and following a budget.

Budgeting helps you to:

 live within your income

 identify financial priorities

 pay bills

 meet financial emergencies

 gain a sense of financial independence

 save and invest to reach financial goals

One critical tip is you ‘pay yourself first’. Set aside 10% of your net income for investing, paying off debt or build an emergency fund.

The following table shows recommended levels of spending (guidelines only):

Category Percent

Housing 30%

Food 25%

Transportation 12.5%

Clothing 7.5%

Health/Fitness 5%

Entertainment 5%

Insurance 5%

Savings 10%

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Preparing a Monthly Budget:

A budget is divided into 5 sections:

1. Net income: this is the income you receive after all deductions have been made; such as EI, CPP, income tax.

a. First Income – your net income

b. Second Income – your spouses net income (if applicable)

c. Other Income – this includes tips, tax credits, inheritances, bonuses

2. Monthly Savings: it is recommended that you save at least 10% of your total net income 3. Monthly Expenses: for example: clothing, groceries, gasoline etc.

4. Annual Expenses: you pay these only once a year but they are usually large so it is advisable that you save for them each month. Ex. Car insurance

5. Summary: the difference between your average monthly income and your monthly expenses – if it is positive you have money to spend (or save) if it is negative you have a deficit and it is necessary to look at your budget again.

Ex1.

Jason and Camilla are a young married couple who have just bought their own home. Jason is a desktop publisher and earns a gross salary of \$510 a week, after deductions it is \$370 a week.

Camilla is a pharmacy technician and earns a net bi-weekly salary of \$742. Jason and Camilla expect their expenses for the month of March to include the following:

Mortgage Payment \$580.70

Car loan payment \$385.50

Phone \$40

Electricity \$90

Heating and water \$160

Cable \$21.20

Groceries \$370

Clothing \$180

Gasoline \$90

Health and disability insurance \$62.80

Personal care \$45

Entertainment \$150

Furniture \$520.60

Annual Expenses:

Car Insurance \$836.50

Life Insurance premiums \$370.14

Property taxes \$2,764.80

Home Insurance \$398.20

Newspapers \$220.00

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1. Net Income Amount per pay period

Annual Amount

Average Monthly Income First Income \$__370*52________ \$_19 240________ 1) \$_3 211____________

Second Income \$__742*26________ \$_19 292________

Other Income \$________________ \$_______________

Total Annual Income \$_38 532________ Monthly Savings 2. Monthly Savings

(10% of Average Monthly Income)

\$_3 211__________ 2) \$_321.10____________

3. Monthly Expenses

Mortgage or Rent \$__580.70_______

Car Payments \$__385.50_______

Telephone \$__40___________

Electricity \$__90___________

Other Utilities \$__21.20________

Cable \$_______________

Groceries \$__370__________

Clothing \$__180__________

Car Maintenance \$_______________

Gasoline \$__190__________

Health and Disability Insurance \$__62.80________

Personal Care \$__45___________

Entertainment \$__150__________

Other Furniture \$__520.60_______

Other Gifts \$__48.20________ Total Monthly Expenses

TOTAL MONTHLY EXPENSES 3) \$__2 684___________

4. Annual Expenses Annual Amount Monthly Amount Car Insurance \$_836.50_______ \$__69.71______

Life Insurance \$_370.14_______ \$__30.85______

Property Taxes \$_2 764.80______ \$__230.40_____

Home Insurance \$_398.20_______ \$__33.18______

Vacations \$______________ \$_____________

Newspaper and Periodicals \$_220__________ \$__18.33______

Other \$______________ \$_____________ Total Monthly Contributions

to Annual Expenses TOTAL MONTHLY CONTRIBUTIONS TO ANNUAL EXPENSES 4) \$_382.47___________

5. Summary

1. Average Monthly Income 1) \$_3 211____________

2. Savings 2) \$_321.10_______

3. Total Monthly Expenses 3) \$_2 684________

4. Total Monthly Contributions to Annual

Expenses 4) \$_382.47_______

Total Amounts 2 + 3 + 4 \$__3 387.57________

5. Amount available for other savings or expenditures (deficit) 5) \$__(176.57)_________

Note: If a budget is in a deficit positions, it needs to be analyzed for possible adjustments to spending

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Jason and Camilla are in a deficit. (A deficit is indicated by the brackets.) This means that they are spending more money than they make. This is not a good financial situation. You do not want to spend more money than you have.

What changes can you suggest to Jason and Camilla so they can balance their budget? (A balanced budget means they aren’t spending more than they earn)

Analyzing the budget it looks like they have spent a lot of money this month on furniture and entertainment. If you don’t have enough money they should not be spending money on furniture or gifts.

Although, if they just purchased a house they likely will not have to purchase furniture every month so this expense will not occur next month which would mean that they will have a balanced budget next month.

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Example:

Jason Williams and Carol Grimes are a young married couple who have just purchased their first home. Jason is a desktop publisher and receives a gross salary of \$480 a week. After deductions, his net salary is \$370 a week. Carol is a pharmacy technician and receives a gross salary of \$882 biweekly. After deductions, her net biweekly salary is \$742. Jason and Carol prepare a budget each month. If their budget indicates a shortfall or deficit, they adjust the budget to remove the deficit. Jason and Carol would like to purchase living room furniture during the month of March.

They expect their other expenses for the month of March to include the following:

 a mortgage payment is \$580.70

 car payment is \$385.50

 a telecommunications payment is \$42.50

 a hydro payment is \$90.00

 a heating and water payments are \$154.00

 a cable payment is \$21.20

 a groceries are \$370.00

 a clothing is \$580.00

 a gasoline expense is \$92.00

 a health and disability insurance is \$62.80 a month

 a personal care expenses are \$45.00

 an entertainment is \$446.70

Their annual expenses include the following Autopac payment is \$836.50

• life insurance premiums are \$370.14

• property taxes on their new home are \$2764.80

• home insurance is \$398.20

• newspapers and periodicals are \$220 a year

a. Can Jason and Carol afford to purchase a new living room set?

No, they cannot afford to purchase the new furniture because their budget is in a deficit.

b. If Jason and Carol don’t have a balanced budget, can you make some suggestions where they can reduce the amount they spend each month?

If they wanted to save money for the purchase of the new furniture then I would suggest that they spend less on clothing and entertainment each month. They can save this money each month until they have enough to purchase the new furniture.

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Deficit positions are shown in brackets – this means that you have spent more money than you earn.

1. Net Income Amount per pay period

Annual Amount

Average Monthly Income First Income \$__370 x 52 ______ \$___19 240______ 1) \$_3 211____________

Second Income \$__742 x 26_______ \$___19 292______

Other Income \$________________ \$_______________

Total Annual Income \$___28 532______ Monthly Savings 2. Monthly Savings

(10% of Average Monthly Income)

\$_3 211 x 0.10_____ 2) \$_321.10____________

3. Monthly Expenses

Mortgage or Rent \$_580.70________

Car Payments \$_385.50________

Telephone \$_42.50_________

Electricity \$_90.00_________

Other Utilities \$_154.00________

Cable \$_21.20_________

Groceries \$_370.00________

Clothing \$_580.00________

Car Maintenance \$_______________

Gasoline \$_92.00_________

Health and Disability Insurance \$_62.80_________

Personal Care \$_45.00_________

Entertainment \$_446.70________

Other (furniture) \$_______________

Other (gifts) \$_______________ Total Monthly Expenses

TOTAL MONTHLY EXPENSES 3) \$_2 870.40____________

4. Annual Expenses Annual Amount Monthly Amount Car Insurance \$_836.50_______ \$_69.71_______

Life Insurance \$_370.14_______ \$_30.85_______

Property Taxes \$_2 764.80_____ \$_230.40______

Home Insurance \$_398.20_______ \$_33.18_______

Vacations \$______________ \$_____________

Newspaper and Periodicals \$_220.00_______ \$_18.33_______

Other \$______________ \$_____________ Total Monthly Contributions

to Annual Expenses TOTAL MONTHLY CONTRIBUTIONS TO ANNUAL EXPENSES 4) \$_382.47__________

5. Summary

1. Average Monthly Income 1) \$_3 211.00__________

2. Savings 2) \$__321.10______

3. Total Monthly Expenses 3) \$__2 870.40_____

4. Total Monthly Contributions to Annual

Expenses 4) \$_382.47______

Total Amounts 2 + 3 + 4 \$_3 573.97_______

5. Amount available for other savings or expenditures (deficit) 5) \$_(362.97)________

Note: If a budget is in a deficit positions, it needs to be analyzed for possible adjustments to spending

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Curriculum Outcomes:

11E4.M.1. Solve problems that involve personal budgets.

## Assignment: Budgets

1. Prepare a budget for Kirk Donner for the month of October. Use one of the budget forms provided at the end of the lesson, or create a worksheet of your own.

Kirk is a university student who lives at home with his parents. During the past year, he worked for a lawn service in the summer months and earned a net income of \$4800. He also works part-time during the year, and earns a net income of \$90 per week. Kirk was awarded a scholarship of \$1000.

Kirk’s expenses for the month of October will include the following:

 payment of \$150.00 to his parents for board and room

 car payment is \$105.80

 gasoline expense is \$65.00

 clothing is \$140.00

 personal care expense is \$25.00

 entertainment expense is \$100.00

 gifts are \$35.00

 CD expense is \$20.00

Kirk’s annual expenses will include the following:

 university tuition is \$3200

 books and supplies are \$550

 Autopac payment is \$470.50

 vacation is \$750

 magazine subscription is \$28 a year

 Christmas gifts are \$240.70

b) Is Kirk’s budget in a deficit position?

c) Kirk has to pay for his textbooks. Will he be able to?

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2. Prepare a budget for Dana Smythe for the month of May. Use one of the budget forms provided at the end of the lesson, or create a worksheet of your own. Dana has completed a welding course and has just started working. She has a biweekly net salary of \$1090. Dana is trying to save money to buy a car. Her expenses for the month of August will include the following:

 rent payment is \$525.00, and she shares this with her two roommates

 bus pass is \$55.85

 telecommunications payment is \$30.00, which she shares with her two roommates

 hydro payment is \$56.00, which she shares with her two roommates

 water payment is \$36.00, which she shares with her two roommates

 cable payment is \$21.20 which she shares with her two roommates

 groceries are \$140.00

 clothing is \$200.00

 health and disability insurance is \$42.80

 personal care expense is \$3000

 entertainment expense is \$8000

 gifts are \$2140

 student loan payment is \$180.00

 charitable contribution is \$25.00

Dana’s annual expenses will include the following:

 tenant’s insurance is \$252, which she shares with her two roommates

 vacation is \$1500

 newspaper subscription is \$168.60, which she shares with her two roommates

 gym membership is \$450

a) Is Dana’s budget in a deficit position?

b) Dana would like to purchase a car for about \$8000 in the near future. How much is Dana able to set aside in May to purchase a car? How long will it take Dana until she is able to afford a car if she sets aside the same amount each month?

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