Personal Finance 101
Note: This article is based on the expertise of presenters at CFA Society Toronto’s financial literacy event in January 2025 with an intended audience of post-secondary students, young adults, and newcomers to Canada looking to take control of their finances.

Budgeting, saving, and investing can be daunting terms if you’re just starting on your personal finance journey, but with the right background information, you’ll be ready to make informed decisions in no time.

 

That’s where this quick guide to personal finance, comes in! With the help of industry experts, this article explores these three key aspects of investing:

1) saving and budgeting,
2) investment basics, and

3) ETF considerations, providing you with the information you need to start on the right financial path.

Let’s start at the beginning, with the foundations of personal finance.

Saving and Budgeting

According to Lynn Wang, MSc, CFA, CFP®, CLU, FRM, a great way to conceptualize personal finance is to liken it to the process of building a house. 

Wang, Wealth Advisor, iA Private Wealth and Insurance Advisor, iA Private Wealth Insurance, says you need to start with the foundation, which includes financial planning and budgeting. Next, you build the structure of the house, or go through the asset allocation process, where you decide how you want to invest. Then you focus on the exterior of the house, or risk management, where you’re focused on ensuring the structure is as protected as possible from the elements. Once the main structure is complete, you can move on to interior design, where you get into the details of picking stocks and securities.

Building a strong foundation

Much like with building a house, it’s essential to have a strong foundation in place before moving on to other elements of the investment process.

Wang notes there are two equations to help you assess the strength of your foundation: net cash flow and net worth.

1. Income – Expenses = Net Cash Flow

2. Assets – Debt = Net Worth

“The goal is to achieve positive cash flow, and in this scenario, any extra income can go toward assets or reducing debt,” explains Wang. “In a negative cash flow scenario, you will need to take savings or more from a credit card to cover the negative balance.”

To ensure positive cash flow, it’s essential to go through the budgeting process: analyze your non-discretionary and discretionary expenses and put a limit on discretionary expenses so you can generate savings (positive cash flow).

Investment basics 

Now that you have a strong foundation in place, you’re ready to move on to the structural components, where you explore where to invest your accumulated assets.

“Investment to me involves buying assets with the expectation that they will grow in value over time,” explains Ling Zhang, Vice President, iShares Canada Product, Black- Rock Asset Management Canada Limited. “Investments are usually used to achieve longer-term goals like saving for education or retirement.”

Let’s take a closer look at the common investment categories:

Cash (high-interest-rate savings account, deposits, or guaranteed investment certificates): Typically offer guaranteed return on investment over a period and have very low risk.

Bonds (fixed-income investments): When you purchase a bond, you lend money to the issuer. The issuer pays you periodic interest, and when the bond matures, the issuer will pay back the initial investment. Bonds generally pay higher income than cash deposits, but may carry greater risks, such as credit or interest risk.

Stocks (also known as equities): Represent the shares of ownership in a company. The price of the stocks can fluctuate based on the company’s performance, market conditions, and other factors. Over the long term, stocks can provide higher total return than bonds, but they also experience greater volatility.

Commodities (such as gold or silver): May help offset the impacts of inflation on other investments, and they’re also considered a portfolio diversifier, as they typically have lower correlation with other asset classes.

Derivatives (option contracts, futures, swaps): Financial contracts to achieve certain investment outcomes like hedging
currency risk or increased leverage.
Real estate (homes or rental properties): This can be income from rental payments or appreciation in property value over time. These investments can require substantial capital and ongoing maintenance and management responsibilities.

Mutual funds and exchange-traded funds (ETFs): These are investment vehicles that hold numerous assets (like stocks or bonds). They are professionally managed—the portfolio manager will rebalance the portfolio and manage the cash flow and other responsibilities. This means there will be a management fee charged while you’re holding the mutual funds or ETFs.

Zhang explains that while mutual funds have been in existence for over 100 years, ETFs launched in the 90s, so they are newer and less familiar to Canadian investors. ETFs are collections of securities that can be bought and sold on a stock exchange, which can offer benefits like ease of access, trading liquidity, portfolio diversification, and low cost.

ETF fast facts

Zhang highlights that the diverse ETFs available provide different access and choices, and ETF providers continue to innovate and bring new products in the market. Here are some key examples of ETF options to consider:
• Asset class: Equity, fixed income, preferred shares, commodity, options, mixed
• Sector and industry: Financials, technology, utilities, consumers, real estate, health care, etc.
• Geography: Canada, US, Europe, Japan, China, India, etc.
• Style: Cap-weighted; factor-based; environmental, social, and governance (ESG); index tracking; actively managed;

target outcome

Key considerations when investing in ETFs

• Understand the costs involved, including the ongoing cost, the transaction cost, and the tax implications
• Select an ETF based on your own important criteria, which can include exposure, risk, value alignment, currency, investment knowledge, and available time
• Decide on your approach: ETFs aggregate into several main categories (broad index, narrow index, rules-based, active), so do your research and determine what fits best with your goals, risk tolerance, and other factors

• Consult with the experts—investment professionals can help guide you through the process

Your personal finance journey starts… now!

Now that you’ve learned the basics of budgeting, saving, and investing, and the importance of building a strong foundation before focusing on the interior design of investing, you have the tools you need to successfully start your
personal finance journey. Remember to always take time to assess your situation before making any decisions, and to consult with professionals for guidance along the way to ensure you stay on the right path.