McGill University Personal Finance Essentials

A friend on social media posted about this online financial course that is available for free from McGill University in Canada. As you can imagine, the course is designed for Canadians, but I found that the concepts, ideas, and terminology could be applied to individuals in other countries. I was able to complete the course in about 4-5 hours (I did it all on Christmas Eve).

The article that was written about the course, gives more insight into what the course is about and who it is designed for. Once you complete the course, you will receive a certificate of completion. Feel free to read the article.

Below are my notes from the course. They are not well structured, but I did make an effort to note the key points that were mentioned in each section. I have also included my test results from each section in case you want to compare your results to mine. For each section, you have to get 80% or greater in order to pass each module.

I would encourage you to take the course for yourself even if you are good with money. I consider myself to be good with money, but did not realize until I got to Module 8 that there is a psychological aspect to how well or bad you are with money and investing.

Module 1, Intro

No notes from this section.

No test for this section.

Module 2, Debt and Borrowing

Common Sources of Debt

  • understand what sources of credit are most appropriate
  • terms and conditions for the type of debt

Credit Cards

  • are easier to obtain
  • rewards and benefits
  • look at the fees and interest rates
  • a card may have a high rate, but the benefits can outweigh the rate

Lines of Credit

  • operates similar to checking account as it gives debit cards or is connected to checks
  • it accrues interest immediately
  • usually has lower fees and interest rates than credit cards
  • people often usually take out a larger balance for line of credit than for credit cards as they have lower rates

Long Term Financing

  • usually used for larger costs assets, cars, or houses
  • if you don't pay for it in full, then the asset is repossessed
  • the asset is collateral

Mortgages

  • used specifically for buying a home
  • minimum down payment is usually required, 5% to 20%
  • down payment cant be used from other sources, like line of credit
  • mortgage loan insurance covers the lender in case you default
  • a change of the mortgage term will require agreement between the two parties involved
  • loans are amortized
  • type of interest rate is a consideration. mortgage payments stay the same with fixed rates. However variable rates will cause your payment amount to go up.
  • time and interest are impacted by the mount of payments made during the repayment period

Credit Scores

Credit Worthiness

  • Credit history is used and based on credit report. Like a report card and how responsible you are
  • includes debt sent to collections, bankruptcy,
  • usually stay on report for 6 years, but may stay on longer
  • positive info, like making on time payments, may stay on longer
  • math formula is used to calculate the score; from 300-900 (in Canada)
  • factors include how long you have had credit for, outstanding balances, missed payments, amount of outstanding debts, if debts have been sent to collections, being close to the credit limit, times you've tried to get more credit, record of insolvency or bankruptcy
  • good credit gives you preferential interest rates
  • check your credit report regularly

Rules for Borrowing

  • live within your means
  • always use debt wisely
  • need a solid plan for repaying debt before getting it

Passed with 80% score.

Module 3, Your Money Today and Tomorrow

  • Time value of money - the amount of money is wroth more the sooner it is received

Compounding

  • allows you to earn interest on interest
  • present value and future value fv = pv * (1 + r)^t

fv = 100 * (1 + 0.04)^2

fv = 108.16

  • the higher interest rate or greater number of periods, the higher the future value
  • can only compare values at the same point in time IF they are not at the same point in time, then you have to bring them to the same point in time

Discounting

  • money traveling backwards in time, it is called Discounting; the reverse of compounding
  • pv = fv / (1 + r)^t

pv = 104 / (1 + 0.04)^1

pv = 100

Everyday Applications

  • doing investments in installments will earn more interest than a lump sum
  • doing payments in chunks, less interest is charged on the remaining balance

I passed with a 90%.

Module 4, Strategic Budget Building

  • need to have a budget
  • budgets also deal with the time value of money

Why Budget

  • budget is estimate of income and expenditures over a given period of time cash in vs cash out
  • you want to have a surplus, more income than expenditures
  • process of budget helps achieve goals

Tips and Techniques

  • structured planning approach

Preparing

  • kick off meeting;
  • write 1-3 words where you stand financially
  • write 1-3 words where you like to be 1-3 years from now, balance ambition and reason
  • include a vision statement
  • write 5 biggest challenges to achieving budget goals
  • include information that you need to stand where you are and where you would like to be
  • supplementary material is available for the course
  • have stakeholders involved to help you achieve your goals in the future; important to have those connections established

Analyzing

  • make fact-based decisions
  • calculate your revenue and expenditures
  • use the revenue tool that is available

Deciding

  • finalize the 3-year vision
  • strategies to overcome the challenges and achieve the vision
  • look back at the vision statement, adjust it as needed; should be 1-2 sentences
  • refine the vision based on the challenges identified
  • 5-7 ways to overcome the challenges to be able to achieve the vision

Keys Steps to Budgeting

  • achieving quick wins
  • list 3 things that will get done in 2-3 months to achieve goals
  • use KPIs to track progress; come up with 3-5 key areas (bank balance, investments, etc)
  • if you get behind on your KPI, then adjust and keep going

Key takeaways

  • annual budget is important
  • have a vision where you want to be in 3 years
  • review budget throughout the year
  • new budgets
  • celebrate successes

Passed section with 100%.

Module 5, The Art of Investing, Part 1

Investment Options

  • need to know the difference between stocks and bonds
  • stocks are very risky
  • bonds are IOUs, more secure
  • you make money from a bond via the interest
  • money market = bonds less than 1 year
  • bonds promise a fixed income
  • long term bonds have more risk than short term
  • companies bonds are more risky than government bonds
  • bonds are less risky than stocks
  • stocks usually have higher returns, 8% on average
  • bear vs bull markets

how to invest

  • open brokerage account
  • mutual funds have professionals that invest on investors behalf
  • active mutual funds adjust over time
  • passive mutual funds just follow the market, usually are cheaper than active

  • the earlier you start investing, the better

Common Mistakes and Rules to Avoid Them

Diversification

  • most investors repeat the same mistakes
  • s and p 500 index - large 500 stocks in the market, gives an overall picture of the performance of the stock market
  • compare the stocks to the S and P and it is less volatile
  • diversification doesn't eliminate every kind of risk , value can still go down if there is bad news about the entire economy

how do you diversify

  • maximizing by including every kind of industry in your portfolio
  • invest in index funds, buys multiple funds ; they don't trade a lot
  • also invest internationally
  • diversification doesn't protect from market crashes
  • usually the market recovers from crashes; thus the high risk for stocks

the dot com boom

  • the .coms got to high levels and then the bubble popped

learn from the mistakes of others

  • buy low, sell high; basic rule for making money of the market
  • most people do the opposite
  • should be expected that there will be more than one financial crisis in your lifetime
  • keep investing when markets are depressed
  • markets usually recover from crashes after a few years

minimize investment expenses

  • the more the trade, some have worse experiences
  • investment expense should be controlled; find low costs investments
  • investing fess make a big difference when it comes to compounding if your money you will get less over time, in some cases by half

summary

  • diversified portfolio
  • don't buy low and sell high ; mood of the market
  • keep investing when things look bad
  • minimize investment expenses
  • be cautious when market becomes excited about a company or invention that will "change the world"

Failed with 70% first time Passed with 90% second time

Module 6, The Art of Investing, Part 2

Progressive Income Tax in Canada

Doesn't apply to be since I'm in the US, so I didn't take notes on this.

Considering Income Tax when Investing

  • investment income is taxed on top of your regular income

Paying Down Debt

  • interest saved on debts are not taxed
  • paying personal debt should be considered first

Government incentives

Information in this section is specific to Canada. However it does describes in a similar nature of how retirement accounts work in the US. From what I can gather is

  • TFSA = Roth 401K or Roth IRA
  • RRSP = Traditional 401K

Failed with 60% on first attempt Passed with 100% on second attempt

Module 7, The Realities of Real Estate

Why Real Estate?

  • capital appreciation
  • provides a sense of security
  • can use it as leverage to borrow money
  • can use it to reduce taxes
  • value of real estate, the market usually keeps up with inflation but can go down with economic down turns

Factors to Consider

location

  • population and income growth
  • growing cities need more housing and provide a stable stream of income, and more capital appreciation
  • Detroit is used as an example

macro factors

  • more people will buy houses when mortgages when rates go down
  • constraints play a factor, such as the higher cost of living

micro factors

  • where and what you want to buy
  • up and coming neighborhood or established neighborhood
  • what do you want to buy?
  • price and in relation to the size of the property
  • consider age of the building

Housing Affordability and Rent vs Buy Decision

  • know whether you can afford a house or not in your current state
  • spend no more than 28% to 36% of your income on housing
  • house to rent ratio ;some cases means that it is better to rent than to buy
  • price to rent ratio = price of property / annualized rent

alternative ways to invest in real estate

  • invest in REITs (real estate investment trusts)
  • REITs can have different property types.
  • usually are very good

Failed with 70% on first attempt Passed with 80% on second attempt

Module 8, Behavioral Finance

  • cross between psychology and finance
  • investor irrationality

What Kind of Investor Are You?

risk aversion

  • risk aversion - how much do you dislike risk
  • most investors are risk averse
  • there are different levels of risk aversion
  • less risk would be treasury bills, gics
  • higher risk would be stocks
  • there is no true way to assess risk aversion

risk aversion factors

  • investors level of wealth - wealthy investors can take on more risk
  • age - younger investors can afford to take on more risk can recover from bad mistakes based on future income and being able to bounce back over time
  • personal situation and liquidity needs
  • personality - some worry more than others. some don't worry enough. Thus it factors in to how much each person is willing to risk.

Psychological Mistakes

  • emotions can impact investment decisions
  • Behavioral Biases - observed tendency for some to make mistakes

biases

  • conservatism bias - under react to new information, incorporate prior information
  • representativeness - similar to stereotypes; over-extrapolation of long trends
  • disposition effect - sell stocks in their portfolio that work well and hold under-performing stocks; often related to a state of denial
  • biased self attribution - attribute their success to their own skill when they are making money, but claim bad luck when things go wrong
  • fear - fear has impact related to the risk you are willing to take; avoid making financial decisions when in a high emotional state

three stages of grief

  • denial
  • anger
  • bargaining

Investment Strategies

trading strategies

  • momentum trading - invest in stocks that have done well over the past year related to conservatism bias; the market can be slow to react to the news, thus a delay in reaching its true value
  • post-earnings announcement drift - continue drifting in the initial direction after the initial announcement; related to the conservatism bias; results in the stock price not increasing as good as it should

Passed with 80% on first attempt

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