Most searched financial questions (with answers)

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When it comes to growing your wealth and strengthening your personal finances, there’s always more you can learn. While you can find a lot of information online, getting guidance you can trust can take more work. To simplify your search, we answer some of the personal finance questions that have been trending higher among Canadians this year.

“What credit score is needed for a house?”

Two things make buying a home more attainable: saving for a meaningful down payment and having a solid credit score. The latter is critical because it can help you lower the interest rate on your mortgage and influence the type of mortgage you qualify for, which can result in significant savings over time.

While different lenders have different credit score requirements, most want to see a score of between 620 and 680 to qualify for a conventional mortgage. With a large enough down payment and a high credit score, you may not be required to get mortgage insurance. That’s the short answer, but you can learn more about what affects your credit score, how to improve it and what’s considered strong credit here.

“What’s the difference between an RRSP and a TFSA?”

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are investment accounts geared toward helping Canadians save for their financial goals.

The first big difference is how your contribution room for each account grows. RRSP contribution room is based on your income – you can save up to 18% of your annual income up to a maximum amount, which increases a little bit every year. Additional TFSA contribution is granted every year and is the same for everyone. The maximum amount is indexed to inflation and may or may not grow in the next year.

RRSPs are funded with pre-tax dollars, which means that your contributions can reduce your taxable income for the year. This can potentially lead to a tax refund. On the other hand, TFSAs are funded with after-tax dollars. This means that you need to pay income tax on your earnings before you can contribute to the account, and there is no applicable tax credit available.

When it comes to withdrawals, RRSP withdrawals are considered taxable income for the year they are withdrawn. However, withdrawals from a TFSA have no impact on taxation. It is important to note that TFSA contribution room does not replenish until January 1st of the following year after a withdrawal. As for the RRSP, the contribution room replenishes after March 1^s..

“What are the TFSA/FHSA/RRSP contribution limits?”

Contribution limits for registered accounts vary not just for each kind but also from year to year. TFSA contribution room starts to accumulate the year you turn 18. For 2024, you can contribute up to $7,000, but if you’ve never put anything into a TFSA since the accounts were launched in 2009, you could contribute up to $95,000 this year.

The Tax-Free First Home Savings Account (FHSA) works a little differently. As the name implies, only first-time homebuyers, under the rules spelled out by the Canada Revenue Agency, can open this account. FHSAs allow you to contribute up to $8,000 a year to a maximum of $40,000. The caveat to this account is that an account must be opened for the annual contribution allowance to begin accumulating, so it is in an individual’s best interest to have an account opened!

The RRSP contribution room follows a formula that is based on your income. In any given year, your contribution room is equal to 18% of your reported income from the previous year, with the maximum annual room set at $31,560 in 2024.¹

“What is compound interest?”

Compound interest is the process that allows you to earn interest on your interest, which can help your money grow exponentially over time. In simple terms, you’re not only earning interest on your initial investment, but on all the additional interest earned as it builds up.

There are a number of analogies that can help you visualize what this means for your money, but the most straightforward is an oak tree. You plant a tree as a sapling (the initial principal), which becomes taller and more robust as it grows (earning interest). The tree’s trunk splits off into branches, which then grow their own smaller branches and leaves (compounding interest). The tree continues to grow upward and outward as it builds upon itself, just like your principal. Learn more about the power of compound growth here.

“What is inflation?”

In essence, inflation reflects the rise in the cost of living – for things such as food, gas and other goods and services – over time. In Canada, inflation can be measured using the Consumer Price Index (or CPI for short) which measures the average change over time in the prices paid by consumers for a basket of goods and services. Some inflation is healthy for an economy, but if it gets too high it can make life unaffordable and erode the value of your savings, since your money will buy less than it could a month or a year ago. The Bank of Canada (Canada’s central bank tasked with keeping inflation under control) tries to maintain an annual inflation rate of 2%.

“Should I save or invest?”

Short answer: yes. To reach your goals you need to do both, but the main difference between the two boils down to risk. Generally, saving is about setting money aside so you can access it quickly if you need it to cover an unexpected expense or have a short-term goal. As a result, these are usually funds you can’t afford to risk in the market – although there are some investments with lower return potential that have less risk.

Investing can allow you to seek higher returns, but it also means potentially losing money as well. When you save for a long-term goal, such as retirement, the potential for higher long-term returns through a diversified portfolio could outweigh any losses you may experience in the short term. To learn about how staying invested could increase your wealth, check out the details here.

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