Your financial literacy reality check
With Financial Literacy Month in full swing, educators and officials are turning their attention to the gap in the average Canadian's financial capabilities. Studies show we still have a ways to go.
BMO's 2013 Financial Literacy Report Card found many of us don't even realize how much we don't know. The survey of 1,250 Canadians found 45 per cent give themselves a letter grade of A or a B in financial literacy. Yet only 48 per cent correctly answered questions about compound interest and 31 per cent of self-professed grade A achievers failed the overall quiz on financial concepts.
To clarify financial literacy realities, we asked two seasoned professionals weigh in. Chris Snyder is a fee-only certified financial planner and chairman of ECC Group personal financial advisers. Voicing the debt management perspective on financial literacy is Jeffrey Schwartz, the executive director of the non-profit credit counselling firm Consolidated Credit.
Q. Just what is financial literacy?
Chris Snyder: Having the knowledge and skills about money so you can take effective action to meet your financial goals. That includes knowing where and when to get help.
Jeffrey Schwartz: My personal definition would be the demonstrable knowledge and skills to make responsible and smart financial decisions. Really, what we're getting down to is the knowledge necessary to manage your personal finances including debt, investments, running a household and preparing yourself for the future.
Q. Can you explain the "say-do" gap in financial literacy study results?
Snyder: Often, people are afraid to put up their hand and ask enough questions. I think men in particular are expected to know all about financial matters -- and they don't. So they're afraid to ask questions and admit this lack of knowledge. As I write in my book, Be Smart with Your Money, this often leads to uninformed decisions. Plus, a lot of people think they know more than they really do.
Schwartz: No one wants to admit that they don't know how to handle something so common as their own finances. Because Canadians deal with money multiple times every day, they think they automatically understand it. That assumption couldn't be further from the truth.
When it comes to money, most people are, quite frankly, uninformed. Canadians will walk into a store and buy something not because they need it, but because they want it or because it's on sale. They'll view their purchase as a savvy money move. But living beyond their means and living paycheque to paycheque is not good.
Typically, we have a pretty cavalier attitude towards debt right now. I suggest that interest rates that have been as low as they have for as long as they have, that's likely one of the reasons they have that cavalier attitude. People think that because they can afford the payments now, everything will be fine.
The reality is that household debt is at an all-time high. Canadians are taking on way too much low-cost debt without thinking through or understanding the long-term financial impact.
Q. What are some overlooked factors that determine financial literacy?
Snyder: In part, it's not going for help when you need it. I've been providing financial advice for 48 years but if I don't know something and am advising someone I'll say, ‘Look, I'll find out.' That doesn't mean just relying on others to tell you what to do. You should be well-educated yourself, so you can ask the right questions. You don't have to have all the answers. But the more you know, the better questions you can ask.
One of the most important things I've learned in business is to know what the facts are. People might hear a rumour, and immediately take action. They buy because everybody else is buying. If you can change your habits to search out the facts 26 times in a row, you're more likely to do it on the 27th try. Until you develop the habits, you're very limited on how much you can improve your financial literacy.
Schwartz: It's better to start young. We started our children at kindergarten, using the three piggy bank rule with them: one each for savings, charity and spending money. The older you are, the more entrenched you are in your behaviour and the harder it is to make a change. That said, it's never too early or too late to improve your money know-how.
As for those people who run into financial problems, it often isn't their fault. Typically, financial literacy starts at home, which can be a disadvantage if their parents handled their finances poorly. As a society, we could do a lot more -- and earlier -- in our schools to help people learn about managing their money and the importance of it.
Finally, practice what you learn. It's one thing to create a budget, but it's another thing to stick to it. There's more to improving financial literacy than reading a book or attending a seminar. You've got to put those skills into practice. By doing so, we create better habits and make wiser decisions around our personal finances.
Q. Is it realistic for anyone to fully achieve financial literacy?
Snyder: My answer is no, it's impossible. There's information coming out every day, all the time. But you have to have the skills to be able to deal with it.
To get started, you have to make a commitment that you want to do it. Often that comes about because people had a bad experience. Because financial literacy is a lifelong commitment, they also have to keep up at staying financially literate. It's an everyday thing, and it basically comes down to the individual.
Schwartz: Personally, I'm constantly striving for new information and new opportunities to learn. It's an attitude more than anything else. I don't think that I'm ever done because I constantly want to look at new and different ways to improve myself.
Secondly, there are constantly new products out there. So it's always a good idea to keep abreast of new opportunities to utilize your money. The Registered Education Savings Plan (RESP) hasn't always been out there. The fact that the government helps to incentivize you to contribute to an RESP -- that's a good thing. Another example of relatively new and wonderful financial product is the Tax-Free Savings Account (TFSA).
I think the possibility of becoming stagnant around financial literacy comes down to two attitude-related questions: Do you want to learn more and do you want to improve?
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