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(CHRIS YOUNG/THE CANADIAN PRESS/Chris Youn)
(CHRIS YOUNG/THE CANADIAN PRESS/Chris Youn)

Investor Education

Jim Flaherty: Lessons from mother Add to ...

He is the man responsible for the biggest government deficit in Canadian history. But never let it be said that Finance Minister Jim Flaherty knows nothing about frugality.

Growing up Montreal in the 1950s, he was one of eight children. His father was a sales manager. His mom tended to the kids and the home, and tried to stretch the budget as far as she could.

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"I remember my mother being very frugal in balancing things, and being at the grocery store and having to put something back on the shelf because there wasn't enough money," Mr. Flaherty said in an interview. His mother, who lived through the Depression, was particularly wary of the dangers of credit.

But the Minister isn't sure that he has passed those lessons on to his 19-year-old triplet sons. "They won't like me saying this, but they're among the group that could increase their financial literacy."

Groundbreaking research shows that most Canadians are in that group. From those struggling with credit card debt to well-off individuals who've been stung by complex investments they didn't really understand, low financial literacy levels are becoming a national epidemic - one that Mr. Flaherty now wishes to cure.

He has put in place the seeds of a plan to increase Canadians' knowledge about money matters. It will make use of new findings from psychology and behavioural economics to coax individuals into making better decisions, and will pilfer strategies from government campaigns against cigarettes.

"When I look at issues relating to, for example, the use of credit cards or the assumption of mortgage risk, there's an increasing realization that a lot of people don't understand the fundamentals of finance," Mr. Flaherty said. Canadians are further in debt than they have ever been: The household debt-to-income ratio hit an all-time record in December and economists are concerned about the speed of growth in personal debt. Canadians are increasingly using borrowed money to finance daily expenses, rather than to make big purchases such as cars.

The backbone of the scheme is a 13-member task force led by Sun Life Financial CEO Don Stewart and BMO Nesbitt Burns chairman Jacques Menard. The group began public consultations last week.

The endgame will likely be a massive effort to improve financial literacy levels and will include the education system, financial institutions, provincial governments, employers, and, most importantly, individuals.

Just before the task force was formed last year, Statistics Canada asked more than 15,000 people about their financial literacy skills. The survey found that about half of Canadians who want to buy a home aren't saving what they should for a down payment. Most believe that they'll have enough retirement income, even though they don't know how much they must save now - and many aren't even bothering to plan. More than one-third were struggling to keep up with their finances, and about half didn't have a budget.

When the task force assembled, its members assumed that the key recommendations would have to do with education. But findings in the realm of psychology caused them to change course.

"There are simple ways of setting up behaviour patterns that reinforce personal financial interests as opposed to detracting from them," said Mr. Stewart. An example: Employees are much more likely to opt in to a corporate pension plan if the company automatically enrolls them and requires them to fill out a form to opt out.

"Nudging people is a delicate set of dynamics," Mr. Menard said. "You can help people but you cannot be so intrusive as to invade their privacy and expropriate their freedom of choice."

The committee has consulted with experts such as Princeton professor Eldar Shafir and University of Toronto professor Dilip Soman, who said the effort must go beyond education. For example, many people know they should save, but that doesn't translate into action, Prof. Soman noted.

He recently wrote a paper about experiments designed to increase savings among people in rural India. One finding: Workers who received their pay in an envelope saved much more.

Another interesting finding: People are much more likely to follow financial advice if they paid for it.

"The sooner we face the fact that financial literacy is crucial for an inclusive and prosperous economy, the faster we can act," said Doug Melville, Canada's Ombudsman for Banking Services and Investments. He also chairs the board of Social and Enterprise Development Innovations (SEDI), a charity that helps low-income people become self-sufficient.

Nekesha Blake, 29, said a SEDI program that combines financial literacy education with incentives to save gave her a fresh start. The Toronto-area resident was sponsoring her mother, brother and sister from Jamaica, working sporadic hours as a support worker, and taking night courses, when her bank froze her line of credit. She was barely making minimum payments and was overusing credit cards. One day, while riding the subway, she spotted a sign for the program.

"Knowledge is power," said Ms. Blake, who is now a registered practical nurse with a young daughter and stable financial position.

Mr. Stewart recalls his own tough times. As a teenager in the tiny hamlet of Corriecravie Scotland in the 1960s, his father, who ran a car-repair business and a farm, fell ill and the doctor said he might not survive. The business was in debt, and it was supporting the whole family. Mr. Stewart said his mother "was just out of her mind about what would ensue" until his father recovered.

Those days are a distant memory, and consumerism trumps thrift. These days, "a mobile phone today is seen as a right, not just by adults but by very young kids," he notes. "Not only must you have a mobile phone, you must have the latest mobile phone and upgrade and it's got to be a cool colour. To me that epitomizes a society that's looking at very short horizons."

His goal is to create a shift akin to the one that made smoking uncool. "I'd like to envisage a future where it's just not acceptable to say, 'Well, I don't know anything about money but...'"

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