Financial Literacy Month includes a lot of pats on the back and parading of statistics but then November ends and the season of spending begins. Perhaps it is fitting that we are reminded to get our finances in order before the holiday season, but a vague hat-tip to personal finance (while well-intentioned) is not going to solve the issue of financial literacy.
Let us take a look at some interesting financial statistics for Canadians to consider:
- Canadian investment funds charge some of the highest fees in the world.
- If you save just $100 a month and make a very achievable 2-per-cent annual return, the funds will grow to roughly $43,000 in just 10 years and $94,000 in 30 years (assuming a $25,000 initial balance).
- Tax-free savings accounts (TFSA) are not just for holding cash, yet many use them this way
- Credit cards charge interest rates to the tune of 20 per cent. This results in a cost of $1,000 on just a $5,000 balance over a year. If you are currently paying an interest rate less than the 20-per-cent range (or nothing), it is likely temporary and will increase.
- Without including dividends, a passive investment in the broad Canadian markets would have returned 24 per cent in just five years, 17 per cent in 10 years and 150 per cent in 20 years.
Some of these statistics may be common knowledge, while others may be a bit of a surprise but one thing that everyone should know is how important it is to take an interest in one's own finances. Things are only going to get more difficult from here. Gone are the days where an individual could simply live off of their company pension, with little concern over levels of personal savings. The defined benefit pension plan is now becoming something of a legend that a younger saver only hears whispers about. The rise of real estate appears to have largely priced those who do not own a house out of the market, and changes to regulations (for better or worse) are only making it more difficult to purchase a first-time home. Investing those dollars in the markets could be a great alternative to a house down payment, but there is a general fear or knowledge gap for many in making a jump like this.
Finally, a demographic wave of baby boomers entering retirement and drawing more from government programs (that they did pay into over their careers to be fair) is sure to put stress on these programs where the likely solution will be higher taxes in one form or another. These points are not meant to scare individuals, but just paint the picture that it has never been more important to take control of understanding your finances and savings.
There is a lot to be positive about as well. It has never been easier or cheaper to invest on one's own. Financial information, data and tools are being commoditized. Fees are going down and passive investment solutions, through ETFs, are abundant. There is also a large group of very capable advisers with fair fees that can help those that just do not want to do it themselves. The savings tools are available through TFSAs and RRSPs and reporting is improving through initiatives such as CRM2. These are all great developments for the individual and real tools that can help lead to ones financial independence. These tools, however, are useless without the appropriate education and interest that allows for someone to utilize what is available. So how do we encourage people to take financial literacy seriously?
What won't work
Simply putting the information out there: The topic of finance and saving is not fun or interesting to most. Unfortunately, the ones who need the most help are not the ones that will actively seek out financial education from the sources that are out there. It is akin to putting math lessons on the Internet, free for all to see. It is a great resource, but no one is going to go out of his or her way to read it.
No longer talking about this issue in politics: It is always disappointing that this issue seems to get overlooked every time an election comes around. It is probably because it is not nearly as sexy as tax policies or subsidies yet this is one issue that could be improved with relative ease while lifting up the whole country (or province). If everyone is able to save and invest better, the net worth of the nation (and individuals) should rise, which means more tax dollars for governments and more money for the citizens.
Painting it as a 50-year journey: Don't be mistaken, investing and saving is a long-term endeavour that takes time and patience but it does not need to be promoted this way from the get-go. A sure way to get someone to not save and invest for the future is to tell him or her that they have to put their money away for 50 years before they can enjoy it. That dinner out or trip to the Bahamas sounds much nicer than delayed gratification. Talking about retirement is not the way to persuade those not interested in it. The conversation needs to be changed to topics such as letting your money work for you (dividends), the thrill and satisfaction that comes with making a sound investment that works out and the idea that savers can still enjoy life's perks today while saving for tomorrow.
What will work
Teach it as a mandatory course in schools: Personal finance is a topic that literally every Canadian citizen will encounter on a daily basis and needs to have an understanding of, yet it is not taught to students. While biology, history, math and every other course is very important, only a segment of the school population will actually use that information in the "real world." So why is such a useful and important topic such as personal finance not taught? It is a question that deserves a serious answer. Individuals may not be able to understand their tax returns any given year but it is great they know how to dissect a pig.
Encourage friends and family to learn more about their finances: The peer network can be a powerful one and sometimes individuals just need a helping hand or gentle nudge to get them looking at issues such as their finances a bit more closely. Whether its parents teaching their kids, kids teaching their parents, or joining an investment/savings club (there are many), giving a hand or looking for a hand from those that are in need can go a long way in improving someone's financial situation.
In honour of financial literacy month, 5i Research is launching a stock simulation scholarship competition with a total of $10,000 worth of scholarship awards for students in their last year of high school who plan to attend a postsecondary institution. More information can be found at http://www.5iresearch.ca/
Ryan Modesto is managing partner with 5i Research, a conflict-free investment research service for DIY investors.