Are You Financially Literate?

When people learn that I am a financial literacy educator, they typically respond in one of two ways:

“We certainly need more of that, especially for kids in high school.”

Or:

“Oh interesting. Do you teach budgeting?”

I can understand the second response. Budgeting is often the first thing that comes to mind when we think of money management.

If you’ve followed my blog for a while, you know that I don’t use a traditional budgeting approach - because that approach rarely works.

Since I’m interested in getting consistent results for all women, I use values-based planning. (More on that in a bit.)

Then there’s the widespread assumption that we need to help kids become financially literate, since schools, for the most part, aren’t doing the job.

While that’s still mostly true, adults aren’t faring much better.

Consider this from the 2014 Canadian Financial Capability Survey carried out by Statistics Canada:

“As part of the survey, participants were also asked to answer a series of 14 questions concerning their knowledge of topics such as inflation, debt repayment, banking fees and credit reports. On average, Canadian adults answered 8.7 questions correctly, unchanged from 2009, the last time the survey was conducted. Almost one-third of survey participants (31.4%) in 2014 correctly answered 7 questions or less, while 2.7% provided a correct answer to all 14 questions.”

If you were in high school and you correctly answered 8.7 questions out of 14, you’d get a mark of 62%.

Still think that it’s only the kids who need to learn about financial literacy?

The upshot is that even if the kids are taught how to use their money effectively, it won’t do much good if mom and dad are harming themselves financially. The family won’t thrive.

The gap in knowledge revealed by the CFCS survey has serious consequences when it comes to personal finances.

It’s your turn

Consider the following scenarios and write down your answers to the questions:

Mortgages

#1: Your mortgage is coming up for renewal. Your lender helpfully sends you renewal documents in which they list various options – terms, rates, fixed vs variable. They ask you to select your preferred option, sign on the dotted line, and return the documents to them. Voila, mortgage renewed without fuss.

Is that the best way to renew your mortgage? Why or why not?

Insurance

#2. When you purchase a home, your mortgage broker sends you a collection of documents to sign. One of those documents contains an offer of mortgage insurance.

Should you take the insurance? Why or why not?

Investments

#3: You go to your bank to resolve an issue with one of your accounts. While you’re there, the teller points out that you have a stash of money sitting in your savings account not earning much interest. They could help you invest those funds in one of their GICs (think CDs, for my American readers) or possibly even a mutual fund.

Is that a wise choice for your money? Why or why not?

#4. You’ve been doing a great job of saving money for the past three years. When you look at your savings account, you have a tidy sum. At first it feels fantastic to have that much money in there. “Yay me!” you think. Then, you start to doubt yourself. You have a feeling that parking money in a savings account is not the best use of those funds. You decide that you need to start investing.

Where do you start? Why?

Lines of Credit

#5. In that same conversation with the teller, they tell you how great a customer you are and that as a result, you would likely qualify for a line of credit, possibly even at a preferred rate.

Should you open a line of credit? Why or why not?

Best Use of Money

#6. You have just received a substantial refund from the Canada Revenue Agency.

Should you use the funds to pay down credit card debt, invest, or pay for your family vacation? Why?

#7. You’ve been working hard at work and your boss has finally recognized your efforts by giving you a bonus.

Should you pay down your line of credit, on which you pay 7% interest, or invest in an asset that has averaged an annual return of 7% over the past fifteen years? Why?

Debt

#8. You’re stressed about the amount of debt that you’ve accumulated. After losing too many nights of sleep over it, you decide that it’s time to take charge of your money.

Where do you start? What’s the first step?

Credit Scores

#9. You’ve been shopping around to replace your aging car, but, having found the perfect vehicle for your family, you’re turned down when you apply for financing. You’re told that your credit score is too low.

What’s the first thing you should do? Why?

Credit Cards

#10. You’re at Home Depot buying a lawnmower. The teller asks you if you would like to receive 10% off by applying for their consumer credit card?

Do you accept the offer? Why or why not?

#11. Every month, you faithfully open your credit card statements the moment they arrive, look over all the purchases to ensure that they are accurate and make the minimum payment on time. You’ve never been late with a payment. As a result, you feel you are managing your credit card debt well.

Is that true? Why?

The above are examples of real situations that some of my clients faced. In the absence of core financial literacy, they made choices that were not in their best interests. Some of those choices had serious, long-lasting consequences.

Financial skills aren’t simply a nice-to-have extra in your life; they’re essential to your success and peace of mind.

Your financial literacy affects most aspects of your life.

What is Financial Literacy?

How did you do with the questions above? How would you rate your financial literacy? If you’re wondering about the answers to the questions posed above, stay tuned. I’ll address each scenario in my coaching community.

Not yet a member? You can learn more and enroll here.

For now, let’s back up and clarify some terms.

The Financial Consumer Agency of Canada (FCAC) defines financial literacy as “having the knowledge, skills and confidence to make responsible financial decisions.”

After years of working with families to help them repair significant credit and debt issues, I would amend that definition to the following:

Financial literacy is having the knowledge, skills and confidence to make responsible, effective decisions that are aligned with your values, thereby creating better options for yourself and your family while ensuring maximum satisfaction from your dollars.

Just because a decision is responsible doesn’t mean it’s the right decision for you.

When you tie wise, responsible decision-making to your values, the net effect is better results for you.

Personal finance, after all, is about making money work well for you.

Traits of Financially Literate People

People who are financially literate:

🔸 Spend far less than they earn
🔸 Save enough money to create an Emergency Fund
🔸 Save enough to invest for a secure retirement
🔸 Pay off their credit cards in full every month, because they understand the corrosive power of compound interest when it’s used against them
🔸 Avoid consumer debt in all its forms
🔸 Know what questions to ask
🔸 Feel confident asking questions and making decisions when they have the information they need
🔸 Shop around for the best rates for everything – mortgages, insurance, cell phone packages, cars, etc
🔸 Use refunds, bonuses and raises to grow their net worth
🔸 Make their money work hard for them by investing it using research-backed methods
🔸 Understand that compound interest is either their greatest friend or their fiercest foe,
depending on how they use it
🔸 Understand how taxation works and how to use it to their advantage, where possible
🔸 Make good use of tax-sheltered accounts such as RRSPs, TFSAs and RESPs in Canada (401(k)s, etc in the US)

They also know how to answer the ten questions in this post. 😎

Your next steps

If you want to strengthen your money management system, then align your spending with your values. Start by asking, “What do I want my money to do for me? What do I value?” Then create a conscious spending plan with your values in mind.

If any of the above questions left you scratching your head, I have an invitation: Make this your year of Financial Mastery.

Enroll in my Foundation to Financial Freedom Program or my Investing Made Simple Program. They will set you up with the systems, skills and support you need to thrive financially.

Your efforts will pay off in spades; or rather, in more dollars in your accounts. Most importantly, you’ll achieve greater peace of mind.

You can’t put a price on that.