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?”

With respect to the latter response, I get it. Budgeting is often the first thing that comes to mind when we think of money management.

If you have followed my blog for a while, you know that a) I don’t like the word “budget”; and b) I don’t teach budgeting. Why? Because that approach rarely works. Since I’m interested in getting positive results, budgeting gets the heave-ho in favour of 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 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 if junior is taught how to use her money effectively, but mom and dad are harming themselves financially, the family will not thrive.

The gap in knowledge revealed by the CFCS survey has serious consequences when it comes to personal finances. 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 go to renew your mortgage? Why or why not?

Insurance

#2. When you purchase a home, your mortgage broker sets down roughly a pound’s worth 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 chunk 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 have 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?

Dealing with Debt

#8. You are stressed about the amount of debt that you have 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 clunker of a car, but, having found the perfect vehicle for your family, you are 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 have 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 former 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. Financial literacy – or a lack thereof – 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 upcoming blog posts.

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 congruent with your values, thereby creating better options for yourself and your family.

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 and to fund things they value, including their retirement. This article from the Globe and Mail points out that on average, we’re a long way away from that, with a savings rate of only 2.6%. Add to that the fact that roughly half of Canadian families live paycheque to paycheque and you have a recipe for a lot of financial stress.
• 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-sheltering vehicles 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.

Adding Value

Those who want to really crank up the effectiveness of their money management system tie their spending to their values. They don’t try to figure out the best use of their funds after they’ve done most of their spending; they start by asking, “What do I want my money to do for me? What do I value?” They apportion their cash accordingly.

If any of the above questions left you scratching your head, I have a suggestion: Make 2019 your year of Financial Mastery. Take a course, read, ask questions, dig until you find the answers you seek.

Invest in yourself

If you don’t know where to start, or you’d like some help, join our Women’s Money Group – we’ve just taken the group online, which means women everywhere can participate. Or, join us for one of our Money Power workshops (also available online).

Your efforts will pay off in spades; or rather, in more dollars in your pocket. More importantly, you will achieve greater peace of mind. You can’t put a price on that.