Everything you need to know about financial literacy

In a world driven by financial decisions, understanding the principles of money management and using that knowledge to make informed choices has never been more critical.

Financial literacy is often described as the ability to comprehend and utilize financial skills to make well-rounded, effective financial choices. It is the compass that guides a person through the complex landscape of personal finance and helps them navigate the numerous and ongoing financial choices that will shape their lives today and well into the future.

It’s easy to see why financial literacy is important but what are the specific benefits to taking control of your personal financial situation?

What are the benefits of financial literacy?

Embracing financial literacy, whatever your goal, offers countless benefits for you, your family, and society, but here are a few key advantages of becoming financially literate:

• Avoid common financial mistakes
  

  Seemingly innocent financial decisions can have devastating, long-term implications that could cost you money or negatively impact your future goals and plans. Being financially literate ensures you have the tools and knowledge to prevent making mistakes with your personal finances.

• Prepare for emergencies

  While it’s impossible to predict the future, you can plan for the unpredictability of life. A job loss, unexpected medical expenses, or death in the family could have significant impact on your finances that might be difficult to recover from if you don’t have a fund in place for emergencies you can’t predict.

• Setting and achieving your goals

  Better understanding how to budget is key to reaching your financial goals. Whether you’re looking to save for retirement, have dreams of running your own business, or are aiming to set your family up for success in the future generations, thoughtful planning can help you get there. Setting realistic goals and expectations based on your situation is key to reaching your targets and holding yourself accountable.

• Growing confidence

  Money-related stress is common, but having the knowledge that you’re making solid financial decisions can help increase your confidence and decrease anxiety. Being armed with the appropriate information about your finances can help you approach major life decisions with greater confidence and ensure you’re less likely to be surprised or negatively impacted by negative outcomes.

• More savings, less debt

  One of the main benefits of financial literacy is reducing debt and increasing your savings, two things that go hand in hand. Understanding the consequences of taking on debt and learning how to manage it effectively can be life changing. Once your debt is paid off, or paid down, you’ll have more freedom to save for things like a well-rounded emergency fund, real estate, education, or your retirement.

Five strategies to improve your financial literacy

Developing financial literacy to improve your personal finances means learning and practicing a wide variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products.

The good news is that no matter where you are financially, it’s never too late to start practicing good financial habits to work towards your own goals.

1. Create a budget

The most important step is to track how much money you receive each month against how much you spend. You can do this in an Excel spreadsheet, on a piece of paper, or with the help of a budgeting app. However you do it, ensure you’re being honest and going through your finances with a fine-tooth comb.

Your budget should include income (paychecks, investments, alimony), fixed expenses (rent or mortgage, utilities, loan payments), discretionary spending (nonessentials like dining out, shopping, and travel), and savings.

A detailed and thoughtful budget will help you understand where your money is going and identify areas where you can cut back or save more.

2. Educate yourself

Take advantage of educational resources such as books, online courses, and workshops to learn more about personal finance, investing, and retirement planning. Familiarize yourself with fundamental financial concepts such as compound interest, diversification, risk, and return.

Educating yourself means also setting clear financial goals. Take the time to learn about and assess what you want your future to look like and what you’re saving towards to help keep you on track.

3. Pay yourself first

Whatever your savings goal, this reverse budgeting strategy involves deciding how much you can and want to contribute to savings each month and setting that aside before you divvy up the rest of your expenses. Setting up automatic transfers and gradually increasing the amount over time as your financial situation improves will keep your savings growing with little to no effort from you.

4. Pay bills promptly

Stay on top of your monthly bills and make sure that payments consistently arrive on time. If you don’t already, seriously consider setting up automatic payment withdrawals from a chequing account or bill-pay app. This will make your life much easier and if you have all of your bills coming out of the same place, you’ll be able to keep track of your expenses all in one place.

As needed you can also set up reminders by email, phone, or text to ensure you’re aware of when certain bills are coming due and make sure you have the funds in the accounts needed to pay these bills on time.

5. Seek professional advice

If you have complex financial needs or feel overwhelmed by your personal finances, debt, or savings abilities, it can be helpful to reach out to a financial advisor who can provide you with personalized service and suggestions.

Depending on your situation, MNP’s advisors can walk you through your debt consolidation options, support you in developing a plan for your retirement savings, or help position you favourably for a big purchase.

Financial literacy in Canada

Ahead of national Financial Literacy Month in November, take the time to learn more about the resources offered to every Canadian looking to increase their personal financial literacy.

Canada’s five-year National Financial Literacy plan looks to create a more accessible, inclusive, and effective financial environment for all Canadians by reducing barriers, catalyzing action, and providing the tools to manage your finances.

With educational materials for students and adults, you can find links to financial tools and calculators that can help with things ranging from budget planning to comparing credit cards and calculating mortgage payments.

Making change for your future

Improving your financial literacy is an ongoing process and the key to success is small but consistent and meaningful change. As your knowledge and confidence grows, so too will your ability to make more informed financial decisions and achieve your goals.

Visit our website to learn more about the services MNP offers and discover more ways to reduce your debt, save for the future, and get the help you need through difficult financial situations.