Understanding financial literacy in Canada
Financial literacy has grown in popularity over the years. So much so, that the Financial Consumer Agency of Canada now dedicates the entire month of November to it.
These days, financial literacy is a crucial life skill. At its core, it means that individuals understand how to apply various financial skills, empowering them to make more informed decisions regarding their finances.
Why is it important that I become financially literate?
Let’s breakdown why financial literacy is so important:
Decision making: If you’re financially literate, you’re better equipped to make choices about how to spend your money, how to invest your money, and how to save money. This results in an overall improvement of your financial management.
Managing debt: Financial literacy includes developing an understanding of the difference between good debt (student loans, for example) and bad debt (like payday loans), how credit works, as well as a general understanding of how to manage or avoid bad debt.
Planning for retirement: Someone who is financially literate will have the necessary know-how to plan for retirement. You’ll likely understand what retirement savings options are available to you so you can effectively plan for this stage of life.
What kinds of skills will I learn as I work on my financial literacy?
Financial literacy encompasses a number of basic elements. Let’s explore some of them:
Budgeting
Budgeting puts a plan on paper on how to manage your household income. Being able to budget means that you are actively monitoring your income and expenses. Budgeting doesn’t only help you to live within your means, but it’s also a building block of financial stability.
Here are some factors that can shape your budget:
Set financial goals: There are two types of financial goals: short-term goals and long-term goals. A short-term goal may be saving money for an experience. For example, you want to attend a concert that is coming up in a few months. You would need to save a certain amount of money each pay period to be able to purchase a ticket to the concert before the concert date. A long-term goal may be paying off your credit card debt to be debt free within a few years.
Track income and expenses: If you don’t monitor your income and expenses, then managing your money becomes increasingly difficult — if not impossible. It’s important to record income from all sources and to group expenses into different categories. For example, entertainment should include all money spent on going out, streaming services, and / or subscriptions. Doing so will help you understand your spending habits and help you take the next step in budgeting.
Develop a spending plan: After you track how you spend your money, you’re ready to create a spending plan for yourself. You will be able to allocate funds to your different expense categories, based on your observations. When putting together your spending plan, you will also want to look for opportunities to make changes. Meaning, just because you spent $200 last month on entertainment, doesn’t mean that you need to this month. Your priorities may fluctuate over time. You want to make sure you’ve accounted for everything, including allocating an amount to save each month, not just the necessities of life (e.g. mortgage or rent payments) and discretionary spending (e.g. entertainment).
Make adjustments: It’s not a one-and-done exercise. Once you have put your budget together, there is still some work to do. You’ll want to monitor how much you’re spending, because your needs and wants may change month to month. Your income may also change, so your spending may have to adapt to account for any changes or interruptions in income. An unexpected interruption in income, although concerning, can be mitigated by consistently setting aside funds each month in a separate savings account. Your financial goals may change over time, so you also need to regularly reassess them as your priorities evolve.
Saving and investing
Regularly saving and / or investing your money is an essential component of financial literacy. Planning for the future sets you up to achieve your financial goals. Here are some ways to save and invest:
Emergency fund: Setting aside funds helps you absorb unexpected expenses and fluctuations in income.
Savings: Money should be set aside in a separate account, to help you achieve your financial goals.
Investing: There are many opportunities to invest, so it’s important to understand all your options.
Debt and credit management
Managing credit goes hand in hand with understanding how to responsibly use it. Debt management is a byproduct of using credit and fully understanding the consequences — good or bad. Understanding your credit score, how interest is calculated, and having a plan to repay debt are important aspects of managing credit and debt.
Let’s explore what you should know about these concepts to be more financially literate:
Credit scores: Know how credit scores are calculated and how they impact an individual’s access to credit.
Credit usage: Don’t use credit if you can’t pay it back. Only use credit when necessary (or strategically).
Debt repayment: Pay off debts strategically, by prioritizing high-interest credit products first.
Cycle of debt and borrowing: Avoid predatory lenders and high-interest credit products. These can lead to a cycle of debt and borrowing that is difficult to break.
Can MNP help?
Although significant measures have been undertaken to promote financial literacy in Canada, challenges remain. The bright side is we have opportunities to boost the financial IQ of Canadians.
We all play a role in financial literacy — at home, in our schools, in our communities, and beyond. If all Canadians have the necessary tools to effectively manage their finances, financial security will follow. We all benefit from this literacy. Prosperity and a strong Canadian economy will result when we collectively succeed in an evolving, complex, and global financial landscape.
But improving your financial literacy doesn’t happen overnight. It’s a process. And making gradual and meaningful change will occur if you are diligent in your approach.
You don’t have to be perfect. Mistakes will be made and how we respond to those mistakes will better equip us to tackle financial challenges. We learn as we go, which translates into having an ability to make better informed financial decisions, while achieving our financial goals.
MNP can boost your financial literacy skills by helping you discover ways to reduce your debt, save for the future, and provide you with the help you need to navigate challenging financial landscapes.
Reach out to us today for a free, no-obligation consultation to discuss your debt management needs.