Chapter 1

Embracing Financial Literacy

IN THIS CHAPTER

Defining what financial literacy includes and means

Looking at what your parents and others taught you about money

Questioning reliability and objectivity

Overcoming real and imagined barriers to financial success

A continuing stream of studies has indicated that many Canadians are, by and large, financially illiterate. The vast majority of survey respondents have “failing” scores — meaning that they often struggled just to answer half of the questions correctly.

We know from our many, many years of work as personal financial teachers, trainers, writers, and commentators that many folks do indeed have significant gaps in their personal financial knowledge. Though more folks have greater access today to more information than in prior generations, the financial world has grown more complicated, and there are more choices, and pitfalls, than ever before.

Unfortunately, most Canadians don’t know how to manage their personal finances because they were never taught how to do so. Their parents may have avoided discussing money in front of them, and most high schools, colleges, and universities lack courses that equip students with this vital, lifelong-needed skill.

Some people are fortunate enough to learn the keys to financial success at home, from knowledgeable friends, and from the best expert-written books like this one. Others either never discover important personal finance concepts or they learn them the hard way — by making lots of costly mistakes. People who lack knowledge make more mistakes, and the more financial errors you commit, the more money passes through your hands and out of your life. In addition to the enormous financial costs, you experience the emotional toll of not feeling in control of your finances. Increased stress and anxiety go hand in hand with not mastering your money.

This chapter examines what topics fall under the heading of “financial literacy” and where people find out about finances, and it helps you decide whether your current level of knowledge is holding you back. You can find out how to improve your financial literacy and take responsibility for your finances, putting you in charge and reducing your anxiety about money. After all, you have more important things to worry about, like what’s for dinner.

What Being Financially Literate Means

We start with the basics. What exactly are we talking about when it comes to being literate in personal finance? Following are the three key subjects to become acquainted with:

• Managing your everyday transactions: We cover accounting for money in the short term that passes through your hands and your transaction accounts.
• Investing for the long term: We discuss the best ways to invest money for better returns and longer-term purposes.
• Protecting your money: We provide an overview on the generally less popular but highly important topic of protecting your income and assets with insurance.

In addition to these major topic areas, the field of personal finance includes plenty of jargon. As you read this book, you'll become familiar with the terminology, which will boost your confidence and your decision-making skills.

Starting with the basics: Budgeting and transaction accounts

If you’re like most people, as you earn money, much of it too quickly passes through your hands or, more specifically, into and out of your transaction accounts. As you surely know, a hefty chunk of money you earn is siphoned off to federal and provincial taxes. What’s left is used to pay your monthly living expenses, such as housing, food, utilities, clothing, and hopefully some entertainment and recreation. Chapter 2 delves into the different kinds of transaction accounts and how to use them.

Managing your monthly living expenses (including taxes) and budget and establishing and working toward financial goals take time and effort. Parts 1 and 2 help you accomplish these important tasks.

Making your money work for you: Investing

When you’re spending less than you earn and are able to add some more money to your savings each month, you will have the pleasant but challenging problem of deciding where and when to invest your savings. Or maybe you already have additional money you want to invest so it will work harder for you.

The world of investments is complicated and filled with pitfalls. That contributes to some folks leaving their excess money sitting in their everyday — and low-interest — transaction accounts by default. While you could do worse (by losing money in poor investments), you can certainly do better — and you probably actually need to do better in order to accomplish your financial goals. Part 3 covers all things investing and helps you master that important task.

Protecting your income and assets: Insurance

When you’re earning money and have some assets (for example, a car, house, and so forth), insurance protects you against both the loss of that income and the loss of — or damage to — your assets. If others are dependent upon your employment income, you likely need some life insurance. Even without dependents, you probably rely on your own income and thus should have adequate disability insurance.

Assets like a car and home require sufficient insurance protection. And, as your investments and net worth grow, having some excess liability insurance to protect that makes sense as well. See Part 4 for the important details on insurance.

Talking Money at Home

We were both fortunate — our parents taught us a lot of things that have been invaluable throughout our lives, and among those were sound principles for earning, spending, and saving money. Our parents had to know how to do these things because they were raising large families, often on one modest income. They knew the importance of making the most of what you have, and of passing that vital skill on to your kids.

However, most parents’ financial knowledge has some significant gaps. Many people have observed firsthand the struggles of parents dealing with making decisions about everything from buying and financing a home to handling retirement money after being laid off to helping to support their own parents.

In many families, money is a taboo subject — parents don’t level with their kids about the limitations, realities, and details of their budgets. Some parents believe that dealing with money is an adult issue and that children should be insulated from it so they can enjoy being kids. Others readily admit the many holes in their financial knowledge and thus don’t feel comfortable teaching their kids about personal finance. In too many families, kids hear about money only when disagreements and financial crises bubble to the surface. Thus begins the harmful cycle of children having negative associations with money and financial management.

In other cases, parents, with the best of intentions, do try to teach their children about personal finance, but they end up passing on a harmful combination of wrong assumptions, incorrect principles, and bad money-management habits. You may have picked up from a parent, for example, that buying things is a good way to cheer yourself up. Or you may have witnessed a family member maniacally chasing get-rich-quick business and investment ideas. Now, we’re not saying that you shouldn’t listen to your parents. But in the area of personal finance, as in any other area, poor family advice and modelling can be problematic.

Think about where — or if — your parents learned about money management, and then consider whether they had the time, energy, or inclination to research their options before making their decisions. For example, if they didn’t do enough research or had faulty information, your parents may mistakenly have thought that banks were the best places to invest money, or that buying stocks was like going to Las Vegas. (You can find the best places to invest your money in Part 3 of this book.)

In still other cases, the parents have the right approach, but the kids do the opposite out of rebellion. For example, if your parents spent money carefully and thoughtfully, and often made you feel denied, you may find yourself doing the opposite, buying yourself gifts the moment any extra cash comes your way.

Although you can’t change what the educational system and your parents did or didn’t teach you about personal finances, you now have the ability to find out what you need to know to manage your finances.

If you have children of your own, don’t underestimate their potential or send them out into the world without the skills they need to be productive and happy adults. Buy them some good financial books when they head off to university or begin their first job.