It may surprise you to learn that November is Financial Literacy Month. And yet, financial literacy deserves to be given more prominence in today’s world of complex mortgages, loans, insurance policies, complicated investment products and sophisticated financial scams. As Leslie Byrnes, Vice-President, Distribution and Pensions at the Canadian Life and Health Insurance Association (CLHIA) — the trade association representing Canada’s life and health insurers — puts it, “These products can be very intimidating, to say the least.”
Financial literacy means the sharing of knowledge, skill sets, wisdom and experience that Canadians need to make informed, reasoned and responsible financial decisions. Being financially literate helps an individual know when he or she is spending money responsibly. It gives consumers the capacity to discern between financial products that may facilitate their short- and long-term investment goals. And it gives them the knowledge and foresight to effectively weigh the legitimacy of the financial advice they will receive throughout their life. Increased financial literacy provides important life skills that are particularly necessary in this day and age for a number of reasons. First, in the words of the Government of Canada’s Task Force on Financial Literacy: “Canadians today have to make an ever-larger number of financial decisions, at an ever-younger age — and these decisions are increasingly complex and fraught with consequences.” Second, the stakes are much higher today since the ratio of household debt to disposable income in Canada has now surpassed an unprecedented 163.4 per cent. Third, when we consider the historical trends, Canadians, as a whole, currently have minimal personal savings rates.
These three factors have contributed to the development of a dangerous environment for those with minimal financial literacy. A few noteworthy figures from a working paper prepared by the Special Surveys Division of Statistics Canada, and which was presented to the Canadian Task Force on Financial Literacy in the summer of 2010, sheds some much needed light on the current perilous environment. The report claims that “70 per cent of Canadians were fairly or very confident that their retirement income would provide the standard of living they hoped for; though just 40 per cent of Canadians have a good idea of how much money they will need to save to maintain their desired standard of living in retirement.” It also found that only 51 per cent of Canadians have drawn up a personal budget to keep track of expenses and that those with less education are less likely to have a budget. Furthermore, the report identified that many prospective home buyers have only enough savings to cover between 5 per cent and 10 per cent of their desired home’s purchase price — a trend which will likely make it difficult for them to secure a mortgage.
Fostering greater financial literacy for all Canadians will not be accomplished overnight. It must begin early and continue throughout an individual’s life. It requires advocacy-building through the mass media, the financial and insurance industries and all levels of government. The federal Minister of Finance has sponsored Bill C-28, known as the Financial Literacy Leader Act, which is now being considered by the House of Commons. Provincially, following the lead of British Columbia, Manitoba and Ontario have committed to including courses on financial literacy in their curriculums. In so doing, younger Canadians will acquire the tools and skills needed to make sound financial decisions early in life.
The financial industry is well aware of the need to increase financial literacy and has taken steps to achieve this end through the many informational resources that it publishes and makes available online.
Regardless of where the information intended to improve Canadians’ financial literacy originates — from the government, from school boards or from the financial services industry itself — the information must be relevant and tied to real-life circumstances if it is to be understood by Canadians at large. The concern is that financial products are continually becoming more complex and that today it is easier than ever before to accumulate crippling debt. As Leslie Byrnes points out, “as a result, choosing the proper insurance policies or financial products that best suit an investor’s goals has become a more complicated task. But with increased financial literacy, together with a qualified financial advisor, that need not be the case.”