One of my Electrical students came to me for an interview for his Personal Finance course. We were both busy so all he took down were short answers. I promised him I would answer them more fully here.
There were 3 main questions with some sub questions. The first question was “What are your views about the level of financial literacy or personal finance knowledge by most Canadians.”
The last couple of surveys I have read say, that on average, 76% of Canadians are financially illiterate. I think that is an accurate assessment. This matches the numbers I see from the students in my Wealth Accumulation Course. Most people feel that if they have bought a house (real estate), and, have Mutual Funds in an RRSP (Investing), they pretty well know all they need to know. But do they? As an example only about 56% of Canadians have a TFSA. But 70% of those, only have one, because they were told to open one. They don’t know why. Most people do not know the difference between a Credit Union and a Bank. Can you explain the difference between a TFSA and an RRSP? What are the 3 types of income? What is a dividend? Finding the answers to these questions is more than just “googling” them. The real answers are not easy to find. No wonder finances appear so difficult that we tend to stay away from it.
Canada would be a better country is its people knew more about money and Finance. Life for most Canadians would also be less stressful. The stress that financial matters place on families and relationships is tremendous.
Question 2A. What would you like to see happen in our communities to provide a higher level of knowledge and understanding by youth under age 25 with reference to their personal financial well being?
That’s an easy question to answer, but much harder to do. (like most things) The easy answer is to provide better education to students. The how is much harder. Where do you start? I would start in kinder garden. Teaching that putting coins in a piggy bank is a good idea. At that age you don’t have to go much further. In grade 2 or 3, introduce the idea of putting the accumulated coins into groups that add up to dollars. Then how about putting those dollars into a Credit Union savings account. This can be used to introduce the idea of interest. Don’t get complicated and involve math at this point, just keep it simple. Expand on Saving, Cash Flow, and interest in grades 7 and 8. In high school, introduce some business concepts like paying employees, and deductions. Introduce the “Forced Savings” offered by both Banks and Credit Unions, to help with the savings habit. Start talking about consumerism and the purpose of advertising. (To get you to spend money) Introduce positive and negative Cash Flow and the concept of investing.
In college we should be teaching the ways that money is made (only 4 ways) and the types of income (only 3) and how they are earned and taxed. We should teach basic investing strategies like Mutual Funds, GICs, and Stocks. Along with this we need to teach about Credit and how it is used. Both Good Debt and Bad Debt. (Yes there is a difference) This all is based on the fact that we have teachers who understand this stuff in the first place.
Question 2B What should youth do to prepare for the future regarding their own personal financial situation?
They should become interested in their money!!! They should ask questions about money and not be afraid to talk about money. They should read or at least listen (audio books) to books on finance. The 3 I would strongly recommend are; The Wealthy Barber by David Chilton, Rich Dad poor Dad by Robert Kiyosaki, and The Millionaire next door, by Thomas Stanley and William Danko. After reading the Millionaire Next Door they should follow the same habits.
Question 3 has several parts. 3A. What would you recommend students do to improve their personal financial well-being in Canadian society? For example: invest early, get into an RRSP or TFSA as soon as possible and why?
Sounds a lot like question 2B. The first recommendation is to understand Cash Flow and how it applies to them. Are they in negative or positive cash follow? Do they track their money?? That is step ONE in my book. You can not form any kind of financial plan until you know where your money comes from, and where it goes. If you are in negative cash flow, what are you going to change. Keeping up with the Jones is a bad idea. The Jones might be going broke. Tough to be frugal, when your friends are spending like there is no tomorrow. Investing early is definitely good advice, but that means you have to have money to invest, Learning how to save, and being careful with your spending, is more important at this stage.
I personally recommend setting up and using the TFSA first. Especially if you are younger than 50. The TFSA has a much lower contribution limit than the RRSP so often you can contribute to both. The TFSA can hold the same investments as an RRSP, money made in the TFSA is not taxed, but when you need the money, you take it out easily and Tax Free! Also TFSA withdrawals do not count against government payments that are based on income. Potentially Huge!!! Using the RRSP first is a good idea if the company is offering some sort of matching contribution to what you put in.
Question 3B. Should graduates from college or university get into the housing market as soon as possible? Is renting a better option from your view than owning a home or condo?
The simple answer is yes. But to get into the housing market takes money. At least a 5% to 20% down payment! Is it realistic for a grad in Toronto to go buy a Condo, when the average price is $515,816.00. (Toronto Real Estate Board Jan 22 2018.) That would mean they have to have a minimum of $25,790.00 as a down payment. That sum probably looks small compared to their student loan. Get into Real Estate as soon as you can. But if you are graduating with a Student loan, you should pay that off first. A student loan might be classed as good debt, but it is one you should get rid of ASAP.
Getting into Mutual Funds or Stocks might be more realistic. Aggressive investments in a TFSA so they grow to a down payment level, might be a good strategy. You can get into Mutual Funds for as little as $50.00. Yes you can use your RRSP for first time home purchase, but there are some serious strings attached to that. If you can’t afford the down payment for a place, guess you are stuck renting. If you keep rents affordable, it can be much cheaper than owning a home. Don’t believe the real estate adds that say this mortgage is cheaper than rent. The mortgage payment might be, but then there are all the other expenses that go with it. Property taxes, Heat, water, insurance, repairs, etc. My philosophy is that you should definitely own where you live, but someone else should be paying the mortgage.
Question 3C. What should new employees in the workforce, concentrate on mostly, concerning financial security?
Financial security is different for every single person. It is based on your Cash Flow. I teach that there are 4 Personal Financial levels. Level 1 is Pay Check to Pay Check, next comes Comfort, then Security, and finally Financial Independence. Security is defined by having the financial ability to loose a major source of income, like a job, and still to be able to live your current lifestyle (Cash Flow level) for 8 to 12 months, before you have to make a major change. This level is realistically 8 to 10 years out there.
When you first join the workforce, you will be paid the lowest you will ever make. (hopefully) Your earned income will only go up as you become more productive. It is worth mentioning that you will NEVER be paid more than it takes to keep you. The only way to get paid what you are worth, is to become a business owner. (That is not the same as self employed.) When you enter the workforce, the trick is to become worth more, as quickly as possible. To do this, you need to look for companies that train their staff, promote from within, and reimburse you for taking job related courses on your own time. The first 5 years of your career you should be spent working to LEARN not EARN. That means, if the company that trains their people pays a little less, that is still the position that you want. Take every training course they offer, get on every challenging assignment, do extra work where you get to learn more, and find a mentor if there is one. Your greatest worth is what you know, and can do. The more you know, and the more you can do, the higher your value.
Realize that increasing your worth is up to you! It takes more than just going to work every day. Real financial security depends on learning about the 3 ways to gain wealth, so that you have more than just the income from a job. Real security means becoming more and more interested in your money, and how to make it work for you. This will generate multiple small streams of income. When you’re young, you have the greatest investment tool there is. TIME. Don’t waste it. Learning to accumulate wealth takes time and energy. Start NOW.