2020 has challenged Canadians in all sorts of ways, and proved we’re capable of more than we thought. Many people have faced financial challenges because of the uncertainty brought on by the pandemic. Job loss, medical costs, reduced income, and other unexpected life events have meant many people in Canada have had to build up their financial literacy on-the-go to adjust with the changes. Let’s explore what financial literacy is, why it’s important and how you can improve your own financial literacy.
You might be wondering what financial literacy actually means, and it’s pretty simple: financial literacy is the knowledge that helps you make informed decisions about your own finances, and how to manage your money.
Financial literacy can include any number of things, like learning how to budget (especially when your income or job feel unstable), build an emergency fund, pay down debt, invest for retirement planning or access and understand your credit report.
The sheer amount of money-related topics can be overwhelming. But no one expects you to know everything about, well, everything. Tackling a few topics of interest can help you to feel more in control of your own financial life and turn money management, debt repayment and savings into areas you’re interested in.
Financial literacy is a lifelong pursuit. In order to best manage your own personal finances, there will always be new skills to acquire. Basic knowledge (how compound interest accumulates on a credit card balance) is no less important than complex (choosing the right savings and investment options for a secure retirement). Financial literacy can also help you keep your money safe. Lacking the necessary financial knowledge, or being financially illiterate, can make you susceptible to common frauds like identity theft, COVID-19 scams and deceptive tax debt calls.
Debt can be an intimidating and stressful subject for many people. The financial fallout from COVID-19 has meant deferred payments on mortgages and additional credit card debt for hundreds of thousands of households. Almost half of Canadians who are worse off financially because of the pandemic say that their debt has become overwhelming due to COVID-19. The good news: paying down debt doesn’t require you to follow one particular repayment plan. Paying down your debt can be accomplished in a way that best suits your personal preferences. Take a look at the debt snowball and the debt avalanche strategies to get your wheels turning and learn about how you can pay down debt quickly and in a way that suits your situation and your personality.
With the holiday season around the corner for many Canadians, the temptation to overspend and take on debt in the name of holiday cheer can be overwhelming. (The best bet is always to spend only what you have or can repay easily in full.) Understanding the differences between various types of debt and lenders can help you safeguard your finances. For example, a line of credit and a credit card can vary widely in terms of interest rates. And do yourself (and your finances) an even bigger favour and learn about payday loans, which can have incredibly high interest rates and be very difficult for borrowers to repay.
Saving money is often more difficult than spending it, which is a financial lesson many people learn early. When you’re living paycheque to paycheque, even a series of small unexpected expenses can result in big financial worries and create a barrier to a secure financial future. If a serious life event occurs, like a medical emergency, job loss or divorce, or you need money for a larger expense, like an auto or home repair, you could find yourself struggling to manage your monthly costs.
It’s not just the personal choices you or your family make that can impact your financial security. A recession, a health crisis like COVID-19, or even severe weather events like local flooding or fires can impact your savings or cause you to take on more debt if you aren’t prepared.
Creating an emergency fund isn’t difficult, but it also isn’t as simple as just putting money away for a rainy day. It takes research on your part and financial knowledge of your situation to learn how much emergency savings you’ll need to set aside. Explore your finances and make a financial plan. How much do you spend each month on essentials like housing, groceries, transportation and utilities? For the most part, those expenses are likely to be fairly consistent, and you’ll still need to pay your rent or mortgage, put food on the table, and keep the heat on. Keep all of these costs in mind when planning to save for an emergency fund. Anything above and beyond are likely non-essentials which you may be able to do without during a period of financial crisis.
The money in your emergency fund is savings you earmark only for use in emergencies that reflects your monthly cost of living. A general rule of thumb is to set a goal to save enough to cover three to nine months of basic living expenses. If you are hit with an emergency, you’ll be grateful that you took the time to gain the financial skills to support yourself and avoid additional debts.
There is no one right way to increase your financial literacy. Once you understand that financial literacy is about learning what you need to know to make the best decisions for your own finances, you can tailor your personal financial literacy curriculum anyway you like. If you can’t decide exactly where to start, consider taking a financial literacy quiz like this one to give you some insight on topics that might benefit you. Building your financial literacy and your confidence can pay dividends by inspiring you to put even greater effort into your financial health.
Do you want to know more about paying down your debt? A Licensed Insolvency Trustee can help explore options for reducing debt. #FLM2020