With debt levels rising and retirement savings sinking, a lack of financial literacy is costing Canadians big time. Help is needed and CAs are heeding the call
By Robin Taub & Mary Teresa Bitti
Illustration: Mark Stephen
Jim* was 26 years old when he walked into Ted Gordon’s Personal Financial Literacy course at Ottawa’s Algonquin College. Gordon, a CA, has been a financial security adviser with Freedom 55 Financial in Ottawa for the past five years and created the curriculum for the course. “Jim approached me after the course was finished and said, ‘I’m broke,’” re-calls Gordon. “I was astounded because he had a job with the federal government.” As it turns out, even though Jim had a good income that should have been sufficient to meet his expenses and save for the future, he had accumulated $20,000 of student debt and thousands more in credit-card debt. He explained to Gordon that when he got the credit card it felt like free money, so he went on a spending spree, buying music and stereo equipment.
“Jim was living paycheque to paycheque until he recognized that he had a problem,” says Gordon. “The fact is, many people experiencing financial difficulty have money; they’re just not handling it responsibly.”
It’s a situation Laurie Campbell, executive director of Credit Canada, a not-for-profit charitable organization providing credit-counseling services and debt-management solutions, knows all too well. In fact, 40% of the cases it deals with are people like Jim who have sufficient income but don’t know how to manage it. “No one ever taught them how to live within their means and they never learned on their own,” says Campbell. Eventually, a life event — such as a marriage or birth or a crisis such as an illness, disability, death, divorce or job loss — brings these issues to the forefront.
Take Steve,* a Credit Canada client, for example. “He was making a six-figure income, his children were in private school, they had a nanny but the family was cash poor,” says Campbell. “They were not saving at all. They had nothing invested in registered retirement savings plans (RRSPs). Their house was mortgaged to the hilt and as soon as he was laid off there was no cushion to help him over a period of unemployment because every single penny of his income went to service his lifestyle without consideration of what could happen in an emergency. It took losing his job for him to make a change.”
According to Statistics Canada, the average Canadian family carries a debt load of $100,000 and its debt-to-income ratio is at record levels. For every $1,000 in after-tax income, Canadian families owe $1,500. The CICA’s own research shows that half of Canadian adults are not saving enough, setting aside less than 10% of their monthly income, with 25% saving less than 5% or nothing at all. It’s a slippery slope — one with implications for the Canadian economy.
In order to create a national strategy to strengthen financial literacy across the country and in so doing secure the country’s economic well-being, in 2009 the federal government established the Task Force on Financial Literacy. Both Gordon and Campbell were part of the 13-member task force, which included representatives from education, business, not-for-profits and academia, with Gordon serving, along with Jean Vincent, president and general manager of the Native Commercial Credit Corp., as one of two CAs. In February, the task force released its findings and some 30 recommendations — all highlighting the need for collaboration and coordination among schools, governments, financial institutions, employers and labour organizations and, perhaps most importantly, stressing the need for lifelong learning by helping Canadians leverage the variety of programs and resources that currently exist but they may not know about.
The task force defines financial literacy as having the knowledge, skills and confidence to make responsible financial decisions. As a result, among its key recommendations is that Human Resources and Skills Development Canada name financial literacy an essential skill and that financial literacy be integrated into the formal education system, including elementary, high school, college, university and adult learning. The task force also recommended financial literacy training be incorporated into workplace programs.
Jim Yih is a financial educator and founder of Edmonton-based The Think Box, which specializes in financial education programs in the workplace. Creator of retirehappy.ca, his blog was The Globe & Mail’s 2011 personal finance blog of the year. “In my view, financial literacy is a combination of education and skills,” he says. “There is no shortage of information. Everything you need to know to be financially literate is out there, but still 42% of Canadians lack basic financial literacy. Why? Even though the information is available, there is very little formal education around financial literacy. We don’t learn it in school or in the workplace. Instead we learn it informally from our parents and what we are seeing is that most of our parents aren’t doing a very good job either. Until we get to people earlier in a more consistent, unbiased way, things aren’t going to improve.”
That has recently changed in Ontario with the integration of financial literacy into the curriculum for students in grades four to 12 this fall. Manitoba is considering a similar move, as is BC, which has already introduced financial literacy as a mandatory course for high-school students. According to Tom Hamza, president of the Investor Education Fund and co-chair of the Ontario Working Group on Financial Literacy, in Ontario it has started “to be incorporated into topics beyond business and math to ensure that financial learning cannot be avoided.”
Financial literacy isn’t just a set of tools, says Hamza. “It’s a set of actions that will put money in your pocket and improve your financial situation. For example, people renew their mortgage with their original financial institution more than 80% of the time. Most don’t bother comparing what other institutions are offering and that’s the biggest investment of their lives. It just shows there is a very real practical need for financial literacy.”
The bottom line: financial literacy is a necessity in today’s world. The task force believes Canadians must be empowered to make better financial and life choices: to plan better for the future, ride out difficult economic times, protect themselves against financial fraud and navigate major life events. As a nation, this allows Canada to be strong, competitive and successful in a global economy.
A financially literate population promotes self-sufficiency and financial independence, thus reducing the pressure on social programs. It enhances economic stability, strengthens competitiveness and contributes to stronger capital markets.
Understanding personal finances will help an individual save for his or her children’s education, purchase a home, deal with divorce or having to care for elderly parents, make better investment decisions and minimize the amount of income tax he or she must pay. It will help him or her cope with crises and ultimately will help build his or her personal wealth to secure a comfortable future.
As it stands, Canadians aren’t doing such a great job managing their finances. According to research from Statistics Canada for the federal task force, almost 25% of Canadians were weak in keeping track of their finances, planning for the future and staying informed about financial matters. More than a third were struggling or unable to make ends meet and 30% were not preparing for retirement. They fared no better when it came to basic investor knowledge. Only 35% of Canadians knew investments in the stock market are not insured, while one-third did not know what happens to their buying power when the inflation rate is higher than the interest they earn on their investments.
Kurt Rosentreter, a CA and a senior financial adviser with Manulife Securities Inc. in Toronto, is not surprised by the findings. “It’s safe to say the typical Canadian struggles to understand what’s going on with his or her employer pension plan, investments, mortgage, registered education savings plan [RESP], RRSP, life insurance, will — in other words, the world of personal finance,” he says. “Financial literacy is low regardless of whether I’m dealing with an electrician or a CEO. It’s not a gender thing. It’s not a career thing. It’s not a net worth thing. What shakes them out of that apathy is a life event, like a birth, marriage, divorce, death, career change, and they have to act. But it’s pretty rare that someone is proactive and will spend sufficient time each year on his or her finances. And that will hurt him or her long term.” This is particularly true when it comes to estate planning, investments and insurance, says Rosentreter. “And that’s dangerous because if you don’t know what you are buying it’s easy to be taken advantage of.”
Gordon shares an example of recent clients, a married couple in their 40s, who closed their eyes to the poor performance of their portfolio — literally. “In this case, it wasn’t an issue of not saving. Their RRSPs were losing money every year and they didn’t know what to do about it or what to say to their financial planner. The wife’s solution was to stop opening up the statements,” says Gordon. “Had they stayed the course they would not have been able to retire as comfortably as they should, given their incomes. Most people with a financial plan should target around a 5% growth rate each year on their savings, not a decrease. Thankfully, I’ve taken over their RRSPs and they are now making money.”
Demographic, social and economic changes mean Canadians are assuming increasing responsibility for their financial futures and they simply cannot afford inaction. As members of the baby-boom generation retire, there are fewer workers to support them, which strains social programs such as Canada Pension Plan, Old Age Security and healthcare. Due to increases in life expectancy, baby boomers will be living longer in retirement and will need more savings and other means to support themselves. Fewer Canadians now have access to company-supported pension programs and the majority of those who do have defined contribution plans. This shifts the risk associated with investment management from the employer to the individual employee.
At the same time, the financial marketplace is becoming more complex and financial products are becoming more sophisticated and difficult to understand. Poor financial decisions are simply too costly. Many Canadians are already living with high levels of consumer debt and razor-thin savings.
If there is one typical scenario of the baby boomers walking in his door, Rosentreter says it’s the 50-year-old couple who had not put a lot of thought into their finances beyond making last-minute RRSP contributions and possibly purchasing life insurance. That is, until they woke up one day to realize that all the upsizing of their lifestyle has left them with a six-figure mortgage at the same time they are paying tuition for university-bound children. “What they get from me is a one-time physical exami-nation of their finances and a status checkup of where they are. And it’s rarely pretty,” Rosentreter says. “No one wants to hear they will be working until they are 70 because they have no pension and their savings are insufficient because they’ve been spending every dollar on lifestyle. When people are making $150,000 a year and don’t have money for an RRSP or child’s RESP, what’s going on? No one is thinking about the future.”
Part of the problem, says Hamza, is that, unlike health issues, which are “personal and immediate, finances are personal, but not always immediate. It’s hard to get people to see the future consequences of decisions they are making today.” In fact, a national survey by Harris/Decima for the CICA reveals that 34% of people surveyed reported carrying a balance on their credit cards, while 12% have borrowed to cover daily living expenses and almost half still owe against these loans. What’s more, 40% of Canadians 55 or older say they have not saved enough for retirement and of those planning to retire in the next five years, 32% believe they have not saved enough.
Why? They simply do not have the cash flow to save for retirement because they’ve taken on too much debt, says Yih. “Just the other day, I was speaking with a 35-year-old couple who have significant credit-card debt. They also have three children and want a bigger house and a new car because theirs is six years old and they feel they should upgrade. So they are willing to go into even more debt to foster a lifestyle they can’t afford. It’s happening everywhere. And the fact that access to credit is so easy and people are content to carry balances on their credit cards, ignoring the double-digit interest they are being charged, means the problem will only continue to grow.”
This lack of basic money-management skills is a concern that goes beyond Canada. The Organization for Economic Co-operation and Development (OECD) has acknowledged that financial literacy is a key contributing factor to prosperity and well-being around the world and that more needs to be done. The UK, the US, Australia and New Zealand have all been developing and implementing national strategies to improve the financial literacy of their citizens.
In the US in particular, one of the legacies of the financial crisis is the realization that the financial well-being of individuals and families is vital to national financial stability. A lack of financial literacy is one barrier that can lower standards of living and limit prosperity and growth. The Financial Literacy and Education Commission has developed a new national strategy to promote financial literacy and education. The strategy sets a direction for policy, education, practice, research and coordination in the financial literacy and education field. It also establishes concrete goals to increase financial literacy and improve financial decision-making by individual Americans and their families as they pursue personal financial objectives. One goal is to increase awareness of and access to effective financial education, while another is to improve the financial education infrastructure.
The US government has created the website mymoney.gov as a resource dedicated to teaching Americans the basics about financial education. In addition, the American Institute of Certified Public Accountants has created the free program 360 Degrees of Financial Literacy (www.360financialliteracy.org) to help Americans understand their personal finances through every stage of life.
The CICA is also focused on financial literacy and wants to help Canadians better manage their own financial destiny and that of future generations. “Protecting and acting in the public’s interest are the top priorities of Canada’s CAs — a mandate that has defined us for more than 100 years,” says Kevin Dancey, CICA president and CEO.
That commitment to advance financial literacy extends to Canadians of all ages from childhood through retirement. The organization wants to help young people but also aid mature Canadians who face rising debt levels or insufficient retirement savings. “The CA profession is eager to help Canadians gain the financial skills, knowledge and confidence to make the best choices for their circumstances,” says Cairine Wilson, vice-president, CICA member services and publisher of CAmagazine. “The profession has the opportunity to become a fundamental driver of the economic and financial health of individual Canadians, and in turn, the broader economy.”
Tina Di Vito, CA, head of BMO Retirement Institute and author of 52 Ways to Wreck Your Retirement: … And How to Rescue It, published this fall by John Wiley and Sons Inc., couldn’t agree more. “You don’t need to know everything about complicated investments such as derivatives; for most Canadians financial literacy is really about understanding what they own and owe, and how cash flow impacts net worth,” says Di Vito. “Earlier in my career I worked with an accounting firm and prepared cash flow and net worth statements for people who had taken early-retirement packages. It was a real eye opener for them. It forced them to take a look at all their assets and debts — something many of them hadn’t done before.
“We also reviewed tax returns and that was another clear signal to people because they didn’t think about tax when they made investments. It’s not that they are uninformed necessarily or making bad decisions, they just aren’t connecting how all their financial decisions are interconnected. As CAs we are in a unique position to help because we are involved in so many aspects of a client’s life and we can connect the dots.”
The Harris/Decima-CICA survey revealed that the most sought-after financial literacy skills are tips on minimizing taxes, avoiding fraud and how best to teach kids about money. The CICA is working on a series of online and offline education initiatives to advance financial literacy from childhood to retirement. The online resources will include a monthly e-newsletter and a website that will provide free, unbiased information, material on various key aspects of financial literacy and include interactive tools and resources. The CICA will also continue to do groundbreaking research.
In addition, the CICA is publishing a book in September 2011 called A Parent’s Guide to Raising Money-Smart Kids to help parents teach their kids about money. According to its survey, Canadians believe that parents have the primary responsibility of teaching their kids about money and many have tried, but most believe they have not been very successful. However, they recognize they need help and are willing to listen and learn.
Finally, the initiative includes community outreach by CAs to deliver seminars on key financial topics at the grassroots level in their communities, local schools and places of employment. Topics include: financial planning, household budgeting, teaching kids about money, tips for minimizing taxes, saving and investing, managing debt and credit and retirement planning. These financial literacy seminars will offer Canadians a hands-on opportunity to learn and have their questions answered. The CICA is also planning to offer electronic delivery of seminars and to archive these webinars on the future website.
The CICA, working collaboratively with the provincial institutes, will provide CA volunteers with presentation materials and resources. If you are interested in volunteering, please contact Wilson at email@example.com.
Already there are CAs who are eager to get involved. “A recent CICA member survey indicated that more than half the respondents are prepared to volunteer their talents and time to help improve financial literacy,” says Wilson.
When it comes to financial advice, people prefer to trust than to ask tough questions, says Hamza. “Trust is an easy substitute for hard work, but people often place trust blindly.” CAs, however, have earned the public trust and are known for their financial expertise, independence and integrity — characteristics that uniquely position them to help in the effort to make Canadians more financially literate.
For his part, Gordon is optimistic about the future. With the new Conservative majority government in place, the task force recommendations are set to roll out over the coming months, including the naming of a national leader who will report directly to Finance Minister Jim Flaherty. “This person will be the flag bearer for financial literacy across Canada,” says Gordon. “If we follow through on the report recommendations, Canadians can expect to become world leaders in financial literacy. It’s exciting.”
To read the task force report, including all 30 recommendations, please visit www.financialliteracyincanada.com/canadians-and-their-money.html.
*Indicates the name has been changed to protect the privacy of the individual.
Robin Taub is a CA specializing in financial literacy and is the author of A Parent’s Guide to Raising Money-Smart Kids.
Mary Teresa Bitti is a freelance writer based in Oakville, Ont.