A fresh look at financial literacy
What if the key to your dream vacation, homeownership or early retirement wasn’t entirely based on a paycheque but on how well you understand money? Financial Literacy Month turns the spotlight on financial education at a time when many Canadians are unsure about making the right decisions for their financial future.
Recent studies show that only 30% of Canadians feel they have proficiency in financial literacy, so if you’re not sure what steps to take to improve your finances, you’re not alone. Issues related to inflation, housing costs and uncertain markets are on the minds of many, making financial literacy essential today for security and prosperity.
Building a strong financial foundation can have its challenges, but “future you” will thank you for developing strong financial acumen. Here are some tips to get you started.
1. Begin with a budget.
Budgeting successfully can only happen if you create a plan that fits your needs and helps you save.
Start by taking an honest inventory of your income, expenses, debt and financial goals. Review and assess all of your regular expenses that are easier to track, including rent or mortgage payments, monthly food costs, insurance, automatic subscription payments, vacations and more.
Planning ahead is critical if you want to make sure your budget matches your actual spending. In addition to your regular bills, try to account for unexpected expenses, like meals out, last-minute gifts or surprise auto or home repairs – these can quickly derail your spending and saving plans.
Balance your needs and wants so that you are able to save at the end of every month. Waiting for sales and deals and making dinner at home more often can allow you to enjoy planned activities and meals out. Setting money aside in a separate account can help you pay for surprise costs.
Key takeaway: Knowledge is power: Understand what you have, what you spend and what you want, so your budget meets your goals.
2. Manage debt.
Whether you should prioritize saving your money or paying down debt depends on your goals, interest rates and, potentially, other factors. Some general guidelines are to pay high-interest debt first, like credit card debt, since those 20% interest charges can negate any gains from saving. It may be easier to balance repaying low-interest debt (e.g., mortgages or student loans) with saving and investing for the future.
Most people will need to use credit cards or borrow money in some other way, but it’s still a good idea to think about how much debt you’re taking on. For instance, consider the 30/70 rule: ensure your total credit doesn’t exceed 30% of your after-tax pay. As Equifax Canada points out, any higher and there is a risk it could have a negative impact on your credit score – and be hard to pay off. For example, if your limit is $1,000, keep your credit below $300. If you have multiple debts, consider consolidating them into a lower-interest-rate loan, such as moving to a line of credit or transferring to a card with a low or 0% introductory rate.
Key takeaway: If your debt’s interest rate is low, a combined savings and repayment approach can work well. But prioritize paying down high-interest debts first.
3. Be credit score savvy.
A good credit score is a powerful asset. It unlocks better loan terms, lower interest rates and favourable agreements on housing, cars and insurance. There are several ways to boost your score.
One way is to ensure you’re paying bills on time, and in full, although even just covering the minimum payments can help keep your credit score in good shape. If life is busy and you’ve missed payments in the past, consider setting up automatic payments, but make sure you have enough cash in your accounts to cover those expenses.
Finally, it never hurts to get a credit score report from time to time, to make sure there aren’t any errors, and to see where you stand. It’s always better to catch these issues early rather than waiting until you are looking to take on a loan or line of credit.
Key takeaway: Building a strong credit score will pay off when you rent an apartment, apply for a mortgage, buy a car or enter other financial agreements.
4. Save smart.
Make saving part of your budget plan and treat it like a non-negotiable monthly cost by setting up a pre-authorized contribution plan for your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), or First Home Savings Account (FHSA). If you time those withdrawals with your paycheque, you likely won’t miss the money coming out of your account. Review your short- and long-term goals and decide the best place to grow your money.
To ensure nothing derails your savings, consider building an emergency fund that can cover up to three to six months of basic expenses. This helps prevent taking on more debt if a surprise arises (like a job loss). To avoid drawing from the wrong account, most banks now make it easy to set up multiple online accounts, each labelled for different goals, like “Emergency fund,” “Vacation,” “Homeownership” or “Car repairs.”
"We continue to see that those with written financial plans are more likely to feel positive about their retirements, financially, emotionally, socially and physically."
- Michelle Munro, Director of Tax and Retirement Research at Fidelity Investments Canada
Another way to increase your savings is to take advantage of employer matching programs that may be available to you. For instance, if you have an employer-sponsored plan with matching contributions, it’s usually smart to take part and capitalize on the “free money” offered via the matching contribution.
Key takeaway: Make savings automatic, and know what you’re saving for.
5. Grow your money.
Investing early – even with small amounts – can help you benefit from compounding, which is when you start earning money on your gains. Registered accounts like RRSPs, TFSAs and FHSA are ideal saving vehicles, because your money can grow tax-free, which allows you to maximize the benefits of compounding. You can invest in mutual funds or ETFs or hold stocks and bonds directly in those accounts. If you’ve maximized the contribution limits on your registered accounts, you can continue to grow your money in non-registered accounts.
Key takeaway: Investing early and regularly can set up a strong foundation for long-term financial independence. “Future you” will thank you!
Bonus: Know yourself.
One of the important things you’ll learn as your financial literacy grows is that you have to figure out what works best for you. There are many ways to save and invest, but at the end of the day, you need to find a path forward you’re comfortable with. Different investments carry different levels of risk. Knowing your comfort level with risk can help you choose wisely.
Setting goals will clarify what you really want – education, life experiences, homeownership – making it much easier to stay on your financial path. If you’re a student who wants to start investing, check out our financial literacy course, Money Gains, to learn more about the fundamentals of saving and investing.
If you are someone who wants to feel better prepared for your retirement, check out our Fidelity Retirement Report for insights and perspectives.
