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The real lessons of Financial Literacy Month

Thursday, November 17, 2011

ROB CARRICK

rcarrick@globeandmail.com

Twelve points no one has raised since Financial Literacy Month began Nov. 1:

1 Banks are part of the problem

The banks are all over financial literacy month, offering up their experts to the media and issuing lists of helpful tips. Would they like to follow up with some practical measures? Suggestions: Stop allowing people to take out stupidly large mortgages and credit lines, be way more clear about interest rates paid and fees charged on savings and chequing accounts, and start explaining to clients with out-of-control credit card balances that there are cheaper ways to borrow. Oh, and how about cleaning up the murk surrounding penalties for breaking a mortgage?

2 Relying on schools to teach financial literacy is passing the buck

Sure, cram money topics in with those electrifying lessons on the Fathers of Confederation and trigonometric functions. But the best way to become financially literate is to actually handle money. Parents, make sure your kid has a bank account with a bank card and an allowance.

3 Our consumer culture is a big part of the problem

Start teaching kids about media literacy as much as financial literacy. On TV, over the Internet and on billboards, people are smothered 24/7 by images of cool stuff in the hands of beautiful people. We need more independent thinkers who are comfortable saying no.

4 Parents have to model the right behaviour for their kids

Demonstrate how you pay your bills on time, how you borrow responsibly, how you're saving for retirement even though there are decades ahead until you retire. Most importantly, demonstrate non-instant gratification. Tell your kids: "We cannot afford this right now, so we will not buy it."

5 Debt is the gateway drug ...

Excessive debt doesn't just mean you're blowing lots of money on interest payments and never paying off what you owe. It also means you're ignoring the need to save for retirement and your kids' education, not to mention life's expensive emergencies. Collateral damage is inevitable when you're weighed down by debt.

6 ... But some debt is okay

Ideally, debt will help you acquire something - a house, an education - that will add to your net worth. Debt is also okay when it's used strategically and temporarily to acquire things like a car that you can't save up for in a timely way. The tipping point is where a credit card balance is never paid off, or a credit line is never at zero.

7 The investment industry works for itself, not for you

Everybody in the industry is selling something, be it mutual funds or expertise in financial planning and managing investment portfolios. Is there a fiduciary requirement that people looking after your money put your interests first? There should be, but right now there is not.

8 Our housing obsession is a big part of our money problem

Rising house prices mean bigger mortgages that cost more in interest and take longer to pay off. That's half the issue. The rest is that houses have become the ultimate reflection of who we are and thus the driver for endless spending on furnishings electronics and renovations.

9 People don't know what they don't know

You can tell this in the results of polls that the banks have been issuing during financial literacy month. One had 36 per cent of parents saying they want the banks to teach their kids about personal finance. Good thought. And let's get the soft drink industry to teach about nutrition.

10 There's an easy-to-follow formula for all of this: Earnings - (spending + expenses + savings) = zero

This is a mathematical version of the old rule of paying yourself first. Once your expenses and savings are covered, you can spend what's left of your pay. This is a good place to note that it's an oversimplification to say people shouldn't spend more than they earn. We need to ensure savings are being taken care of as well.

11 The risk of losing money is unavoidable if you want to make more than 2 to 3 per cent

People keep asking me whether there are any alternatives to guaranteed investment certificates and high-interest savings accounts that offer better returns without much more risk. The short answer: No. Bond funds, dividend stocks and preferred shares all offer higher yields, but all can fall in price.

12 There's never been more information on personal finance and investing available, and yet we still have financial literacy issues.

Are people slow on the uptake, or do they just put more emphasis on short-term wants than long-term needs? Discuss.

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