November is Financial Literacy Month in Canada and this week's episode is dedicated to that! We talk about the importance and benefits of financial literacy and then walk you through a quiz to see where you'd land on the literacy scale.
If you need some help with getting rid of some of your financial "I Don't Know's", get started with my Financial Foundations Course at the links below:
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TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
Connect With Evan
November is Financial Literacy Month in Canada and this week's episode is dedicated to that! We talk about the importance and benefits of financial literacy and then walk you through a quiz to see where you'd land on the literacy scale.
If you need some help with getting rid of some of your financial "I Don't Know's", get started with my Financial Foundations Course at the links below:
--
TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
Connect With Evan
Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, evan Newfield. On today's episode, we are going back into the vault and we're going to be replaying one of the most popular episodes from last year, all about financial literacy and why it really matters and some of the impacts that it can have on your life. I've been a little bit under the weather this week and so, instead of recording a new episode, I'm really excited to actually be replaying this one, because now it is again Financial Literacy Month here in November, so please enjoy this conversation with myself and my colleague, jordan Nart, about financial literacy. Jordan, it feels like we haven't been on the mic in a long time.
Speaker 2:It's been a minute. You were out. You were out. What? Having babies, I guess I specifically wasn't, my wife was doing that part.
Speaker 1:Good point she was doing all the hard work there. But yeah, we tried to record a number of these podcasts at a time here and so we haven't been recording for a little bit.
Speaker 2:It's been a while.
Speaker 1:Good to be back. Yes, we now have two kids at home and I sleep less than I ever have, so if your catch would be sounding a little bit groggy, a little bit under the weather, it's probably accurate. Jordan, how are you feeling? I feel great, personally, perfect. Well, november here. You should be listening to this sometime in November. November is financial literacy month here in Canada. Jordan, what are you doing to celebrate? You got the decorations out.
Speaker 2:Yeah, for sure. We just got out of Halloween we, you know, took those decorations down quick. Put up the Finland decorations up also quick.
Speaker 1:My basement is full of Finland decorations For sure, unbelievable.
Speaker 2:You know, it's a quick turnaround between now and Christmas, though, so it's a lot of a lot of blow up lawn decorations this time of year. Let's just leave it at that.
Speaker 1:Oh, this is good. Anyways, good sarcasm to start the episode here. Anyways, today, if if you didn't pick up on that we're going to be talking about financial literacy because, yeah, november is financial literacy month, which essentially, is just a a time where the government has said we're going to focus on some of these things to help people understand their money a little bit better and improve their financial lives. So today we're going to talk about some of the reasons why that actually matters. Talk about a huge survey that was done a number of years ago. It was 2014. Some of the results of that and part of that survey was a variety of questions during are you cheating right now? Are you looking at the questions?
Speaker 2:No.
Speaker 1:Okay, good, because I'm going to ask them to you live and we'll see if if we can pass the the test here. I think I'm ready. Okay, good, yeah, we'll. We'll go through some of these basics to understand that. But let's so. Let's start with. What is financial literacy and why is it important? I think I think the word illiteracy doesn't feel very good. There's a tough one, there's some, some baggage that comes along with that. But when I think of financial literacy, it's just having a good understanding of how your money works and the systems that are in place around it. Would you agree with that? I?
Speaker 2:think that makes sense, yeah.
Speaker 1:Big ones would be debt investing, interest risk, risk yeah, those those kind of cover the the main, the main things here. So why is financial literacy or money I don't like money smart, see there, I've heard that before that that implies money dumbs on the other end of it. But just understanding of your money. The big one that that jumps out to me is debt management, because right now, as interest rates are climbing like crazy, now it has so much more impact if you carry a high debt burden. Many people, unfortunately, who have used a credit card or board from a bank recently haven't passed this financial literacy test. I'm going to come to that later when we talk about that, but there's some major issues associated with that.
Speaker 2:Yeah and beyond, even just basic debt mortgages, car loans, whatever, anything with an insurance cost or, sorry, an interest cost tied to it. These are credit cards, lines of credit. You know. Just understanding what those costs are and how they might impact your situation can be huge, big one there.
Speaker 1:You talked about payments. So I've bought cars recently. In last summer my wife and I we bought an RV and I was shocked at the financing terms that were quoted on an RV. The financing terms are like 10 and 15 years. It's like a mortgage on, like your, your plywood box that depreciates like crazy. But those bi-weekly payments, boy, they're attractive.
Speaker 2:Put that in the will pass that debt along your kids.
Speaker 1:Yeah, well, that's kind of the root of the word mortgage. It's a, it's a debt until you die. Like the Mort, my Latin is a little rough, but that's where that kind of comes from. Yeah, Anyways so you know, when you buy a car and say what do you want your payment to be Like, oh boy, what are the implications of that? Going backwards? You can go back to listen to episode number two I think I talked about buying a car because that's pretty critical. Another reason why financial literacy is important is that there's some interesting academic research that was done, looks at a variety of outcomes, but there's some evidence that shows that there's improved retirement savings and, in many cases, significantly more, and the main difference they were able to isolate between people with enough financial means to retire and those without was financial literacy.
Speaker 2:This one makes a ton of sense to me.
Speaker 1:Say more.
Speaker 2:If someone shoots themselves in the financial foot early on in life takes a couple of decades to recover. These are all kind of related debt, interest risk, all that sort of stuff. Maybe you don't get out of that till you're 40. Well, now your timeline to retirement is less, so you don't have the opportunity for the time value of money to be working in your favor. However, if you have some of those basic financial literacy skills coming out of high school per se and you start getting jobs or you're in some real income and you can start putting some money away, You've got decades ahead for compounding the work in your favor. Like you can just see how, if you start buying the eight ball, that's going to impact your long term savings, which is what retirement savings really are. So yeah, that would like. Yeah, that makes a ton of sense.
Speaker 1:So in that case we're kind of talking about playing offense with your money, so that's trying to get ahead. But financial literacy looks at both. So if you're playing a whole I'm again big basketball fan same players are on the court for both offense and defense. And that's you. You got to make it work. So it means defense, meaning not getting yourself in trouble, that's debt management, that's budgeting, whatever. But getting ahead too, so that's investing and saving and increasing your income. So yeah, financial literacy is important for playing offense and defense with your money. Another one improve confidence. A lot of the folks that we deal with here might be high income earners, might be good savers, but still not necessarily the most confident, which leads to stress and all sorts of things that you don't want when you think about your money too. So the more I found with my clients anyways, the more my clients understand what's going on financial literacy, the better they feel, regardless of what the stock market's doing or anything like that at any given time. This one is maybe a little bit more specific, but financial literacy is important because it helps people avoid unfair expenses. So think of like payday loans. I might get some very expensive. I might get some eye rolls from people that are listening. That's not important to me. It's like boy, it's important for a lot of people. So maybe you know somebody that's using these things and thinks it's a good deal, or something like that. They are extremely expensive and even just a basic level of financial literacy and understanding could help avoid some of those major financial mistakes. Last one that I think is really important is that it gives you less exposure to scams and just Regular financial garbage that you see, I might lose some subscribers here, jordan, but I think a cryptocurrency might be adjacent here, maybe not a scam, but something that, if it sounds too good to be true, it probably is kind of thing. Interesting thing about the data around the people that are more likely to participate in cryptocurrencies and other related types of speculative investments males with high levels of income and low financial literacy. What do you think? Have you seen any of that in your life? I?
Speaker 2:think, yeah, I think that that track, I think we can, yeah, yes.
Speaker 1:Okay, so let's take a look at some of the research that's been done on on this topic. So SNP so you might have heard of SNP or standard and pours through the SNP 500. They are a global ratings agency just think of them as a financial institution and they wanted to have a better understanding of Global financial literacy, so they paired up with a number of other institutions to see how good or how bad financial literacy was around the world. So back in 2014, they looked at a hundred and forty countries and a hundred and fifty Thousand people and they perform this survey. Let's talk about some of the results First, and then we can. We'll put Jordan to the test here and I think I have good faith during. I think you're gonna pass.
Speaker 2:Personally, find out.
Speaker 1:However, we'll break down the answers here and explain why some might be right and some might be wrong. Okay, so Canada. Where do you think Canada falls on financially literate countries in the world? I would think we're gonna be pretty high. To be honest, pretty high. Here we go. We would fall probably about as high as it gets. So the highest range, I think, got to 71% of the population of that country being financially literate. I think we fell at 68%. Pretty good, let's call this good news bad news. Good news is we're probably the highest.
Speaker 2:Bad news is that a hundred.
Speaker 1:Bad news is only two out of three people are actually financially literate. We've got some.
Speaker 2:We got some work to do there.
Speaker 1:Yeah, so you know you might expect that Higher income countries would typically be more financially literate. That's not always the case, to be honest. We look around the world Canada, the US K and Australia are near the top, but the drop-off from there is pretty significant. I'm not gonna spend too much time there around the world. The average actually comes out to only a third, so 33% of adults worldwide are financially literate. So compared to the rest of the world, we're actually quite high now when we look at the different concepts that people struggle with and and are really strong with. The ones that people do the best with around the world are numeracy, so that's just understanding the concept of interest and inflation. They're the most understood concepts. My theory on that and maybe they have that in the full breakdown of the survey is that a lot of countries outside of North America yes, we're dealing with inflation a lot right now when the survey was done we weren't. However, other parts of the world have struggled with inflation for a long time, so they are painfully aware of it, even if our inflation was averaging what one and a half less than 2% for the last decade or so. So to me that makes good sense that that inflation and interest. That would be understood there. However, the least understood concept is risk diversification globally interesting, very interesting to me Okay, let's maybe go into Asking these questions here and we can give you the answers as we go. I've already, I think, I'm ready, I'm turn my computer.
Speaker 2:I think I'm ready.
Speaker 1:Okay, this was from the SMP global financial literacy survey. These were the questions that were asked. There's only there's five questions under four Categories, and you pass if you get the answers right in three out of four categories. Sure enough, yep. Let's start with risk diversification, the hardest one. Yeah, the hardest one bring it. So if you get this one right, you know you're good. Okay, number one. So let's suppose you have some money. Suppose you have some money. Is it safer to put your money into one business or investment or To put your money into multiple businesses or investments?
Speaker 2:I Believe that it'd be safer to put my money into multiple businesses or investments.
Speaker 1:Final answer that is correct. Yes, the answer is multiple businesses and again, this is the question that most people, including here in Canada, got wrong the most.
Speaker 2:This is great because we just did an episode about single points of failure recently which touches on this concept.
Speaker 1:Yes, yes. So this is the basic idea of diversification. I like to use an example. Maybe people don't really remember this one, but it back in the early 2000s and Ron was one of the largest companies in the world. Turns out, they were a massive accounting fraud and the company went to zero. So let's say, hypothetically, you had all your money invested in and Ron stock and it went to zero Over the course of three months or whatever it was. You now have nothing. Let's call that unlimited risk. Okay, so you went from one of the best performing stocks in the world to nothing. However, what if you only had half your money and enter on stock and half of it in Apple? Well, right around that time, apple released a little product called the. To remember Xbox. Don't do that to me.
Speaker 2:No, no, no the guy's gotta be an iPhone.
Speaker 1:No, the iPod, iPod, the iPod was in 2001. Yeah, so the iPod came first and it was kind of a prestige product and like whoa, what's this Apple company? And Steve Jobs came back Not too long before that and and things like that. But what if you had half of your money in and Ron stock and half your money in Apple stock? Well, today we're seeing lose half, there we go. Sure, let's just hypothetically lose half of it. That's diversification. So you're able to diversify away that risk of one company going to zero. What if we split it a third? So you had a third of it in and run a third of it in Apple and a third of it in Amazon. What about quarter let's? You know we can keep going here, right and so eventually, as you have more of your money in Different companies, in different industries, different sectors, potentially different countries, that's where you can increase your odds of success, even if there are individual failures along the way. This is why mutual funds and ETFs make a ton of sense, because you pool tens, hundreds and, many cases, thousands of Individual companies all in one and you get rid of that individual risk of one company going to zero. Any other comments on risk diversification?
Speaker 2:I mean, we've probably all heard the expression Don't put all your eggs in one basket. This is it.
Speaker 1:This is it. Yeah, that's the answer to that one. Okay, inflation this is.
Speaker 2:Hmm, painfully, heard about this recently.
Speaker 1:Yes, it's a little on the nose right now. This one relates to your income as well. Okay question Suppose over the next 10 years the prices of things you buy double. If your income also doubles, will you able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
Speaker 2:If my income is going up at the same rate as what I want to buy is going up, I think I'd be able to buy the same amount today as the future. That is correct.
Speaker 1:Yes, absolutely so. This looks at inflation but also the pesky math of percentages. I could probably do a whole episode on that and how percentages can kind of mess with your mind, but essentially let's just use a hypothetical here. So if what you buy cost $20,000 a year, now, 10 years from now, cost 40, but your income goes from 50 to 100, the ratio between the two stays the same. So you should be able to buy exactly the same as what you could before. Pretty straightforward, okay. Now let's look at what they call numeracy or interest. No trick questions here. These aren't not intentionally trying to trick anybody. Suppose you need to borrow 100, they say US dollars. I'm gonna turn it on its head here. You need to borrow 100 Canadian dollars. Oh boy, you're borrowing $100. What is the lower amount to pay back? Okay what is the lower amount to pay back from these two options? Option one $105, or option two $100 plus 3%. Option two that is correct. Yes, okay, interest is often stated as a percentage. The nice thing about this question is that a percent is a number related to 100. So if it's 3% on 100 bucks, that's $3. In this case, Less than 105. 103 is less than 105. They could have made these questions harder, I think. However, it's good to have that basic understanding. So, 20% interest, $120. Quite a bit more. Okay, so that's basic interest. Now the final set of questions here. There's two questions in this, one, similar, but it's about compound interest. Okay, question Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account Boy, that would be nice, 15% per year. And then this is two years again. Will the bank add more money to your account in the second year than it did in the first year, or will it add the same amount of money both years, more, that is correct. They will add more, and let's break that down because in the first year so let's go back to this $100 example here so you have 100 bucks in there and they're gonna pay 15% per year. So in the first year you put in 100, at the end of the year you have 115.
Speaker 2:Second year there's gonna be another 15%, but on my $115 now, not my $100.
Speaker 1:That is correct, yeah, and so 15% on 115 is actually 1725. I didn't do that math in my head. These are tricky numbers now. Yeah, now we're dealing with tricky numbers, but the important thing is, the concept is that your second year is interest on top of the interest, that's compound interest.
Speaker 2:And this is why I think the one that made the most sense, like why financial literacy is important. One of the reasons was increased retirement savings. Like this is it if your money can compound at whatever rate of return you think you can get, doesn't matter if it can compound for more years. At that, you will have more money than if you have less years for that to compound.
Speaker 1:Let's go to the last question. Here. You've already passed, by the way.
Speaker 2:This is spectacular.
Speaker 1:I was kind of nervous. I'd be nervous for sure.
Speaker 2:It's just this.
Speaker 1:I'm good at financial podcast, For sure. You might not even be financially literate. Okay, last one. Suppose you had $100 in a savings account and the bank adds 10% per year to the account. What a loser bank. This one is 10% per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? Okay, 10% per year, five years, Would you have more than $150? Exactly $150 or less than $150?
Speaker 2:More.
Speaker 1:You would have more exactly. So say it's what we call simple interest and you're just adding 10% per year for five years. Well, that's 50 bucks, so you'd have at least $150. However, again in that first year you'd have $110, and then you'd have your interest on top of that one, and then again and again and again. So in your last year you actually have $161.05. Not bad, not bad, I would say. That's even better than $150. That's for sure. About $11 better, awesome, okay. So now listeners, if you have followed along with those questions, hopefully they sounded basic to you, but maybe that gives you a good understanding of what level of financial literacy that the world is at. If you know somebody in your life and you wanna share this podcast with them, feel free. Test your knowledge. The government of Canada actually has a different test on their site. It covers off a lot of other things, but I think this one is probably the most instructive for just basic concepts. But yeah, if you're able to answer those questions accurately about risk, diversification, inflation, interest and compound interest, you're probably in good shape. Also, if you've been listening to the Canadian Money Roadmap for two years, I hope you're probably in better shape than the average bear too. Finally, the thing that I'm gonna mention here is some resources from the government of Canada, because it is our financial literacy month in the US. I think theirs is in April, so you might hear about this again in a few months if you follow any American planners or podcasts or things like that. But I will have a link in the show notes here to our resources for financial literacy month, which includes a financial goal calculator, budget planner, mortgage calculator, a number of resources for how to manage money when interest rates rise, making a plan to pay off your debt, what to consider before borrowing money, knowing your rights when borrowing money that's a good thing to know about that management options all sorts of other things on here great resources to use, especially if you're just getting started and you need some help with those kind of things. Listen to some former episodes of our podcast, too. There's we touch on a number of these topics in a lot more detail going back, but I think this was good to talk about today. Any final thoughts about financial literacy Jordan.
Speaker 2:I don't think so. It's important, though, like these concepts. Hopefully everyone's kind of heard of them at least a little bit. You know we're not getting to the nitty gritty weeds here of finances, but a basic understanding of these things can go a long ways to increasing your success over the long term.
Speaker 1:Everybody's got to start somewhere, and taking off these boxes at the very beginning, I think, is really important. So thanks for taking the time to listen. If you found this interesting, feel free to send us an email at hello at evannewfieldcom and if you liked the podcast, click, follow on the podcast player of your choice, or subscribe, or whatever language they use, and we'll see you in a couple of weeks. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Newfield is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.