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FINANCIAL LITERACY STARTS WITH A BUDGET
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, November 04, 2016


Q – I’ve seen some promotions recently for Financial Literacy Month. What’s this all about? Why is the government concerned about whether I can balance my bank account every month? – Nadia S., Thornhill, Ontario

A – November is Financial Literacy Month in Canada. It’s the government’s way of trying to get people to understand that financial literacy is important for the financial well-being of individuals, and to the economy as a whole. Understanding the basics about money is as essential today as numeracy and basic literacy.

But according to recent studies by Statistics Canada, there is a gap in financial knowledge between men and women, especially among older and more educated Canadians. Also, a higher level of financial knowledge is more often associated with a higher degree of retirement preparation.

According to the Statistics Canada study, men had higher financial literacy scores than women. In 2014, 22% of men correctly answered 5 of the 14 questions that were specifically related to the key issues of interest, inflation, and risk diversification. This compared with 15% among women. In addition, women (31%) were less likely than men (43%) to consider themselves financially knowledgeable.

Troubling growth in financial illiteracy

But note the generally failing level of overall scores, regardless of gender. Taken at face value, these statistics are astonishingly bad, and highlight the real need for an increased focus on financial literacy at all ages.

These troubling numbers spill over into the key area of retirement planning and saving.

According to StatsCan, in 2014, 78% of people surveyed between ages 25 and 64 reported that they were financially preparing for retirement, down slightly from 81% in 2009. However, among younger labour market participants the reduction was more marked, falling to 66% in 2014 from from 75% in 2009

Among labour market participants who were financially preparing for retirement in 2014, just over one-third (34%) expected their primary source of retirement income to be workplace pensions, while 31% expected their main source of income to be RRSPs or RIFs.

Surprisingly, 13% of respondents expected their main source of income to be government pensions, 10% listed other sources, and 12% did not know what their primary source of income in retirement would be. These numbers were nearly unchanged from 2009. A quick look at even the maximum annual government pension payments from CPP and OAS shows that these are not enough to live on comfortably. Again, we’re looking square on at the consequences of financial illiteracy.

That’s why this year’s Financial Literacy Month theme is “Managing money and debt wisely: It pays to know.” In an effort to promote financial literacy, this year, the Financial Consumer Agency of Canada is featuring basic weekly subthemes that highlight basic money management practices, such as creating a budget and living within your means, knowing your rights and responsibilities, having a savings plan, and reviewing your finances.

How to create a budget

The basic building block of financial literacy is the personal budget. Too many people think of a budget as a constraint on their activity or lifestyle and therefore avoid ever making one. In fact, a budget is more of a bird’s-eye view of your income and expenses that can highlight areas of possible trouble and help you avoid financial difficulty.

The first place to start is to try to get a handle on where your money is going. Determine how much income you have. If all else fails – look at your bank statements. Document what you find. Next, perhaps again by consulting your bank statements, determine how much debt you paid off over the past year. Mortgages and credit card debt are the most important items to nail down. Now you can document exactly how much you saved, which can be earmarked for long-term investment purposes.

Now pull it all together. Take your total income and subtract the amount you saved, the amount you paid in taxes, and the amount saved for long-term investment purposes. The amount you spent over the last year is the number that is left. That is what you are spending – no doubt about it. It may be necessary to dissect it a bit more if you are spending more than you are earning.

The most common cash suckers are vehicles and credit cards. The big thing right now is to pinpoint the problem areas. Beyond credit cards and cars – each of us seems to have one or two more areas in our life where we overspend. That’s okay – it’s your choice. The important thing is to be aware of the areas where you “overspend,” and decide if you are really getting your money’s worth. The Financial Consumer Agency of Canada has a handy budget calculator on its website to help you get started. – Robyn

Robyn Thompson, CFP, CIM, FCSI , is the founder of Castlemark Wealth Management , a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2016 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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