While we exceed in many areas, there are some we are drastically behind in: financial literacy happens to be one of them.
In a study released in late 2015, Canada took fifth place in an international financial literacy ranking. The report found that 68 percent of Canadian adults are financially literate enough to answer four questions based on fundamental financial concepts. “The goal was to gauge whether people can make informed decisions based on their understanding of concepts such as risk and diversification, inflation and interest,” states theS&P findings.
Financial literacy is defined by much more than mere numeracy, and includes the understanding of complex banking-systems, how to file taxes, understanding tax exemptions, and so on. It has also been proven that financial illiteracy has a long-term effect on quality of life.
“Consumers who fail to understand the concept of interest compounding, spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans,”the report also states. “They also end up borrowing more and saving less money.”
When compounded by a large group, financial illiteracy can negatively impact an entire economy. For example, Canadians’ debt-to-income ratio hit a record in 2015 when it grew to almost 165 percent. In the second quarter of last year, Canadians borrowed $26.3 billion, an increase of $3.7 billion from the first quarter.
Studies by theFinancial Consumer Agency of Canada (FCAC) show that three in 10 Canadians are struggling to meet their bills and payments. More than six of 10 Canadian adults rate their financial knowledge as poor and nearly six out of 10 adults do not have a good idea about how much money they will need to retire with their desired standard of living.
Canadians who have widely been considered savers instead of spenders, have done an abrupt 180 during the last decade, and now have higher debt loads than their American counterparts.
Not only does lack of financial knowledge affect Canadians’ ability to retire, the exorbitant housing-bubble in Canada’s largest cities has also been partially attributed to poor financial literacy. The Toronto Star found that younger people and first-time homebuyers were particularly worried about their lack of financial literacy in relation to the housing market. “The survey revealed that 70% of young people (ages 18-34) are anxious about not being properly informed about the buying or selling process,” notes the Star. “Other top concerns are centred on affordability.”
This fear has prompted some to ask for tighter government regulations in the housing market. AnAngus Reid opinion survey conducted Canadians across the country revealed, more than half (66%) of Canadians believe the “government should get more involved” in the real estate sector. While the remaining third said the “government should stay out and leave it to the industry to manage.”
Toronto-based finance and real estate expert Larry Weltman isn’t surprised about the Angus Reid findings; however, he believes more government regulation won’t cure the root problem. Weltman sees the heart of the issue rising from poor financial planning and awareness.
Weltman pointed out that large housing bubbles are usually a result of people taking out huge loans and signing up for extremely high mortgage rates, which over-inflates the market.
Larry Weltman, like many other experts, think the solution lies in enhanced financial literacy programs and initiatives across the country, not more regulation. Addressing the rising consumer debt levels and ensuring children and youth are informed enough to avoid common pitfalls will have a more transformative effect on the the economy than government mandated constraints.
The Canadian government is in the midst of a five-year plan dedicated to increasing financial literacy in the populace, it still remains to be seen of this new effort will be successful.