Financial illiteracy is your enemy

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The federal government has identified one of our most significant financial risks and that risk is you.

Improvements have to be made in how Canadians make financial decisions; otherwise, many individuals and the Canadian economy could start a devastating negative financial spiral. This is a big problem and the solution to the problem has begun.

Jane Rooney is Canada’s first Financial Literacy Leader. Last week she announced many different strategies, all focused on helping us make better financial decisions.

The beginning of this initiative started in 2009, when the late Jim Flaherty who was Minister of Finance created a Task Force on Financial Literacy. In announcing his initiative Flaherty said “our economy is built on millions of everyday financial decisions by Canadians.”

Now the onus is on us to start making better financial decisions. The three main strategies include better management of household debt, saving for retirement and fraud protection.

Household debt is at historic highs and is getting worse every month. Gone are the days where “less is more.”

Now most of us think that “more is not enough.” Those who want to engage in excess spending can easily do so by using their personal line of credit that is often registered against their house. Coming up with extra funds is not a problem.

This prolonged period of historic low interest rates has turned a conservative nation of  savers into spenders. The day of reckoning will come.

Nobody knows when interest rates will rise; however it is safe to assume they will at some point. That for many will be the beginning of the end. Those who find it a stretch to manage everyday cash flow will find it impossible after interest rates increase. Promoting financial literacy now will hopefully encourage Canadians to be proactive at managing their debt.

The second strategy of financial literacy is to encourage us to save for retirement. The arithmetic of personal finance means that saving is a necessary part of having funds in the future that will support your lifestyle.

The federal government is attempting to convert us from being spenders to being savers. So far any attempts to achieve this over the past many years have had little or no success.

Individual Canadians are at financial risk and because of the potential domino effect on the Canadian economy when interest rates rise our country could be pushed into another recession.

This is serious, however it is likely that serious change in spending and saving patterns will require an interest rate increase before the loud and clear message of the federal government will be heard by the Canadian public.

The final main theme of financial literacy is fraud protection. Helping Canadians understand the different ways that money can be stolen from them will be helpful.

Understanding the risk of fraud should help us understand the best strategies to prevent fraud from happening.

In my opinion the problem does not lie just with Canadians who do not understand the risks of poor financial management. A large part of the blame lies with the financial firms that should be assisting their clients in any way possible.

The culprit here is the gross lack of transparency of fees.

For example, the way mutual funds are sold to Canadians is archaic. If you want clients to make smart decisions then those same clients have to be given the information that will allow them to do so.

Mutual fund fees and commissions paid to sales people are often hidden. How can we expect people to make intelligent financial decisions if information is withheld?

Our observation is that there is lots to be done. We as individuals have to make better financial decisions and the financial companies that serve Canadians have to be more transparent and disclose fees.