The Case for Financial Literacy

Spring 2008

By Blair Campbell, Manager, Business Development – Atlantic Region

Most of us can imagine what it means to be illiterate – unable to fill out forms, decipher signs or follow the instructions on packaging, not to mention never knowing the pleasures of reading a good book. But what about financial literacy, what exactly is it and how does it affect people’s lives?

Financial literacy in the broadest sense is the ability to comprehend financial concepts and make decisions based on that understanding. At one time you might have considered financial literacy to be the ability to compare prices, know if you’ve been charged the right amount and balance your chequing account. But because the financial environment that we live in today is much more complex and fast paced, financial literacy not only encompasses basic numeracy but also covers the concepts of saving, debt management (loans, mortgages and credit cards), investments (income and capital gains), insurance and pension plans. Unless you’ve pursued a career in business or finance, these topics don’t generally come up during your formal education. Not surprisingly, studies have shown that financial literacy is a real issue in Canada and many other developed countries.

The most recent International Adult Literacy Survey presented participants with a simple grid, showing the interest earned by a $100 invested over a number of years. Participants were asked to state how much the investment would be worth after 10 years. Only 20% of Canadian who completed the survey were able to do so – most forgot to include the $100 in the final total. How likely is it that these individuals will be able to understand the cost of a car lease or comprehend a quarterly statement for an investment account? These problems become compounded as more responsibility is being placed on the individual to save and invest for what is becoming a longer and longer period of retirement. Too often, it is at retirement when people realize they have a problem and by that time it is largely too late.

The consequences of low financial literacy can be far reaching. Excessive levels of consumer debt can eventually restrict the growth of the economy. An impoverished aging population unable to leave the workforce because of poor planning may be less able to sustain productivity levels. And people could be forced to rely more heavily on what is a shrinking social safety net, requiring greater support by government and the public.

At T.E. Wealth, we have long been advocates for financial literacy. In the course of helping clients develop a financial plan and an investment policy statement, education about financial concepts is a key part of the process. Many of our consultants have been asked to work with the adult children of clients to help them learn about financial planning and investing. In addition, we work with employers and their employee groups, and associations and their members, to develop a greater understanding of financial concepts through workshops, one-on-one financial counselling and through T.E. Learn, our online financial education tutorial system.

An important outcome of this education is to ensure individuals have the knowledge and objective guidance to make the best possible use of their pension plan. Defined contribution pension plans (plans that require that the employee make investment choices) are projected to represent of 90% of all pension plans in Canada within a few years. Employers invest a good deal of compensation dollars in pensions and want their employees to fully realize their pension’s value. But if contributions are not invested wisely, if the employee does not understand the trade-offs of risk and return or how to construct a balanced portfolio with appropriate growth opportunities, how likely are either the employer or employee to achieve their goals?

In our experience, employers benefit in multiple ways by improving financial literacy among employees. In addition to helping the employer meet the more rigorous governance requirements associated with offering defined contribution plans and Group RRSPs, they find they can increase employee productivity when employees aren’t worried about their finances, improve employee retention by fostering a greater appreciation of their compensation and become an employer of choice by offering financial education. In Newfoundland, as is the case in other resource-based economies, attracting and retaining skilled employees is a challenge and companies that offer financial education are finding that it gives them a distinctive edge.

We believe that great strides can be made in improving the financial literacy of Canadians by starting in the workplace where comprehension of financial concepts is necessary for employees to make informed and educated choices regarding their retirement. By ensuring today’s workers have the skills and knowledge to prepare for a financially secure retirement, we can avoid many of the societal and economic problems that are a consequence of poor financial literacy.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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