When it comes to important life skills, what’s the first thing that comes to mind? For many people, it might be something related to their work or a daily task (like cooking or cleaning). However, I’d like to propose another important life skill for everyone to master: Financial literacy.
So, what is financial literacy and why is it important? In this blog, we’ll explain the definition of financial literacy, why it’s important, and how to improve your financial management skills.
What Is Financial Literacy?
What is financial literacy, you ask? One definition of financial literacy put forth by Investopedia is “the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.”
Another way to think about financial literacy is that it’s kind of like reading literacy, but for finances. The stronger your literacy skills are, the easier it is to interpret financial documents or topics and understand what they mean.
So, why is financial literacy important? Why would you need to be able to “read” and understand more complicated things related to finances?
Why Is Financial Literacy Important?
Avoiding Excessive Debt
Did you know that Canadian consumers are now carrying $2.1 trillion in debt? That’s what a report by Global News from June 2021 says. The driving force behind this debt can be attributed to mortgage debt and new mortgages filed during the pandemic. The largest increases, according to the story, were in British Columbia and Ontario. This has driven many to seek Ontario debt assistance.
This is why financial literacy in Canada is important. Without the financial knowledge and skills to navigate mortgages, understand how credit scores work, and make (then stick to) a budget, it’s all too easy to fall into debt.
Extreme debt can be limiting for a family—instead of being able to save for retirement and pay for their children’s education, families are left struggling to survive paycheque to paycheque. Collection calls come in at all hours of the day, with creditors making aggressive demands for their money. Even with the limitations on what collection agencies can do, it can be incredibly stressful.
Knowing How to Build Your Credit Score
Your credit score is a general indication of how “reliable” the credit bureaus think you are as a debtor. The higher your score is, the more likely you are to pay back your debt. A low credit score, on the other hand, means that creditors will be more likely to think that you’re too much of a risk to lend money to—at least, not without a bunch of conditions attached to maximize their short-term profits (such as high interest rates, bigger down payments, etc.).
Bad credit can even impact a person’s ability to find a good job—you can’t get fired for having bad credit, but an employer could decide not to hire you based on a low credit score or excessive debt. This, in turn, can make it harder to earn enough money to pay off debt.
Having knowledge of the factors that affect your credit score and how to build good credit can be a life-saver when it comes time to apply for a mortgage, auto loan, or other financial services—since creditors will be more willing to offer favourable terms to people with good credit.
For the benefit of ourselves and our children, it’s vital for everyone to make credit-related educational content and outreach efforts a priority. This is why Credit Canada works on learning initiatives like Financial Literacy Month to help raise awareness and overall financial literacy in Canada.
How to Improve Financial Literacy
So, now that we’ve answered the question of “what is financial literacy and why is it important,” how can you improve your skills when it comes to finance? Here are a few different financial literacy tips to build your knowledge and confidence:
1. Check Out Some Finance Podcasts, Blogs, and Other Resources
Finances can change over time—what was good advice a decade ago might not work so well today. So, it’s important to stay up to date on financial topics. One way to do this is to check out the top finance podcasts, blogs, and other resources available.
Why podcasts and blogs? Because the people behind popular productions will frequently update their content with new advice and tips based on the latest developments in the world of personal finance. This helps ensure that you can stay updated whenever there’s a big newsworthy change that will get the experts talking.
Also, subscribing to most podcasts and blogs is free—so you don’t have to pay a dime for the information!
2. Consider Seeking a Financial Coach
If you aren’t yet confident in your financial literacy skills, it can help to seek out financial coaching services to provide help and advice. Sometimes, simply having access to someone who can act as an advisor can help to reduce the stress and anxiety of dealing with personal finance.
Different financial coaches will have different approaches. Some for-profit coaches might act like financial planners without actually claiming the title of being a certified financial planner (CFP). They may offer various services that go above and beyond simple advice or education. However, it’s important to check that they have the qualifications needed to provide those services!
Others might work as not-for-profit agencies that provide general advice and education over the course of several learning sessions—with the odd bit of support thrown in or referrals to licensed professionals.
3. Consider Using Financial Literacy for Youth Programs
Financial literacy for youth programs do exist—and can help young adults learn the skills they need to manage their money early on. By leveraging the resources in these programs to teach your kids (or, if you’re a younger reader, checking them out for yourself), you can prepare them for financial success before they leave the nest.
The sooner you can instill strong financial skills and good habits, the better. With a head start on finance skills, it’s a lot easier to prepare for the “real world” after high school (or college). So, financial literacy for youth programs can be a real benefit for your kids!
4. Set Aside Funds for an Emergency or Rainy Day
You never know when an emergency might strike and leave you in need of a large reserve of cash. The COVID-19 pandemic is just one example of a situation that left many people without their primary source of income and struggling to get by. Even with the emergency benefits supplied by the Canadian government, COVID-19 hit Canada’s job market hard.
So, when working on your financial literacy skills, it can help to focus on finding ways to save up money for an emergency, such as depositing money into a savings account or investing in a retirement account that you can pull from in a pinch (such as an RRSP or TFSA).
Also, practicing finding ways to save up money can help build the good habits and skills you need to maintain a budget.
5. Don’t Be Afraid to Ask for Help
Doing things on your own can be a great way to build confidence. However, there’s no need to do everything by yourself. If things get hard, it’s important to seek help from reputable sources, like debt help services providers or financial debt counselling programs.
Credit Counsellors at non-profit organisations like Credit Canada are here to provide you with free, non-judgmental, and confidential support when you most need it. Being in debt or struggling with the complexities of the "legal speak" in a pages-thick mortgage agreement is nothing to be embarrassed about—in fact, countless people have gone through the same experiences.
If you need a shoulder to lean on, help getting out of debt, or just some advice for how to deal with debt, reach out to Credit Canada today. We’ve helped thousands of people just like you—so why wait for help? Call us at 1.800.267.2272 to get started!
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