Over the last few years, financial technology (or FinTech if you’re savvy like that) has changed the way people are managing their money. Sleek and simple ‘self-serve’ options and apps are popping up everywhere, allowing people to keep greater control over their finances instead of the more traditional route -- handing them off to a Financial Advisor and hoping for the best. Despite 41% of us reporting that money is the leading cause of stress in our lives, we’ve still been (until now) relatively happy to hand over control of our finances to industry advisors, and behind-the-scenes algorithms that would terrify even a medalled math major.
This new wave of financial management alternatives is providing simpler solutions, better insights, faster access and increased visibility around where our money is, and greater control over what it’s doing. Which sounds great, right? And it is great. But while these new platforms are pitching themselves to the mainstream markets, very few of us have the financial management skills we need to really take advantage of these self-serve tools in a way that provides us with the biggest benefit and lowest risk. Enter ‘financial literacy’ – the latest financial buzzword and often trending topic among millennial do-it-yourself-ers.
What is financial literacy? Despite how popular it may be on social media, many Canadians struggle to understand how to effectively manage their money beyond a month-to-month budget. And it’s no wonder. The recent interest in financial literacy has highlighted our unconscious uncoupling from our money and the way in which we manage it. Until lately, very little has been done to institutionalize learning (at any age) about what financial literacy really is and how to improve it. Essentially, we’ve got an Ikea dresser without an Allen key. The pieces are there, but we’re missing the right tools.
So, what do you really need to know?
If you want to be more involved in managing your money, there’s never been a better time. When it comes to your finances, you don’t have to know everything, but you do need a handle on the basics to understand whether taking control is the right move for you. Generally, there are five areas you should have a solid grasp on:
Understand what your earning potential is now, and in the future. Is your income fixed or variable? Reliable or intermittent? Do you have potential additional income sources? Can you realistically expect to earn more in the future, after an investment in more experience or more education?
Try: Long-term scenario planning can be helpful. Map out a year-over-year outline of your best and worst case scenarios given your current situation, and your plans for the future. If you’re able to define your realistic annual range, you’ll stress less wondering whether you’re earning what you need to.
2. Saving and investing
Here’s where things get a bit more complicated. When it comes to saving and investing, it may feel like your choices are endless. Interest rates are at historically low levels, which can be good if you’re borrowing (more on that below), but they can make it hard to grow your money in a traditional “savings account.”
Try: A good way to build an investment strategy is to understand your risk tolerance and define your ideal future state. Where do you want to be in ten years? Twenty? How much will starting earlier, even with a small amount, lead to more savings growth in the long run? How much can you afford to invest given what you’re currently earning without putting yourself at risk? You can work backwards from there, to see which investment options will get you where you want to be without putting it all on the line.
Imagine if you had to treat your own personal spending with the rigour you handle the financials at work. You’d probably work harder to plan your budget, spend your money, and diligently keep your accounts in order than you currently do. That might sound like it takes all the fun out of how you handle your finances (was there ever any to begin with?), but it’s a real would-you-rather situation. Either get a bit more organized when it comes to keeping track of your spending or stare blankly at your credit card bill at the end of the month, regretting that ab-roller that’s sitting (in its original box) in the basement.
Try: Keep an accountant’s eye on your books and find your sweet spot, where your fixed costs are under control and allow for some disposable income. There are lots of tools to help you stay within that range, by tracking your spending habits and forcing you to face up to the potentially budget-draining effects of your subscription to that snack-of-the-month box, or that third music-streaming app that you don’t use.
Understanding your spending is more than looking at your credit card bills each month; it also takes into account what you’ve been (or are planning to) borrow, and the financial implications (both short-term and long-term) of those loans. It’s important to understand what’s involved in any type of loan, whether it’s a mortgage, personal line of credit, or simply what goes on your credit card -- whenever you borrow money, you’ll always be paying back more than you took out. How much more depends on all sorts of factors - and you should be clear about which of those apply to you and the cumulative impact that will make down the line. The good news is that interest rates are at historically low levels, so it can be a good time to borrow. Your lender will likely conduct a “stress test,” to see how your income could handle small increases in interest rates, but you can do the same, so that you don’t get carried away with what you can afford only under current conditions.
Try: Examine your current debts and look for ways to take advantage of low interest rates to pay off the principal amount sooner. A consolidated loan, or a line of credit, for example, will likely be better than paying credit card rates, especially if you’re just making minimum payments. And a shorter amortization period for a mortgage means higher payments in the short run, but means paying less interest in the long run and being mortgage-free sooner.
Protecting your money is a bit different than saving it, although certainly related. Money you want to protect includes things like emergency funds, retirement plans, or lump sums earmarked for a future purchase. Money you have but can’t use, at least not in the short term. Because you’re depending on it, it needs to be guarded a little more carefully than some other, higher-risk investment strategies. What you want to protect depends entirely on your plans for the future. You can apply a similar strategy to your Savings and Investing - work out what you need to protect based on where you want to be in five years, ten, twenty. Then add any big purchases you’re planning to make in the short-term, like a down-payment, a new car, or one of those fridges that makes your grocery list for you. This money needs to be banked or invested in stable, low-risk investment platforms, whether that’s an RRSP or a Savings Account.
A must-have for any funds you can afford to invest in is a Tax-Free Savings Account (TFSA). At least that way any interest you do make stays with you, instead of showing up as surprise additional income at tax time. There are limits to how much you can contribute to a TFSA each year, but the total amount has accumulated since TFSAs were created years ago, so if you haven’t taken advantage before now you have lots of room to work with.
Try: Not everyone knows that you can choose from an array of investment options to include in your TFSA, from aggressive stocks and mutual funds to more conservative, short-term products like bonds and guaranteed investment certificates (GICs), so you’re not limited to traditional, interest-earning savings accounts.
Keep in mind, even if you become an expert on what you make, spend, save and protect, your overall financial wellness is about more than just numbers on a screen. Once you’ve got a basic idea of your financial situation, you’ll also be able to understand more big picture stuff, like how secure you are financially, and what changes you need to make to achieve your goals.
In a nutshell, “financial wellness” is when people can understand and manage their economic lives with confidence and efficacy. It sounds broad, but really it boils down to making good financial decisions, planning for the future, and making sure you’re covered in case of emergencies. “Financial literacy” means understanding your current situation, the factors that influence how much you spend and save, and what steps you need to take to maintain or improve how your money is working for you.
Amanda Ashford is a Brand & Communications consultant building brands with purpose and using business as a force for good. As a global traveller, Amanda is constantly inspired by the sounds, scenes and stories found around the world, and our shared passion for purpose that connects us all.
Amanda Ashford is a paid spokesperson of Sonnet Insurance.