Financial Literacy in Canada – Importance & Education 2024

Do you think Financial Literacy is important? Does having basic financial knowledge serve any purpose? Here we will be answering all these queries. Scroll through the complete guide on Financial Literacy in Canada, its importance for students, professionals, entrepreneurs, and anybody for that matter.

Financial Literacy – Introduction

Over the years, financial markets, services, and the products have grown leaps and bounds. Our forefathers used to swap goods for goods and there was no medium of exchange. Later, we tendered gold to purchase whatever we wished to buy. We are now in an era where we cannot even think of our lives without ‘money’. Has it stopped there? No. We are moving towards digital and decentralized money using blockchain technology. Yes, cryptocurrencies are in vogue now.   

Similarly, our forefathers had lesser needs. All they wanted was bread, butter, shelter, and clothing. But with globalization, we have access to yen number of entertainment like travelling across the globe, wearing branded clothes, indulging in sports, eating variety of cuisines etc. All these determine our standard of living and we have all become money maniacs, such that we even our kitty party talks are about money.

With zero knowledge on finance, can you imagine yourself shining among a group of friends flaunting about their investments, digital gold, SIP growth and real estate profits? You would probably think of adding to your financial knowledge. Isn’t it?

What is Financial Literacy?

Financial literacy is nothing but developing necessary financial skills, in order to manage your money effectively. With the evolution of technology in finance, nowadays, it is not only limited to managing your money, but it is also about not losing your money to fraud.

So, let us dig into the importance of financial literacy and know what is the exact scenario in Canada.

Before that let’s get an idea on the key areas of become a financially literate person.

Components of Financial Literacy

The four integral parts of financial literacy are:

1. Budgeting

Do you know that only 65% of Canadians are able to pay their bills in time and one out of 6 Canadians face cashflow deficits. Well, you can be a high-income earner in Canada, raking in $250,000 a year, you will still end up being poor, if you are ignorant about budgeting. If you are wondering where your money goes every month, it is high time to have a hawk eye and keep a track of your income and expenses.

As it is said, “A penny saved is a penny earned.” You do not have to be a miser, but you must be smart enough to analyze and cut down on unnecessary expenses.

2. Savings

Ok now, let us envisage you have cut down on expenses and you are having surplus cash at the month end. What next? Well, we never know what life throws at us. The best example of this is the COVID-19 pandemic, that put all of us in major uncertainty in the recent past.

Therefore, you must have a good sum of money reserved in your bank account to meet contingencies. You must direct your monthly cashflow surpluses into a bank savings account until you reach your emergency needs target. But the reality is that only 64% of Canadians have funds reserved for emergency and that too to cover 3 months of expenses.

3. Investing

Let us presume you have enough liquid funds to meet any mishaps, what next? Get educated on financial markets and invest your money in growth assets like shares, mutual funds, ETFs, or real estate of your choice that will make you money even while you are sleeping.

4. Debt Management

There is an impression in the society that debt will let you into a cycle of poverty. But if you are a wise person, you can turn it from a foe into your friend. Just imagine you are borrowing $300,000 @ 2% interest rate and purchasing an investment property. You need to pay principal and interest of $1,000 every month, whereas, your tenant pays you $2,000 every month. You earn $1,000 per month. So, it is important that you know to manage risks than avoiding risks.

We are all drifting towards an automated world. It is not only about managing our money by equipping ourself with the skills mentioned above, but preventing ourselves from any kind of monetary fraud.

Guess what? CPA Canada has reported that 46% of Canadians are victims to financial frauds. In fact, 22% of Canadians have been victims to financial fraud in the past two years. Prevention is better than cure. And, nobody wants to be in such a situation. Having basic financial knowledge can definitely save you from various scams.

So, it is always better to secure your hard-earned money by being well-informed about all the deceits happening, and by shielding your assets against them.

Also, explore unique ways to teach kids about financial literacy and money management.

Why is Financial Literacy important to Individuals?

• Generally, we plan for our future, but with financial literacy, you create your own future.
• When we hit the bed at night, all we need is mental peace. With financial literacy, you can sleep like a baby, knowing that you have sufficient funds to meet your lifestyle expenses.
• Nearly 73% of Canadians have an outstanding debt, if you are one among them, financial literacy will make you an effective user credit.
• You can face unexpected situations without fear.
• Only 55% of Canadians have Wills and 40% of Canadians have Power of Attorney in place. With financial literacy, you can frame a well-structured estate plan and pass on your assets to your lineage.
• By investing money, you need not work hard for money, whereas, money will be working hard for you.
• You can save your money from chit funds, pyramid schemes, Ponzi schemes, lotteries etc
• You will have a safety mechanism against technology-based fraud

Financial Literacy for Students

We all go to schools and universities to make money, but how many of these institutions teach us how to manage money? Probably very few. Today’s youth will build tomorrow’s nation, so it is important for parents to inculcate piggy bank savings habit in their child.

Although, students of today have access to internet and information, educational institutions must make financial education as a part of student’s curriculum. Inculcating it in their formative years will build a strong foundation for their future financial sustainability.

Especially in Canada, it is very crucial for students to learn financial planning. It has been reported that nearly 23% of young Canadians have stated that education is the biggest expenditure for them in the next three years. Moreover, 47% of those students who are aiming for pursuing their post-graduation in next 3 years have already saved up for their education, whereas, 40% look to borrow and the remaining 13% have no plans on what to do.  Also, 50% of young Canadians have an education loan in their name. These are not simple numbers, but an eye opener! This is where Financial Literacy can better craft the future of young Canadians.

Education must be a tool for survival and growth, it must not lead the young Canadians into a debt trap. Hence, it is crucial to impart financial education in the Canadian youth. This will help them plan their education and manage money wisely.

Financial Literacy for Professionals

When people are finally employed after their education, people think they are on top of their world. Well, you can party extravagantly and have a honeymoon period for a maximum 3 months, after which it is highly crucial for you to take things under your control.

You must start working towards short term goals like buying vehicle or holiday, medium term goals like wedding, purchasing home and long-term goals like retirement funding.

Especially as a salaried person, you must be well verse in your country’s taxation rules. Often, tax forms a major part of your expense and you must implement tax minimising mechanisms. This will save you a large chunk of money in the long run.

Only 47% of Canadians are aware of how much savings they need to accumulate to maintain their standard of living post-retirement. In retirement planning, time is your biggest asset. So, you must start towards a happy retirement right when you are young, so that you will have a good amount of time. You must start mastering money at this stage, if not money will be your master at later stages, when you are in need.

What are your retirement plans? Have you started thinking about it?

Financial Literacy for Business Owners

You can have the most unique business idea, you may be dealing with the product that is on a high demand, you can be great in marketing, you can be smart in attracting and retaining customers. But, making profits is quintessential in business and all your efforts will flunk if you don’t manage your business finances sagaciously.

As a business owner, you must have knowledge of profit and loss accounts, balance sheets and cashflow management. Similarly, when you reach the point of scaling your business to the next level, you must be able to talk numbers to banks, private equity firms or investors.

To put simply, you can only launch your business with a great idea, but if you must grow and sustain your business, you must know to handle money.

Of course, you can hire a team to manage business finances (although not feasible for small business owners/ self-employed). However, gaining financial literacy is the stepping stone towards a successful business. Don’t you think so?

Financial Literacy Initiatives by the Canadian government

Data is the new gold. For us to predict or to take any enhancement measures, all we need is historical data. Knowing its importance, the government of Canada conducts Canadian Financial Capability Survey (CFCS), once in every five years.

The Financial Consumer Agency of Canada (FCAC) along with financial literacy Action group has initiated “November as the financial literacy month” to enhance financial education and learning amongst Canadians. During this month FCAC works with various public sector, private limited and non-profit organizations to help Canadians improve their financial skills and knowledge.

The federal government of Canada launched a task force for improving financial literacy in 2009. The members involved in the task force travelled to nook and corners of Canada and met citizens as well as finance experts to find out the ground condition. After two years of research, the committee submitted a report to the Minister called “Canadians and Their Money Building a brighter financial future”. This report talks about the ground reality, importance of financial literacy and ways for improvement.

Does Financial Literacy Really Matter?

It is laudable that the government of Canada is well-aware of the importance of financial literacy among its citizens and is taking steps time and again to keep improving it. These steps have helped Canadians to make better choices, plan ahead, evaluate financial data, make best use of resources and weather the ever challenging and changing financial markets. The improvement in the survey data conducted once in every five years is a testimony to this.

As Canadians, your ultimate goal must be financial freedom. If you get in a financial crisis (God forbid!) it gets difficult to overcome it immediately. But, having adequate financial education can solve the problem faster and better it in the long run. Education and skills will determine how much you make, whereas it is financial literacy that will decide how much you save, how hard it works for you and for how long you can pass it on to.

Whether its the working of new-age online banks or the emerging robo-advisors in Canada, be ready to equip yourself with the financial changes taking place around you.

After reading this, you might have become aware of the pivotal role that financial literacy plays in our daily life and personal growth. Basic Financial Literacy is a must not only in Canada but across the globe. What do you feel? Do share your views.