Financial Literacy

September 24, 2019

Financial literacy is a “buzz” term that is thrown out to indicate a level of sophistication usually in relation to debt management.  But what exactly is financial literacy?  In the most simplistic definition, we might think of financial literacy as “understanding how money works” – nonetheless, understanding how money works, especially in relation to debt is a very complex matter indeed.

To understand how money works we need to have a broader understanding of how it is created in the first place and that would take a lot of study.  The easiest way to express how money works is to say that it doesn’t actually exist, which is true, money is no longer quantified merely by dollars and cents.  Today, money is a digital expression of value based upon ever changing rules of trade in computer data bases.

If consumers could create money in the same way as banks poverty would no longer exist, we would basically pretend we had money and spend it and for each dollar we spent we would have ten more dollars to spend.  This is the basic principal of fractional reserve banking as can been in this explainer video.

Financial literacy is something that is often preached from high places with little if any real effort to implement a meaningful educational strategy.  At the simplest level of literacy – balancing a budget – twenty-five years of working in the insolvency industry has taught me that poor people are far better at it than more affluent people (who can generally afford to waste money).

Mortgage debt is the most sought-after debt in Canada, many consumers think of mortgages as “good debt” – a better understanding of finances might suggest otherwise, no debt is good.  Certainly, the purpose of mortgage debt is preferable to credit card debt, but that doesn’t make it good.  We have blogged before about the extremely high cost of compound interest on mortgage debt which deceives many less financially literate people.  Adding a longer term to a mortgage renewal is far more costly than most mortgagees think.

Similarly cashing out RSPs in order to acquire a mortgage is something that should require more than a knee jerk reaction to impulsively purchase a house.  Interestingly, when I took the OREA course in the 1980s, we were taught that the average Canadian makes the decision to purchase a house within 14 minutes, that’s impulsive!

When RSPs are collapsed 15 years of repayment, either directly to RSP or to the CRA for income taxes, will follow.  The latest government initiative to allow CMHC to offer no interest loans, in order that people can enter the housing bubble, serves no interest except that of mortgage lenders (mostly banks) that are finding consumer debtors are over saturated with debt.  Again, see previous blogs for further discussion.

Grandma used to say; “never a lender or borrower be” and there is great wisdom in that simple sentence.  Some debt is difficult to avoid – debt for a house purchase or car loan for example, but sadly more and more Canadians are using debt to purchase the necessities of life, food, clothing, electricity, gas and so on.  All the financial literacy in the world won’t help reverse the debt bubble that we live in – what seems more important, yet lacking, is meaningful consumer protection from the government to stop, slow or curtail current lending practices.

Bankers’ financial literacy is simply not there either, financial advisers are trained in hours, days or weeks and lack the depth, life experience and sophistication necessary to give good advice to bank clients, this topic was previously discussed in several CBC news articles.  Bank staff are basically debt salespeople – the main product that banks offer their clients is debt and there is little negotiability for most forms of consumer debt. 

If you seek to improve your own financial literacy you will find that you face a tremendous challenge.  Sadly, there are no high school, college or university programmes that can possibly prepare you to have a full and comprehensive understanding of consumer finances.  You are on your own, caveat emptor (“buyer beware”).  It is doubtful that your lawyer will explain all the nuances involved in the standard terms of a mortgage agreement, indeed it is doubtful that your lawyer has actually read them.  Now, I don’t mean that to sound disparaging of lawyers, it is simply the case that these, and other, common “everyday documents” are extremely complex and overlaid and intertwined with clauses that favour lender protectionism.