59. Are you financially literate?
Are you financially literate?
November is Financial Literacy Month in Canada and this week's episode is dedicated to that! We talk about the importance and benefits of financial literacy and then walk you through a quiz to see where you'd land on the literacy scale.
Of course, to help improve your financial literacy, please go back and listen to previous episodes of the podcast to learn more about the topics we discussed on this episode.
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Transcript:
Evan Neufeld: Hello, and welcome back to the Canadian Money Roadmap Podcast. I'm your host, Evan Neufeld. Today Jordan Arndt is back with me and we are talking about financial literacy, some things to know, and a little quiz to see if you pass. Jordan, it feels like we haven't been on the mic in a long time.
Jordan Arndt: It's been a minute. You were out, what, having babies I guess.
Evan Neufeld: I specifically wasn't, my wife was doing that part. Good point. Yes, she was doing all the hard work there. But yeah, we tried to record a number of these podcasts at a time here, and so we haven't been recording for a little bit, but good to be back. Yes. We now have two kids at home and I sleep less than I ever have. So if you're catching me sounding a little bit groggy, a little bit under the weather, it's probably accurate. Jordan, how you feeling? I feel great personally. Perfect. Well, November here. You should be listening to this sometime mid-November. November is financial literacy month here in Canada. Jordan, what are you doing to celebrate? Do you got the decorations out?
Jordan Arndt: Yeah, for sure. We just got out of Halloween. We took those decorations down quick, put up the “fin lit” decorations up also quick. My basement is full of “fin lit” decorations, it's unbelievable. You know, it's a quick turnaround between now and Christmas though, so there's a lot of blow up lawn decorations this time of year. Let's just leave it at that. Oh, this is good.
Evan Neufeld: Anyways, good sarcasm to start the episode here. Anyways today, if you didn't pick up on that, we're going to be talking about financial literacy because November is financial literacy month, which essentially is just a time where the government has said, we're going to focus on some of these things to help people understand their money a little bit better and improve their financial lives.
So today we're going to talk about some of the reasons why that actually matters. Talk about a huge survey that was done a number of years ago, it was 2014. Some of the results of that and part of that survey was a variety of questions. Jordan, are you cheating right now? Are you looking at the questions?
No. Okay, good. Because I'm going to ask them to you live and we'll see if we can pass the test here. I think I'm ready.
Okay, good. Yeah, we'll go through some of these basics to understand that, but let's start with what is financial literacy and why is it important? I think the word illiteracy doesn't feel very good. There's some baggage that comes along with that, but when I think of financial literacy, it's just having a good understanding of how your money works and the systems that are in place around it. Would you agree? I think that makes sense. Yeah. Big ones would be debt, investing, interest, and risk. Those kind of cover the main things here. So why is financial literacy or money. I don't like money smarts either. I've heard that before, that implies money dumbs on the other end of it. But just understanding of your money. The big one that that jumps out to me is debt management, because right now, as interest rates are climbing like crazy now, it has so much more impact if you carry a high debt burden. Many people unfortunately who have used a credit card or borrowed from a bank recently, haven't passed this financial literacy test. I'm going to come to that later when we talk about that, but there's some major issues associated with that.
Jordan Arndt: Yeah and beyond even just basic debt, mortgages, car loans, whatever. Anything with an insurance cost or, sorry, an interest cost tied to it, like you said, credit cards, lines of credit, you know, just understanding what those costs are and how they might impact your situation can be huge.
Evan Neufeld: Big one there. You talked about payments. So, I've bought cars recently last summer. My wife and I, we bought an RV and I was shocked at the financing terms that were quoted. On an RV, the financing terms, they're like 10 and 15 years. It's like a mortgage on your plywood box that depreciates like crazy. But those biweekly payments, boy, they're attractive.
Jordan Arndt: Put that in the will, pass that debt along to your kids.
Evan Neufeld: Yeah. Well that's kind of the root of the word mortgage. It's a, debt until you die. Like the mort, My Latin is a little rough, but that's where that kind of comes from. Yeah. Anyways. So, you know, when you buy a car and say, What do you want your payment to be like, Oh boy, what are the implications of that going backwards. You can go back to listen to episode number two. I think I talk about buying a car because that's pretty critical. Another reason why financial literacy is important is that there's some interesting academic research that was done. Looked at a variety of outcomes, but there's some evidence that shows that there's improved retirement savings in many cases, significantly more. And the main difference, they were able to isolate between people with enough financial means to retire and those without, was financial literacy.
Jordan Arndt: This one makes a ton of sense to me. Someone shoots themself in the financial foot early on in life. Takes a couple decades to recover. These are all kind of related, debt, interest, risk, all that sort of stuff. Maybe you don't get out of that until you're 40. Well, now your timeline to retirement is less so you don't have the opportunity for the time value of money to be working in your favor. However, if you have some of those basic financial literacy skills coming out of high school per se, and you start getting jobs, or you're earn some real income and you can start putting some money away, you've got decades ahead for compounding the work in your favor. Like you can just see how if you start buying the eight ball, that's going to impact your long term savings, which is what retirement savings really are. So yeah, that makes a ton of sense.
Evan Neufeld: So in that case, we're kind of talking about playing offense with your money, so that's trying to get ahead. But financial literacy looks at both. So if you're playing a whole, again, I'm a big basketball fan. Same players are on the court for both offense and defense. And that’s you, you got to make it work. So it means defense, meaning not getting yourself in trouble, that's debt management, that's budgeting, whatever, but getting ahead to, So that's investing and saving and increasing your income. So, Financial literacy is important for playing offense and defense with your money.
Another one, improve confidence. A lot of the folks that we deal with here might be high income earners, might be good savers, but still not necessarily the most confident, which leads to stress and all sorts of things that you don't want when you think about your money too. So the more I've found with my clients anyways, the more my clients understand what's going on, financial literacy, the better they feel regardless of what the stock market's doing or anything like that at any given time.
This one is maybe a little bit more specific. Financial literacy is important because it helps people avoid unfair expenses. So think of like payday loans. I might get some eye rolls from people that are listening. It's like, that's not important to me. It's like, boy, it's important for a lot of people, so maybe you know somebody that's using these things and thinks it's a good deal or something like that. They are extremely expensive and even just a basic level of financial literacy and understanding could help avoid some of those major financial mistakes. Last one that I think is really important is it gives you less exposure to scams and just regular financial garbage that you see. I might lose some subscribers here, Jordan, but I think cryptocurrency might be adjacent here. Maybe not a scam, but something that if it sounds too good to be true, it probably is kind of thing. Interesting thing about the data around the people that are more likely to participate in cryptocurrencies and other related types of speculative investments, males with high levels of income and low financial literacy. What do you think? Have you seen any of that in your life? I think, yeah, that tracks. Let's take a look at some of the research that's been done on this topic. So, S&P, so you might have heard of S&P or Standard and Poors through the S&P 500. They are a global ratings agency. Just think of them as a financial institution, and they wanted to have a better understanding of global financial literacy. So they paired up with a number of other institutions to see how good or how bad financial literacy was around the world. So back in 2014, they looked at 140 countries and 150,000 people and they performed this survey. Let's talk about some of the results first, and then we'll put Jordan to the test here and I think I have good faith in Jordan. I think you're going to pass personally. However we'll break down the answers here and explain why some might be right and some might be wrong. So Canada, Jordan, where do you think Canada falls on financially literate countries in the world?
Jordan Arndt: I would think we're going to be pretty high, to be honest.
Evan Neufeld: Pretty high. Here we go. We would fall probably about as high as it gets. So the highest range, I think got to 71% of the population of that country being financially literate. I think we fell at 68%. Pretty good. Let's call this good news, bad news. Good news is we're probably the highest, bad news is is only two out of three people are actually financially literate.. We've got some work to do there. So you know, you might expect higher income countries would typically be more financially literate. That's not always the case, to be honest. We look around the world, Canada, the US, UK and Australia are near the top, but the drop off from there is pretty significant. I'm not going to spend too much time there. Around the world, the average actually comes out to only a third. So 33% of adults worldwide are financially literate. So compared to the rest of the world, we're actually quite high. Now when we look at the different concepts that people struggle with and are really strong with, the ones that people do the best with around the world are numeracy, so that's just understanding the concept of interest and inflation. They're the most understood concepts. My theory on that and maybe they have that in the full breakdown of the survey. Is that a lot of countries outside of North America, Yes, we're dealing with inflation a lot right now. When the survey was done we weren't. However, other parts of the world have struggled with inflation for a long time. So they are painfully aware of it. Even if our inflation was averaging what, one and a half, less than 2% for the last decade or so. So to me that makes good sense, that inflation and interest would be understood there. However, the least understood concept is risk diversification, globally. Interesting. Very interesting to me. Let's maybe go into asking these questions here and we can give you the answers as we go. Jordan, you ready? I think I'm ready. I can turn my computer around.
Jordan Arndt: I think I'm ready.
Evan Neufeld: Okay. This was from the S&P Global Financial Literacy Survey. These were the questions that were asked. There was only, there's five questions under four categories, and you pass if you get the answers right in three out of four categories. Fair enough? Yep. Let's start with risk diversification. The hardest one. So if you get this one right, you know you're good. Okay. Number one, Jordan, let's suppose you have some money. Is it safer to put your money into one business or investment or to put your money into multiple businesses or investments?
Jordan Arndt: I believe that it'd be safer to put my money into multiple businesses or investments. Final answer.
Evan Neufeld: That is correct. Yes. The answer is multiple businesses. And again, this is the question that most people, including here in Canada, got wrong the most.
Jordan Arndt: This is great because we just did an episode about single points of failure recently, which touches on this concept.
Evan Neufeld: Yes, so this is the basic idea of diversification. I like to use an example, maybe people don't really remember this one, but back in the early two thousands, Enron was one of the largest companies in the world. Turns out they were a massive accounting fraud, and the company went to zero. So let's say hypothetically, you had all your money invested in Enron stock and it went to zero over the course of three months or whatever it was.
You now have nothing. Let's call that unlimited risk. Okay, so you went from one of the best performing stocks in the world to nothing. However, what if you only had half your money in Enron stock and half of it in Apple? Well, right around that time, Apple released a little product called the, Do you remember?
Jordan Arndt: Xbox
Evan Neufeld: Don't do that to me. No, the iPod. The iPod was in 2001. So the iPod came first and there was kind of a prestige product and it was like, Ooh, what's this Apple company? And Steve Jobs came back not too long before that and things like that. But what if you had half of your money in Enron stock and half your money in Apple stock? Well, you only lose half?
There we go. Sure. Let's just hypothetically lose half of it. That's diversification. So you were able to diversify away that risk of one company going to zero. What if we split it a third? So you had a third of it in Enron, a third of it in Apple, and a third of it in Amazon. What about quarter, we can keep going here, right? And so eventually, as you have more of your money in different companies, in different industries, different sectors, potentially different countries, that's where you can increase your odds of success, even if there are individual failures along the way. This is why mutual funds and ETFs make a ton of sense, because you pool tens, hundreds, and many cases, thousands of individual companies all in one, and you get rid of that individual risk of one company going to zero. Any other comments on risk diversification, Jordan?
Jordan Arndt: I mean, we've probably all heard the expression, Don't put all your eggs in one basket. This is it.
Evan Neufeld: Yeah, that's the answer to that one. Okay. Inflation. This is painfully a little on the nose right now. This one relates to your income as well. Question. Suppose over the next 10 years the prices of things you buy double. If your income also doubles, will you able to buy less than you can buy today? The same as you can buy today, or more than you can buy today?
Jordan Arndt: If my income's going up at the same rate as what I want to buy is going up, I think I'd be able to buy the same amount today as the future. That is correct?
Evan Neufeld: Yes, absolutely. So this looks at inflation, but also the pesky math of percentages. I could probably do a whole episode on that and how percentages can kind of mess with your mind. But essentially, let's just use a hypothetical here. So if what you buy costs $20,000 a year, now, 10 years from now, it costs $40,000, but your income goes from 50,000 to a 100,000. The ratio between the two stays the same. So you should be able to buy exactly the same as what you could before. Pretty straight forward. Now let's look at what they call numeracy or interest. No trick questions here. These aren't not intentionally trying to trick anybody. Suppose you need to borrow a hundred US dollars, I'm going to turn it on its head here. You need to borrow a hundred Canadian dollars. You're borrowing a hundred dollars. What is the lower amount to pay back? Okay. What is the lower amount to pay back from these two options? Option one $105 or option two, a hundred dollars plus 3%,
Jordan Arndt: Option two.
Evan Neufeld: That is correct, Yes. Okay. Interest is often stated as a percent. The nice thing about this question is that a percent is a number related to a hundred. So if it's 3% on a hundred bucks, that's $3. In this case, less than 105, 103 is less than 105. They could have made these questions harder, I think. However it's good to have that basic understanding. So 20% interest, $120. Quite a bit more. Okay, so that's basic interest. Now the final set of questions here, there's two questions in this. One similar, but it's about compound interest. Okay, question: Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Boy, that would be nice. 15% per year, and then this is two years again. Will the bank add more money to your account in the second year than it did in the first year, or will it add the same amount of money both years?
Jordan Arndt: More.
Evan Neufeld: That is correct. They will add more. And let's break that down because in the first year, let's go back to this a hundred dollars example here. So you have a hundred bucks in there and they're going to pay you 15% per year. So in the first year, you put in a hundred, at the end of the year you have 115.
Jordan Arndt: Second year, they're going to give you another 15%, but on my $115 now, not a hundred dollars.
Evan Neufeld: That is correct. And so 15% on 115 is actually $17.25. I didn't do that math in my head, these are tricky numbers now. Now we're dealing with tricky numbers, but the important thing is the content is that your second year is interest on top of the interest. That's compound interest. And this
Jordan Arndt: And this is why I think the one that made the most sense, like why financial literacy is important. One of the reasons was increased retirement savings. Like this is it. If your money can compound at whatever rate of return you think you can get, doesn't matter if it can compound for more years at that, you will have more money than if you have less years for that to compound.
Evan Neufeld: Let's go to the last question here. You've already passed, by the way. This is spectacular. I was kind of nervous. I'd be nervous for sure doing a financial podcast and you might not even be financially illiterate. Okay, last one. Suppose you had a hundred dollars in a savings account and the bank adds 10% per year to the account. What a loser bank this one is. 10% per year to the account. How much money would you have in the account after five years, if you did not remove any money from the account? 10% per year, five years, would you have more than $150, exactly $150 or less than $150?
Jordan Arndt: More.
Evan Neufeld: You would have more, exactly. What we call simple interest, and you're just adding 10% per year for five years. Well, that's 50 bucks, so you'd have at least 150. However, again, in that first year, you'd have 110, and then you'd have your interest on top of that one, and then again and again and again.
So in your last year, you actually have $161 and 5 cents. Not bad. I would say that's even better than 150.
Jordan Arndt: That's about $11 better.
Evan Neufeld: Awesome. Okay, so now listeners, if you have followed along with those questions, hopefully they sounded basic to you, but maybe that gives you a good understanding of what level of financial literacy that the world is at.
If you know somebody in your life and you want to share this podcast with them, feel free. Test your knowledge. The Government of Canada actually has a different test on their site. It covers off a lot of other things, but I think this one is probably the most instructive for just basic concepts.
But yeah, if you are able to answer those questions accurately about risk, diversification, inflation, interest, and compound interest, you're probably in good shape also. iI you've been listening to the Canadian Money Roadmap for two years, I hope you're probably in better shape than the average bear too.
Finally, the thing that I'm going to mention here is some resources from the Government of Canada because it is Financial literacy month. In the US I think theirs is in April. So you might hear about this again in a few months if you follow any American planners or podcasts or things like that. But I will have a link in the show notes here to our resources for Financial Literacy Month, which includes a financial goal calculator, budget planner, mortgage calculator, a number of resources for how to manage money when interest rates rise, making a plan to pay off your debt. What to consider before borrowing money, knowing your rights when borrowing money, that's a good thing to know about. Debt management options, all sorts of other things on here. Great resources to use, especially if you're just getting started and you need some help with those kinds of things. Listen to some former episodes of our podcast too. We touch on a number of these topics in a lot more detail going back, but I think this was good to talk about today. Any final thoughts about financial literacy?
Jordan Arndt: I don't think so. It's important though, like these concepts, hopefully everyone's kind of heard of them at least a little bit. You know, we're not getting to the nitty gritty weeds here of finances, but a basic understanding of these things can go a long way to increasing your success over the long.
Evan Neufeld: Everybody's got to start somewhere. And ticking off these boxes at the very beginning I think is important. So thanks for taking the time to listen. If you found this interesting, feel free to send us an email at hello@evanneufeld.com. And if you like the podcast, click follow on the podcast player of your choice or subscribe or whatever language they use. And we'll see in a couple weeks.
Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.