Archive for June, 2015

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Financial Literacy Report Cards: Teaching Top 6 Skills

It’s report card time for kids, but it’s also a good time for parents and teachers to reflect on the level of financial literacy among students, and bringing more effective financial education to next year’s curriculum, which begins just a couple of months from now.

Unfortunately, despite a plethora of free resources available to teachers, there still seems to be considerable resistance to delivering key life skills in the area of financial education.

As a member of the Federal Task Force on Financial Literacy, I have spent significant time reviewing excellent presentations from hundreds of stakeholders. It appears that some progress has been made in developing a greater awareness for the importance of the issue in a modern world. However, there is much work to be done.

Financial education begins with understanding basic financial math, but includes much more to meet the definition of financial literacy: having the knowledge, skills and confidence to make responsible financial decisions.

Here are six practical skills teachers may wish to include in their curriculum next year; readers may wish to weigh in with further suggestions:

Basic Math: How to add, subtract, multiply and divide in your head so as to understand the best per-unit price of any consumer product you are buying in a retail outlet.

Percent: What is a percentage? And how to use the concept of per cent and proration in day-to-day life . . . try to explain this to your kids; the concept is more difficult than one may think.

Recurring Costs: One of the biggest increases in the CPO is the cost of entertainment. Kids and parents alike could benefit from learning how to calculate the annual cost of a recurring expense (such as a cell phone or custom-designed entertainment sites) over a period of 1, 3 and 5 years.

Adding Interest: Computing the cost of interest (a) on a purchase (b) on investments (c) on a credit card to find the real cost of that pair of shoes or electronic device can be an eye-opener.

Finding New Money: The real dollar benefit of paying off consumer debt faster is an interesting exercise that shows kids—and their parents—how to free up new money for investment purposes. It’s a great lesson in saving for the future, too.

Why Save? The benefit of investing rather than spending just got so much brighter with the $10,000 TFSA contribution room. Helping kids to aspire to their first TFSA account is like teaching them how to win the retirement lottery . . . think about it.

Making responsible financial decisions throughout one’s lifetime is as much about having hard numeracy skills as it is about gaining the insight that comes from learning financial behaviors that beget the right results: how to meet your life goals with financial peace of mind.

Consider the following as teachable subjects at home and at school:

Money and emotion – how would you show your children that emotion can be attached to money, to the detriment of your personal goals?

Money and responsible choices – what’s a good choice and what’s a bad one?

Financial decision-making – how do you make a decision about spending and saving money using examples of benefits for the short term and the longer term?

Consequences of financial behaviors – how do you teach children to recover from financial mistakes or build on great financial decisions?

Summer time is a great time to increase financial literacy and integrate responsible financial behaviors before the mad “back-to-school” spending frenzy. Thinking about this important life skill with more purpose is an important part of growing up . . . no matter how old you are.

In the meantime, kudos to all the fine work teachers do to influence responsible citizenship. Have a wonderful summer!


Three Essential Ingredients for Building Wealth

Father’s Day is coming up. It’s a perfect time to reflect, cherish and remember the financial wisdom your father instilled in you and how it shaped your life.

The author of Rich Dad, Poor Dad, Robert Kiyosaki, offers many important quotes about health and wealth throughout his book, but here are two of my personal favorites:

• “The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant.”

• “I am concerned that too many people are focused too much on money and not on their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve the problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.”

A healthy mind, a sound, lifelong education and financial wisdom: three ingredients to wealth creation. How right is Mr. Kiyosaki? Spot on, in Canada at least.

Over time, changes in net worth can lead to shifts in wealth concentration, says Statistics Canada in a June 3 review of their Survey of Financial Security. Age and education have a lot to do with that; so do healthy financial behaviors, which underscore the importance of tax and wealth planning advice.

Net worth is an important measure to track; an increasing trend in this metric indicates a healthy balance between asset growth and debt reduction. In other words, wealth will grow when people make choices to spend less than they make and invest in assets that will appreciate in value and produce investment income.

The statistics, in fact, underscore the importance of committing to responsible, life-long financial behaviors to guarantee a prosperous future.

On a national scale, 3.5% of Canadian family units have little or no wealth. What’s frustrating is that these numbers are unchanged in 13 years (3.3% in 1999). Who are the people in this circumstance?

• Singles. At the top of the list are unattached individuals and lone-parent families. This speaks to the need for people to be connected, make good choices about their partners and think carefully about the circumstances around which they start a family.

• The Young – 15- to 34-year-olds. Financial knowledge and skills are critical to this cohort, who set spending and saving habits in these formative years.

• The Uneducated. Finally there are those who haven’t achieved a high-school diploma. Education is critical to financial success later in life – a key factor in the ability to earn sufficient income to buy a home and invest in the financial markets.

It is true that if you are well educated, income will be higher, and the opportunity to own assets will be possible. However, debt may also be higher. In 2012, top earners held 47% of the total household wealth (compared with 45% in 1999) but also held 41% of all debt (compared with 40% in 1999).

The key ingredient in wealth inequality is the purchase of real estate assets, which, according to the study, represented 57% of total assets. For families in the top income quintile, the share of real estate ownership increased from 34% to 40%.

Mortgage debt, meanwhile, was blamed for three-quarters of all debt in both 1999 and 2012 across the board, yet for the poorest home owners mortgage debt represented 64% of all debt. That’s an increase from 61% in 1999.

This speaks well to the important three-part role tax and financial advisors must take with their clients:

Educator. Tax advisors and financial advisors working together have an important role to play in counselling young people in the principles of Real Wealth Management – how to accumulate, grow, preserve and transition wealth with sustainability.

This is a great investment in the future growth and transition of the family wealth they may be accounting for today.

Advocate. Income counts when accumulating assets and in managing debt. Look for relationships with tax and financial advisors who are interested in working hard with the whole family to create more after-tax income that can be put to work to acquire assets and manage debt.

Steward. “The careful and responsible management of something entrusted to one’s care. . . ,” that’s the definition of stewardship from the Merriam-Webster Dictionary. Growing healthy, well-educated children is the job of parents. Growing healthy, tax-efficient financial portfolios that build sustainable wealth is the work of a dedicated wealth advisor.

Wisdom results when collaboration is sprinkled into the decision-making process. Cherish your dad and his gifts of financial wisdom this weekend…


“Atrocious” Economic Data, but Healthier Household Debt Ratios

The most recent economic data is indeed atrocious, as Bank of Canada Governor Stephen Poloz predicted in England late last year. But there is some terrific news in the data that was released last week on the first quarter results: Canada’s household debt service ratio fell to 6.74%, its lowest level since this number was first recorded in 1990.

It’s been a tough year in economic forecasting. Seven months ago Poloz predicted Canada’s economy would grow 2.4% in the first quarter of 2015; but that was before oil prices tanked, the US economy sputtered, and in Canada activity decreased in natural resources, construction and exports.

We weren’t alone – the US economy had its issues too.  The US Conference Board blamed bad weather, a west-coast dock strike and weak global demand for exports, and warned, “what isn’t likely to change is very low inflation and a squeeze on profit margins as costs rise but prices do not.” The May 15 report predicts a modest interest rate increase at the short end of the yield curve late this year or early next, “but we expect very little change at the long end of the yield curve.”

Meanwhile, back in Canada, hard numbers were released by Statistics Canada on May 29—atrocious, as predicted by Mr. Poloz:
• Real gross domestic product (GDP) decreased 0.1% in the first quarter, as opposed to growth of 0.6% last quarter. Stats Canada says this is the first negative growth rate of real GDP since 2011.
• Exports of goods and services fell for the second quarter in a row (-0.3%), following a 0.4% decline in the fourth quarter of 2014.
• Imports fell too: running at only 0.4% after three consecutive quarters of positive growth.
• And the terms of trade tanked for the fourth quarter in a row: export prices fell while import prices increased.

So where is the good news? If you are an employee you made more, especially if you were in the service industry. If you were producing goods, you’ll have seen a slight decline.

Also, household saving rates (the difference between disposable income and household expenses) went up to 5% in the first quarter, a good showing from a rate of 3.6% in the fourth quarter of 2014. Still, the national saving rate (measured as a percentage of national income) declined to 3.5%, the lowest level since the third quarter of 2010.

More important, according to Statistic Canada, the household debt service ratio, (which is household mortgage and non-mortgage interest paid, divided by household disposable income) fell to 6.74%, the lowest level since being first recorded in 1990.

However, when we look to comments by the OECD on the global economy and inflation in its Interim Economic Assessment on March 18 this year, savers hoarding money could also be a sign of other difficulties:

“Year-on-year inflation is already negative in a larger number of countries than at any time in recent decades, and that number is likely to grow before the effects of the oil price decline start to drop out in the second half of the year. It is possible that 12-month inflation will be negative in the five largest economies at some point in the first half of 2015, which would be unprecedented.”

What does this all mean to hard-working Canadians? Deflation increases the real value of debt, so it’s important to get out of debt. But deflation can also discourage spending because people think that prices will drop in the future. When consumers aren’t spending, tax revenues stall for governments and business growth, job security and economic recoveries sputter, too.

That’s why, in times of uncertainty, it’s important to keep a sharp focus on your net worth, and the composition of after-tax income streams. The best buffer against quarter-over-quarter uncertainty in global economics might just be a healthy family balance sheet.