Financial Literacy Month: How to Plan for a Brighter Future

The dreaded financial talk. But what if it didn’t have to be?

November is Financial Literacy Month in Canada, a time for individuals to assess their current financial position and make improvements for a brighter financial future. 

What is Financial Literacy?

Financial literacy is, according to Investopedia, “the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.” How you accumulate that knowledge is up to you. If you wish to further your financial knowledge, consider resources such as traditional education courses, reading books, listening to podcasts, subscribing to financial content, or working with a financial advisor or other professional you trust.

In today’s economic landscape, finances can be a touchy subject. Food inflation and the housing market are only two ways Canadians feel a pinch in their pockets. A recent financial literacy test from the Canadian Bankers Association conducted by Abacus Data reveals Canadians struggle with a basic understanding of financial concepts. Of the respondents, just over two in three who participated in the study could answer most of the questions correctly, and 15% answered one or less correctly.

So, how can you increase your financial literacy? Below are tips to guide you in thinking about various financial goals, managing daily expenses, and planning for your future.

Goal setting

What are your financial goals? Maybe it is owning a second property, getting married, living abroad, or saving for early retirement. Whatever your dreams, setting goals to strive for when managing and planning your financial future goes a long way.

If you’re new to financial goal setting, set short-term financial goals. Doing so will give you a foundation you can build on, such as building an emergency fund, paying down high-interest debt, or creating a budget and sticking with it. Setting short-term goals will help give you the confidence to achieve larger, overarching goals that take more time.

When you’ve set your goals, write them down and with someone you trust: such as family, a close friend or your financial advisor. Individuals are more likely to achieve these goals if they are held accountable.

Additionally, determine the hierarchy of your goals, especially if you share finances with a spouse, partner, or family member. It is crucial to ensure your goals are aligned in order of importance so you can determine where your joint priorities lie and how you will work towards them.

Making (and sticking to) a monthly budget

Once you’ve set your financial goals, it is time to build a monthly budget to help you reach them. To start, track the amount of income you receive on a monthly basis against how much you spend. By closely monitoring your spending patterns, you can identify if your budget is accurate or if there are expenses or income you did not account for.

Additionally, routinely monitoring your spending habits can help you identify fraudulent transactions, such as unverified charges. You can manually track your budget using a spreadsheet or on paper; however, apps, including some banking apps, make digitally tracking your budget easy. 

Your budget should include items under four main sections:

Income (including but not limited to):

• Your paycheque(s)
• Investments
• Commissions
• Tax benefits
• Other support (such as spousal or child support) 

Fixed expenses (including but not limited to):

• Rent or mortgage payments
• Utilities
• Car payment
• Insurance
• Groceries
• Phone
• Loan payments

Discretionary expenses (including but not limited to):

• Pet care
• Eating out
• Entertainment (going out, subscriptions to Netflix or Spotify)
• Shopping
• Travel

Savings (including but not limited to):

• Emergency fund
• Retirement
• Higher education
• Residence

Managing debt

A monthly budget can help you manage debt by reducing spending in non-essential areas. If you have accumulated debt, consider developing a debt payment plan with a trusted advisor who can guide you in the best strategies to reduce your amount owed. These strategies may include reducing discretionary spending, prioritizing high-interest loan repayment, or consolidating debts. If debt is excessive and unmanageable, consider contacting lenders to renegotiate your repayment plan.  

Invest in your future

Where do you want to be in 10 years? Whatever your goals, creating a plan to invest in your future financial health will help set you up for success. There are several strategies you can take advantage of to benefit you, including but not limited to:

• If your employer offers a retirement savings plan, contribute the maximum to receive the employer match.
• Open a Registered Retirement Savings Plan (RRSP) if your employer does not provide this or you are self-employed.
• Open and contribute to a Tax-Free Savings Account (TFSA).
• Will you be paying for a dependent’s education or your own? If so, open and contribute to a Registered Education Savings Plan (RESP). 
• Create a diversified investment portfolio with the help of a financial advisor.

Understand credit

Knowing your credit score and how it impacts your financial health is vital for any financial plan. In short, a credit score is an evaluation of your credit habits and often includes several factors, such as:

• Your payment history, including paying bills when they’re due, missed or late payments, time they were unpaid, and frequency.
• The amount owing to all creditors, the types of accounts, and how much credit you have used.
• The forms of credit you use, like credit cards, mortgages, installment loans, and the number of accounts you have.
• Length of credit history dating back to your first credit account, including all activity that has happened since.

Pause to reflect

A financial plan is a great start, but you should regularly reflect on your goals and progress. Establish checkpoints to review your actions and ask yourself, “Am I on track to meet my goals?” By pausing to review your financial plan and progress, you can more easily stay on track and adjust your strategy to maximize results.

Connect with expert advice

Lastly, if you’re feeling overwhelmed or having difficulty with your finances, consider seeking professional advice from a financial advisor and other trusted professionals, such as insurance brokers and debt counsellors. These professionals can assist you in developing a plan to reach your financial goals, mitigate risk, and manage debt along the way. By connecting with a professional, they can provide you with personalized advice based on your unique financial goals.

Sources: 

Canadian Bankers Association

Government of Canada

Credit Counselling Society

Investopedia