The Importance of Making Good Financial Decisions
Why paying down debt is not “old school”
We are a few months into 2015 and in the headlines we continue to read about the same political and economic challenges that we have heard many times before and even a few new ones, like the impact of retreating oil prices. Sometimes, it is hard to believe the financial crisis of 2008 is actually 7 years behind us. On the bright side, there have been signs of renewed growth in developed markets, especially in the U.S., and investment returns over the past three years have exceeded expectations. However, we are living in a world of low interest rates and reports indicate that household debt levels have reached alarming new highs. Where are we now and have we really learned anything from the fallout of 2008 in order to prevent the same thing from happening again?
According to a report published by the McKinsey Global Institute, household debt-to-income ratios have continued to grow in many countries at an “unsustainable” pace. In Canada, the jump in the country’s debt-to-income ratio is second only to Greece, according to this report. Whether you believe things are truly this dire or not, low interest rates are only partially to blame for how we live today, in a debt-laden economy. Canadians have become comfortable with their debt load and paying off the mortgage as fast as you can is so “old school”. With interest rates continuing to be at historic lows, many figure it must be more advantageous to keep the mortgage at 2.9% and invest or spend any resulting extra cash flow. Paying off debt that carries non-deductible interest is really financial planning 101, so why isn’t everyone doing it?
You’re never too young to acquire financial literacy
One of the main concerns percolating in Canada is around people’s lack of financial literacy and their inability to make good financial decisions. For those working in the retirement and pension plan business in Canada, financial literacy has been a concern for at least two decades as plan sponsors have tried to get plan members to take an interest in their own retirement plans. These retirement and pension plan sponsors find that their members only start to take interest in their plans at around age 45, but by then it is too late.
The challenge is how to get youth to pay attention to important financial topics like retirement planning and debt when they are more interested in social media and instant gratification than planning for the future. In a recent editorial in The Pension and Benefits Monitor, there was a suggestion that the best way to teach Canadians financial literacy is to stop handing out credit cards. Instead, it should be mandatory to take courses on the use of credit cards. You would not be allowed to have a credit card until you pass the course. This could be applied to a host of other financial products as well – mortgages, car loans, RRSPs and so on.
In all seriousness, besides what little is taught in the school system, children can only watch what their parents do and look to them for guidance. As a result, parents need to think about teaching the next generation about the value of a dollar and how to manage it. It’s the focus of a Nexus article on a life-stage approach to the development of financial literacy. Alex Jemetz, the author of this article, is the newest member of the Nexus team.
1. The household debt referred to in the report includes mortgages and is based on Q2 2014 data.