The Importance of Making Good Financial Decisions

Topic: Wealth Planning

Nicole (Weiss) Louthe 

March 21, 2015


Print & Share

Print

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?

In our post about importance of making good financial decisions this McKinsey Report graph we see that debt-to-income is on the rise in Canada

From McKinsey Global Institute report, Debt and (not much) Deleveraging, February 2015.

 

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.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

More Like This...

See another Investments blog post that may be of interest to you.

The Demise of FTX and Sam Bankman-Fried

Topic:
Investments
Excerpt:
At the beginning of November 2022, Sam Bankman-Fried was crypto-currency’s “White Knight”. The flip-flop and t-shirt-wearing 30-year-old was the found

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100

Topic:
Wealth Planning, Living to 100
Excerpt:
“You’re going to live to 100!” For some, this may sound like a fantastic, welcome prognosis. They imagine gazing at sunsets every evening at the

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Lessons From the Art World and Beyond

Topic:
Investments
Excerpt:
“Exactitude is not truth.”

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know