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How Canadians overestimate their financial knowledge — and pay the price

Man stressed out about financial situation

There is a dangerous gap between what we think we know about our finances and what we actually know about money management. 

In a new report, data revealed that the majority of Canadians felt confident in virtually every area of money management. Of the 6,551 respondents from across Canada: 

  • 70% felt confident about their overall financial knowledge;
  • 82% report they are good at keeping track of money;
  • 79% report they are good at making ends meet;
  • 76% believe they have a clear idea of what financial products they need;   
  • 70% report they have a “good idea” of how much money they’ll need in retirement.

This is good news, given the relationship between financial confidence and financial well-being. According to a 2016 report for the Financial Consumer Agency of Canada: “Financial confidence is a better predictor than financial knowledge when it comes to outcomes associated with day-to-day money and debt management.”

How we handle money tells a different tale

While our confidence may be high, when tested on our knowledge of money management and financial decisions, our performance told a completely different story. 

Key results, from the data, showed: 

  • Almost half (46%) failed the basic financial literacy test
  • 78% said they’d run out of money in 90 days or less if they lost their job today;
  • 77% are willing to neglect saving for retirement in order to buy a home sooner;
  • 66% of renters are willing to buy a property where household payments would exceed 30% or more of their income; 
  • 1 in 5 don’t have life insurance;
  • Little over half of Canadians (56%) have a written will.

Risks of poor financial literacy

Poor money management can lead to serious budget crunches as well as current and future lifestyle consequences.

In particular, the Financial Literacy vs. Financial Sufficiency 2020 report showed a few major gaps between what Canadians believe they know and how they act. 

Gap 1: Higher debt levels

The data suggests that despite confidence in money matters, those who lacked financial knowledge tend to carry higher levels of debt — and appear unaware of the short and long-term impact of high-interest debt.

For example, 60% of respondents understand compound interest and 80% knew that making late payments to credit cards (or loans) can hurt your credit score, yet 33% of respondents typically carried a balance of $1,001 or more on their credit card and 27% believed it was “ok to skip a payment now and then as long as you eventually pay it.” (Turns out 5% of respondents didn’t know if it was OK or not.)

Gap 2: Unprepared for the unexpected

infographic how quickly Canadians would run out of money if they lost their job

The best way to manage debt wasn’t the only area where our knowledge and actions were incongruent. 

When it came to protecting ourselves from future financial pain, most Canadians (82%) knew that an emergency fund should hold at least six months’ worth of expenses. Ontario residents, for example, would need just over $45,000 in a just-in-case-slush-fund (based on Statistics Canada 2018 cost of living standards). Yet, data from Zolo’s Financial Literacy vs. Financial Sufficiency 2020 report shows that only 13% of respondents have an emergency fund with more than $10,000 saved. Worse, 2% don’t know if they have an emergency fund and 7% report no savings to cover unexpected costs. 

Gap 3: Cash flow problems now, cash flow problems later

Most Canadians now realize the importance of using a budget with 88% believing that it’s one of the primary tools to manage financial decisions — and, yet, only 30% of respondents stick to their budget. 

Zolo infographic on why Canadians use financial budgets

This lack of planning and monitoring of our finances can impact our day-to-day money management — a situation made worse by the impact of the novel coronavirus.

Impact of COVID-19 on our financial health wasn’t good

Since the COVID-19 pandemic, confidence in our ability to make sound financial decisions has not waivered; however, our ability to meet our financial obligations has suffered: 

  • 55% reported being behind on two or more consecutive months in paying a bill;
  • 47% were behind on two or more consecutive months in making a loan payment; and
  • 47% reported being behind on two or more consecutive months in paying their rent or mortgage.

Gaps in financial literacy cause gaps in financial sufficiency

There is little doubt that confidence is a key component of financial literacy, but as the results of the Financial Literacy vs. Financial Sufficiency 2020 report highlight: When it comes to financial literacy, one of our biggest obstacles is our own pride.   

This isn’t an unknown fact. In a 2017 study published in the Journal of Behavioral and Experimental Finance, author Camilla Stromberg et. al illustrate how confidence leads to self-control — and self-control is the biggest predictor of how well a person will manage their money.

What is financial literacy
Financial literacy is a set of skills combined with knowledge that allows someone to make informed and effective financial decisions.

To overcome the uncomfortable truth that pride gets in the way, we need to work at making financial education and money management tools more accessible; at the same time, we need to nurture a culture where mistakes and errors are considered opportunities and not setbacks.

It’s time to shift the focus. Too often we want to hide our money management missteps as if it’s some shameful secret. We need to celebrate learning, not hide our ignorance.

To elevate financial literacy, we need to focus on these three key components:

  • Knowledge: refers to an understanding of personal and broader financial matters; 
  • Skills: refers to the ability to apply that financial knowledge in everyday life; and
  • Confidence: allows each individual the self-assurance to make important decisions. 

Virtually every Canadian would benefit from access to free financial education

As a nation, we need to start focusing on the skills that will help build knowledge, habits and confidence. From an early age, this means focusing on learning the tools that help with:

  • budgeting;
  • banking;
  • saving and investing;
  • using credit and debt;
  • and the impact of interest and taxes.

To help, the Zolo Financial Literacy vs. Financial Sufficiency 2020 report offers insight into: 

  • The disconnect between the confidence in our knowledge and what we really know, based on our actions;
  • Insight into our current and ongoing priorities and how best to achieve those goals in a financially prudent manner;
  • A snapshot of how financial education has helped guide Canadians in making better financial decisions;
  • A glimpse into the areas where Canadians could still benefit from free, universal financial education and skill-building.

The report also breaks down the information pertinent to home buyers and homeowners: 

  1. How first-time homebuyers — and millennials still prioritizing homeownership — can save up for a home, even in economically unstable times. Read more here
  2. How homeownership offers safety and security, even in uncertain times. Read more here.  
  3. How COVID-19 impacts real estate. Read more here.
  4. How to get approved for a mortgage or get the best rates by improving your credit score. Read more here.

Learning each of these skills is a lifelong process.

Regardless of how or when these skills are learned, they are integral to helping each of us to achieve a lifestyle that is financially balanced, sustainable and responsible. If we are on or near this ideal then we have achieved financial literacy. 

Survey Details

The survey data used for the Zolo Financial Literacy vs. Financial Sufficiency 2020 Report was collected through an online survey between September 19 to October 12, 2020. 

The online survey asked 6,651 respondents a variety of opinion, self-report and knowledge-based questions in order to measure financial knowledge, confidence and skills — all of which are integral to financial literacy. 

The estimated margin of error is +/- 1.59 percentage points, 19.8 times out of 20.

Image of Romana King

Romana King

Romana King is an award-winning personal finance writer, real estate expert and the current Director of Content at Zolo Homebase. Romana has contributed to business and lifestyle publications including, Toronto Sun, Maclean’s, MoneySense, Globe & Mail Custom Content Team, and The Toronto Star. Among her achievements, Romana won silver for her annual Where to Buy Now real estate package in the 2019 Canadian Online Publishing Awards. In 2015, she won a SABEW Business Journalism award. When she was editor of CI Top Broker, Romana helped guide her team to obtain its first KRW Business Journalism nomination, and in 2011, she was part of a small team that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards. Her north star is to consistently provide actionable, valuable and accurate information that helps elevate the financial literacy of everyone.