It’s rare that the economy isn’t front and centre under most conditions. When business is booming and stocks are surging, the headlines focus on the bull in the market. In recent times, however, it’s all about the sluggish impact of COVID-19 and whether or not North America can pull itself out of the current economic crisis.
To put it in perspective, the unemployment rate in American in January 2020 was just 3.6%. In April, just weeks after the official World Health Organization pronouncement that COVID-19 was a pandemic, the unemployment rate skyrocketed to 14.7%. The number of unemployed Americans has gone down a bit, with the U.S.-based Bureau of Labor Statistics reporting an unemployment rate just under 8% in September 2020.
Canada was no different. In January 2020, the nation’s unemployment rate was 5.5% but by May this number had skyrocketed to just under 14%. By September the number of unemployed had dropped to 9% with almost a third of jobs lost, due to the pandemic, filled.
Given this tentative good news is there any reason to be concerned? Yes. According to a new report, money management was already a big challenge before the pandemic — and things may get worse, before they get better.
Financial literacy still needs work
Data from the report revealed that most North Americans (70%) feel “confident or “very confident” when it came to money management and financial decisions. Of the 6,551 respondents:
- 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.
While confidence is an integral part of financial literacy, it cannot replace knowledge or skills. Unfortunately, a recent report shows a big gap between financial confidence and personal finance literacy.
The evidence of this gap shows up in how we handle financial setback or unforeseen circumstances — such as the impact of a global virus that temporarily shut down economies across the world.
According to the data, almost half (46%) of us wouldn’t pass a basic financial literacy test — a test designed to evaluate how well we understand basic financial concepts such as interest charges, taxes, credit card use, impact of debt, and investing concepts.
Data also shows that more than three-quarters (78%) of North Americans would run out of money in 90 days or less, if they lost their job today. Almost a quarter (23%) would run out of money in less than a month.
This inability to absorb potential financial setbacks highlights the need increase the financial literacy of just about every generation in North America.
What is financial literacy?
Financial literacy is a set of skills combined with knowledge that allows a person to make informed and effective financial decisions, now and in the future.
Financial literacy definition:
According to Investopedia, the definition of financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing. The lack of these skills is called financial illiteracy.
Need for financial education
A lack of financial literacy skills can lead to a number of pitfalls throughout a person’s life. Data shows that financially illiterate people are more likely to accumulate high-interest debt or unsustainable levels of debt.
For example, 60% of respondents clearly understood the impact of compound interest and 80% knew that making late payments to credit cards (or loans) would hurt your credit score, yet a third (33%) of respondents carried a credit card balance of $1,001 or more. What’s worse is that 27% believed it was “ok to skip a payment now and then as long as you eventually pay it.”
Financially illiterate people also tend to make spending decisions that can hurt them and consistently fail to plan for the future, leaving them scrambling or finding less-than-ideal solutions.
In the recent data, for example, 35% of millennials made debt repayment their priority for 2021, while 14% are saving for a down payment and 11% are actively looking to buy a house. Yet, only 3% consider saving for a retirement their first priority and less (2%) will be actively saving up an emergency fund.
This last bit is particularly worrisome as an emergency fund is an integral part of financial planning. It’s not that we don’t know; according to report data, more than three-quarters (82%) know that an emergency fund is an integral part of financial planning and agree that this fund should hold at least six months’ worth of expenses. Given that the average cost of living is $31,572 USD per year, according to Expasistan.com, that means a typical North American should have just under $16,000 USD in their emergency fund. Yet, only 13% of respondents had an emergency fund that was over $10,000. Worse, 7% reported no emergency savings, at all.
Financial literacy for kids
Every parent wants to raise a financially literate child, but this desire gets overwhelmed by our fears or uncertainties regarding how to manage money well. Teaching children to budget, plan, earn and save is not easy when, as adults, we are still trying to figure it out ourselves.
Still, money management is integral. It’s a life skill and the earlier we lay the foundation, the easier it will be for our children to master the basics.
To help, here are some safe, age-appropriate online resources and a handful of links to off-line resources:
- Free downloads for “Money Matters” resources from First Command Educational Foundation;
- Free online courses (starting in the elementary grades right up to high school) at Youth.handsonbanking.org;
- Book: Money Sense for Kids! from Kids’ Finance;
- For teens at their first job, here’s an online resource for how to decode a paycheque;
- USMint learn about money site;
- Government of Canada site with resources to teach kids about money;
- TD Canada site with resources to teach kids about money;
- Articles for parents about allowances.
Budgeting tips in an uncertain economy
If you are looking to develop a list of money goals start with a non-judgemental examination of what you are currently doing and where you want to go. Remember, financial security looks different to each person so it’s not about following a formula but practising good habits. Experts agree that when you develop good habits around money, you set yourself up to have a long-term plan, while meeting short-term needs.
This starts with being intentional about how you spend and on what — and this starts with creating a budget.
According to the data, 87% of respondents have a budget but only 30% stay on budget.
To help, here are five broad budgeting tips:
- Create a budget;
- Reviewing your spending and expenses, regularly;
- Minimize online or credit card shopping if you need to curb spending or pay down debt;
- Find creative ways to save;
- Build or start to save an emergency fund.
How to manage your money better
To get better at managing money, we need to focus on skills that will help build knowledge, develop good habits and increase our financial confidence.
Regardless of your age, focus on learning tools that help you:
- save and invest;
- use credit and debt;
- and use the benefits of interest and tax-deductions to your advantage.