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It pays to be Savvy

Financial literacy the key to balancing the books
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On January 2nd, while you were still shaking off a hangover, a very exclusive group of people accomplished an amazing thing; they earned more money than you will earn all year. According to a study by the Canadian Centre for Policy Alternatives, that’s what happens when you make an average of $8,528,304 — which is what Canada’s 100 highest paid CEOs made. That’s right, on average the best-paid 100 CEOs in Canada make more than 218 times as much as an average working stiff.

Many would argue rightfully that it’s a free market and people should be able to earn what their employer is willing to pay. Despite evidence that the return on investment from these pay packages is very poor compared to other outlays of corporate resources, and despite the fact that shareholders sometimes have a say in executive pay, shareholder activism is something very few people participate in.

The trouble is that too many of us are financially illiterate.

The aforementioned investor anxiety is a nearly irrelevant ‘gee it would be nice to have that problem’ issue for the majority of Canadians. A recent study conducted by Scotiabank revealed some startling observations; almost half of Canadians report being just one or two paycheques away from a financial crisis. Some 72 per cent of Canadians say they have no financial plan.

The study also suggests that a third of those who contribute to their retirement savings will withdraw funds from their RRSPs prematurely, using funds primarily for day-to-day living purposes.

There is an ever increasing array and complexity of financial products available, from bank accounts to credit cards to mortgages. What is needed is a better understanding of them. To quote Alan Greenspan, past Chair of the U.S. Federal Reserve Board: “Today’s financial world is highly complex when compared with that of a generation ago. Forty years ago, a simple understanding of how to maintain a checking and savings account at local banks…may have been sufficient.

“Now, consumers must be able to differentiate between a wide range of financial products and services and providers. Previous less indebted generations may not have needed such a comprehensive understanding of such aspects of credit as the impact of compounding interest and the implications of mismanaging credit accounts.”

This lack of comprehension of debt and credit risk is what compelled the Certified General Accountants Association of Canada to commission a consumer survey in the spring of 2007. The survey revealed the depths of misunderstanding. Among the most shocking is the fact that 84 per cent of Canadians reported having some type of debt, while 25 per cent of Canadians were not aware that changes in interest rates, housing prices, wages or reduced access to credit would negatively affect their financial wellbeing.

Another 25 per cent of Canadians do not commit to any type of savings, not even for retirement. Household debt is at an all-time high, reaching $1 trillion in 2006.

Perhaps the most shocking stat is the possibly fatal combination of lower personal saving rates and higher household debt; Canadians’ personal saving rate has been declining since the early 1980s, dropping from its highest level of 20.2 per cent in 1982 to its lowest of 1.2 per cent in 2005, and household debt has been increasing annually by 4.7 per cent for the past 30 years, outpacing gains in personal disposable income, assets and the GDP.

When we look at reasons for the sub-prime mortgage meltdown south of the border, many Canadians may be thinking “there but for the grace of god go I.” Based on these grim statistics it’s probably safe to assume that in general, most Canadians’ understanding of personal finance is hopelessly inadequate.

We have a bad case of Affluenza!

Catching Affluenza

“It's not your salary that makes you rich it's your spending habits.”

— Charles A. Jaffe

The term affluenza describes the epidemic of over consumption and was popularized by the 1997 documentary of the same name from Seattle Public Broadcasting Station KCTS. The producer of the documentary, John de Graaf, also co-authored a book with the same title.

The program describes the high social and environmental costs of over consumption and materialism; de Graff describes it as “A painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more.”

To quote the Shania Twain song Ka-Ching , “All we ever want is more… A lot more than we had before… So take me to the nearest store…”

The main culprit causing rising levels of debt is consumption rather than asset accumulation. Some of the triggers include housing appreciation that boosts households net worth combined, with low interest rates that make saving less attractive and borrowing costs easier to bear, as well as improved access to credit that lowers the need for old fashioned saving for a “rainy day”.

Increasing house prices, lower cost of consumer goods and easy access to (at least initially) cheap cash, have led people to feel like they’re the Howell’s on Gilligan’s Island. They’re acting and spending as if they’re affluent, even when they barely have two coconuts to rub together.

It’s difficult to sympathize with people who re-mortgage their homes so they can take a trip or buy a boat, then go bankrupt when their reverse mortgage payments get too high. But the sad truth is that most people live in denial and it’s always a Faustian bargain with the credit card companies — keep letting me spend and I’ll keep forking over the interest payments.

A look around Whistler would tell you our town is not immune to this affliction, but aside from assumptions what statistical evidence is there to asses the financial savvy of our residents?

According to Dan Wilson, Whistler 2020 Monitoring Coordinator, Affluenza might not be the pandemic that plagues Whistler, it’s affordability: “Our affordability statistics indicate that the annual income of an increasing proportion of Whistlerites doesn't cover the estimated cost of living in the community. The increase in costs is primarily driven by rising housing, recreation and food costs.”

When viewed in the context of the region, it’s Whistler families that pay the biggest price to live here. Wilson added, “comparing the cost of living in Whistler to the Vancouver region reveals that Whistler is less affordable for families but slightly more affordable for single residents.

“The Gross Income required for a family of four living a basic lifestyle in Whistler is $66,500. Gross income required for an individual living a basic lifestyle in Whistler is $27,000”. He also acknowledged that “Savings are not included in the cost of living…”

Most telling is the fact that 43 per cent of permanent Whistler residents spend more than 30 per cent of their income on housing costs, which defies the rule of thumb for financial sustainability for not purchasing a home that is more that twice your annual realized income.

Another local resident who has a finger on the pulse of Whistler as well as finance is Sue Adams, Chair of the Board of North Shore Credit Union. Sue has been active in the Whistler and Pemberton business community since 1988 as owner/operator of several local grocery and catering operations. Her involvement with NSCU includes serving on the Board of Directors since 1999. She also lends her considerable energy and expertise to the Women of Whistler Business Network, chairs the Board of Directors of The Vancouver International Wine Festival and is a member of the Executive Committee of the Playhouse Theatre Board of Trustees, Vancouver. Sue was also recently appointed to British Columbia’s Small Business Roundtable, and is a frequent speaker on the topic of small business management and entrepreneurship who mentors others on turning their business visions into reality.

Adams agrees that rising debt levels are a cause for concern:

“I think the fears of rising debt, personally, corporately and even at all levels of government are justified,” she said.

In a complex world of finance her advice is refreshingly simple: “The principal is pretty simple no matter what the size of the situation, (it’s) money in and money out — over-extending or not taking the adequate risk aversion steps, will land you in trouble if the environment changes.”

When asked what the financially illiterate should do to make themselves more sophisticated she suggested education:

“Education is the key and it has to start at home, (and) failing that then at the school level. Like all social or coping mechanisms they are often passed down through the family unless some intervention or an educational opportunity arises to change the pattern.”

Back to School — Birds and the Bees vs. the ABC’s of Finance

“Formal education will make you a living; self-education will make you a fortune.”

— Jim Rohn

Conversations about money are more taboo than Politics, religion and sex combined. Most parents would rather discuss sex and drugs than money; it’s the ultimate taboo. Modern parents are happy to explain the birds and the bees but not the ABC’s of money.

The reason, more than likely, is that parents don’t understand it themselves. Sex education has been part of school curriculum since the ‘70s but financial literacy has only been around since 2004 when the province mandated that B.C. High School children take the mandatory Finances program as part of the Planning 10 course curriculum. The course includes financial literacy skills, including budgeting, credit, costs of post-secondary education and career options, and personal financial planning for transition from secondary school. The program’s success has led to the announcement by Canadian Finance Minister Jim Flaherty that the program will be adapted for a national web-based version and established as a pilot course to teach young Canadians the basics of financial literacy.

Most experts agree the best time to teach students about money is before they get to college and assume all that student loan debt (although some advocates suggest teaching kids as young as six beginning with a simple savings account), and student debt is serious money. According to Nellie Mae, a U.S. student loan provider, the average credit card debt for a college senior in the U.S. is $2,864. As well, the Project on Student debt suggests the average student loan debt for the class of 2006-2007 is $21,100.

Canadian students don’t fare any better according to a recent speech to the B.C. Business Education Association by Patricia Bowles, the director of communications and education for the B.C. Securities Commission — 67 per cent of Canadian university students are in debt and 29 per cent of 16-24 year olds don’t know how to prepare and manage a weekly budget.

Making smart choices about money is difficult. Some people rely on friends and family for advice or seek help from financial advice books like David Chilton’s “The Wealthy Barber” or Robert Kiyosaki’s “Rich Dad Poor Dad”. Those who can afford it turn to professionals.

Sue Adams describes the plethora of resources available — “The book shelves are full of authoritative financial management publications – overwhelming really. There are good money management columns in most newsmagazines and newspapers. Your local financial institutions can offer excellent basic money management techniques at no cost (and) they will often continue to mentor their clients or members for years”.

We face a complicated financial scenario with as many choices in resources as we have in services. What we need is a different approach to teaching people about financial literacy.

German Piggy Banks

“A bank is a place that will lend you money if you can prove that you don't need it”

— Bob Hope

One organization meeting our changing social and economic needs is Toronto based SEDI — Social and Enterprise Development Innovations. It’s a nationwide charitable organization dedicated to enabling poor and unemployed Canadians become self-sufficient. What is unique is their involvement in policy development, which bridges community and public policy work.

South of the border several initiatives are currently underway including: Operation HOPE, Inc. which has created a series of public/private partnerships and strategic alliances to implement programs focused on connecting the minority community with mainstream, private sector resources, and empowering under-served communities. The Washington Community Alliance for Self-Help (CASH) created the King County Business Training and Peer Loan Program, where participants are guided through a peer lending micro-enterprise development program. Because the program is peer to peer, “social collateral” is built and loans are repaid at a rate of 79 per cent.

These programs, while innovative, primarily target low income, disadvantaged and underserved communities. One program serving a wider audience is New York’s Office of Financial Empowerment, set up by Mayor Michael Bloomberg (who made his fortune selling financial information). The objective is to use the powers of government to promote both financial education and better design of financial products.

Perhaps the most innovative tool for money management is Germany’s Sparschwein (German for piggy bank). The Munich-based business is a direct seller that encourages consumers to scavenge their homes for unused items from ski equipment to computers which will then be sold through auction sites like eBay. The selling process is handled by Sparschwein agents (who go door to door collecting the items) and Sparschwein deposits the proceeds (minus a handling fee) directly into a seller's saving account held at Deutsche Kreditbank. They offer up to 2.35 per cent interest on an account.

The compelling feature is that it’s the world's first financial institution that allows people to build up savings without money. The agents also advise the owner on how to make the most of this money for specific goals like buying a house, financing and education, planning for retirement etc. Accelerated by the tech revolution, this concept allows participants to build financial wealth with No Money Down and they have created a surprising amount of wealth. Sparschwein has increased their customers' wealth by over 49 million euros and earned more than 3 million euros for themselves in the process.

Locally, this kind of strategy could be beneficial and should be appealing (who doesn’t have a pair of skis in the crawl space that could be a ticket to owning a profit making ethical fund?) Partnering is key — partnering with the private sector to put its money and expertise into building a business plan, a Bank or Credit Union to provide financial know how and some generic advice, Government to provide an economic sustainability speaker series and information, and local not-for-profit groups to mobilize and provide resources.

The need for change is obvious: one in five Canadians lacks confidence in their financial skills and two-thirds aren't properly equipped for tasks like investing and financial planning. What is required is a collaborative effort that transcends typical business and economic development strategies and creates meaningful affordability strategies by turning affordability upside down and helping people manage their money to create wealth for themselves. However, leadership is needed to make it happen.

This could be an opportunity for the community to deliver an innovative solution to our affordability issues, and governments, the private sector and voluntary organizations would all have a role to play. Now that would make dollars and sense!



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