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!