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What is financial literacy and why is it important?

06 November 2020 by Lucie Blanchet
Financial literacy

By Lucie Blanchet, Executive Vice President, Personal Banking and Client Experience

I’ll admit that the term “financial literacy” can seem complicated. The word “literacy” isn’t part of everyday language, and the word “financial” can scare people off. But you shouldn’t be intimidated by that. 

What is financial literacy?

The concept of financial literacy is actually pretty simple. It means being knowledgeable enough to feel confident in making the right decisions when managing your personal finances, and managing the stress and emotions that go along with it.

Being knowledgeable in financial literacy can mean knowing the difference between savings strategies, being able to make a budget, and understanding some of the general basics about taxes. It also means being aware of how important it is to save or plan for your retirement. It encompasses a wide range of subjects.

Does this mean you have to become a financial expert? No. To me, the important thing is knowing enough to feel confident in making the right financial decisions for your particular situation, or being able to ask the right questions. Being financially literate can help ensure that your personal finances remain in a healthy state.

Why is financial literacy important?

It’s important to note that being in good financial health doesn’t mean being rich.

Rather, it means being aware of your situation and having a plan to improve it; that’s already less stressful than burying your head in the sand. Peace of mind is one of the advantages of financial literacy.

The basics of good financial health

Don’t live beyond your means. We recommend making a budget, being aware of your required monthly expenses, figuring out what you have left, then making judicious choices about your discretionary spending.

Ideally, save 10% to 15% from each paycheque. As soon as you start earning money and have a good idea of your required expenses, the ideal thing would be to save 10% to 15% of your salary on a systematic basis. As the saying goes, pay yourself first.

Create an emergency fund. We recommend setting aside three to six months’ worth of expenses. An emergency fund has to be easily accessible, preferably in cash. It may not be a good idea to put it towards investment vehicles that fluctuate with the market.

You definitely have to be disciplined to do this. To improve your financial health, you have to set objectives and follow your plan. The benefits will have repercussions in all aspects of your life. Most of all, don’t hesitate to seek advice from experts.

There’s still work to do

Collectively, we still have a long way to go, especially when it comes to financial awareness, knowledge, and the importance of being proactive.

November is financial literacy month and I think that’s so important right now. In 2020, many people went back to the basics in managing their portfolio. The pandemic has helped raise awareness among lots of people, even those who are already comfortable with finance. We have all had to manage our finances during the crisis.

But generally speaking, far too many Canadians still don’t know enough about finance. According to the 2019 Canadian Financial Capability Survey, 56% of Canadians aged 18 to 34 have taken steps to strengthen their knowledge.

Making a difference together

I believe that financial knowledge should be an integral part of our education from an early age. It’s just as important as math or physical education.

That’s why National Bank launched an initiative with the Canadian Foundation for Economic Education (CFEE) to create a financial literacy program. These programs are specifically created for high school, CEGEP and university students, but also for newcomers to Canada. As a financial institution, using the knowledge from our experts, our mission is to contribute to everyone’s financial education to ensure the collective good of our society.

Parents also have an important role to play in their children’s financial education. Talking about finance and money is still taboo for many families. But you can teach kids about savings, budgets and the value of money earlier than you think. It’s a first step towards financial independence.

My hope is for everyone to ask themselves the right questions, seek advice, and strengthen their knowledge. You’re less anxious when you feel in control. And you can’t put a price on peace of mind when it comes to your finances.

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