The month of November is Financial Literacy Month, a creation of the Financial Consumer Agency of Canada, the government agency that supervises federally regulated financial institutions. As stated on the Financial Literacy Month website:
“Financial literacy means having the knowledge, skills and confidence to make responsible financial decisions.”
I strongly believe that knowledge is power. Here’s an example:
You want to finance a car, and the car salesman says he can “put you into this car for a small payment of only $99 per week.” Is that a good deal? Do you have the financial literacy to know what questions to ask to determine if that is a good deal for you? What questions should you ask? If I was faced with that decision, I would want to know:
- How much would the car cost if I paid cash?
- What is the total of all of my payments?
Those two questions will tell you virtually everything you need to know to make the decision, although you could also ask for the interest rate you will be paying, the total interest paid, and if there are any special terms (like pre-payment penalties). Here are two answers to those questions:
- If you pay cash today the car costs $15,182
- The total of your payments on our financing plan will be $36,322
Wow. It turns out that the deal to “only pay $99 per week” will have you paying more than twice the value of the car! Why? Because the loan interest is 29.9%, and it lasts for 7 years, so you will be making 364 payments, which includes $21,140 in interest! (You can verify the math for yourself with this online loan amortization schedule calculator).
And that’s why financial literacy is so important: if you don’t know what questions to ask, you can easily make some very bad financial decisions.
The salesman will never say to you “Do you want to pay $36,000 for this $15,000 car?” They will always use the more friendly “$99 per week” sales pitch. I’m not picking on salesman; they have a job to do, and they may genuinely believe that $99 per week is a great deal for you. My point is that you must look out for yourself. You must be financially literate. That’s why the team at Hoyes Michalos promotes Financial Literacy Month, and why we will be actively supporting it’s objectives.
To find out more, check out Moneyproblems.ca talks budgeting and money management for Financial Literacy Month for lots of free tools, workbooks and information.