Financial Literacy Needs More Thinking and Less Math

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Posted in Money Tips
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

Financial LIteracy Needs More Thinking and Less Math

November is financial literacy month in Canada, and for the seventh straight year the government will encourage Canadians to:

take concrete actions to better manage their money and debt, including making a budget, having a savings plan and understanding their financial rights and responsibilities.

So, the solution to all of our financial problems is to make a budget.

I disagree.

In my experience, budget’s don’t work for most people, because they don’t stick to them. They get discouraged, and they end up worse off than before.

I’ve talked a lot about what I believe is a better alternative to budgeting.

You can watch my videos on my secret to not budgeting on youtube:

or listen to a previous podcast about why I think making a budget is a wast of your time.

You can even read Chapter 17 in my book Straight Talk on Your Money.

However what I want you to take away from today’s podcast is that I believe the solution to our financial literacy problem runs deeper than budgeting.

Financial Literacy Means Asking The Right Questions

Canadians are carrying record levels of debt, so obviously we have a problem, and despite the government’s best intentions, budgeting won’t solve it.

So what’s the solution?

On today’s show I make two comments:

  • First, my clients have an income problem, not a debt problem, with our average client earning income about 40% less than the median income in Ontario. Obviously budgeting won’t help if you don’t earn enough, so that needs to be a focus for discussion.
  • Second, we need to teach critical thinking, which is more important than basic budgeting. We need to have the skills to make real life decisions about where to save, whether to rent or buy. Even making the right choice about what cell phone plan you should buy requires critical thinking. On the podcast I talk about how and why we should design financial literacy lesson plans for students around these topics.  How we can teach them to ask the right financial questions.

If you have kids, listen together and talk to them about how they can think critically about their finances.

Resources Mentioned in the Show

Previous Financial Literacy Podcasts

FULL TRANSCRIPT – Show #166 Financial Literacy Solutions

Financial Literacy Is About Critical Thinking Less Math

November is Financial Literacy Month in Canada. The first financial literacy month was in 2011, and in 2012 the Parliament of Canada proclaimed that each November would be Financial Literacy Month. The Financial Consumer Agency of Canada, a division of the federal government, under the leadership of the Financial Literacy Leader, co-ordinates activities across Canada.

This year the theme is “Take Charge of Your Finances: It pays to know!” and the government is encouraging Canadians to “take concrete actions to better manage their money and debt, including making a budget, having a savings plan and understanding their financial rights and responsibilities.”

Okay, that all sounds good. Who can disagree with making a budget, and having a savings plan, and understanding your financial rights and responsibilities?

Well, I can disagree with it, and I will.

Today on Debt Free in 30 I want to give you a completely different take on financial literacy. I think the experts have it all wrong.

Financial literacy is an issue we cover every November on this show. Back in 2014, on show #9, my guest was Jane Rooney, Canada’s Financial Literacy Leader, who continues in that job even today.
Should financial literacy be taught in high school? That was the discussion back in 2015 on show #62 with Dave Mitchell, a retired high school teacher with decades of experience.

Then last year, in 2016, my guest on show #116 was Prakash Amarasooriya, who at the time was a member of the Toronto Youth Cabinet who launched a petition urging the Ontario Ministry of Education to beef up their Grade 10 career studies course to include basic financial skills like budgeting.

And here we are in 2017, and once again we are talking about financial literacy.

Is there any point in continuing this discussion?

The government has been working on their mandate to improve the financial literacy of Canadians for 7 years. Yet during that time:

  • Total household credit has increased 31% from 1.6 trillion to 2.1 trillion dollars
  • Consumer credit including credit cards, lines of credit, car loans and similar revolving debt has increased 17% from 503 billion to 590 billion dollars
  • Total household mortgage debt has increased 37% from 1.1 trillion to 1.5 trillion dollars
  • And the debt-to-income ratio in Canada has ballooned from 160% to almost 168%.

I think that, given these numbers, you could easily argue that the entire financial literacy education process has been a dismal failure.

The counter argument, of course, is that our precarious financial situation proves more than ever that there is a big need for financial literacy education. Just because the message hasn’t gotten through to everyone yet doesn’t mean we should stop trying.

Here’s my take on this issue.

I said at the start of the show that the government is encouraging Canadians to “take concrete actions to better manage their money and debt, including making a budget…”

Okay, let’s start there. The government is suggesting that our financial problems are caused by not having a budget, and therefore if you make a budget, you can solve some of your problems.
I disagree, for two reasons.

First, as we know from our Joe Debtor study, the average person in Ontario with so much debt that they have to file a consumer proposal or bankruptcy has an income that is about 40% less than the median income in Ontario. That’s often caused by the lack of a good, steady job or having reduced work hours.

So tell me this: if you are a recent college graduate, with a lot of student loan debt, and you can’t find a full time job in your field, and you are surviving working two lower paying part time jobs, how will making a budget help you?

If you had to take substantial time off work because of an injury, or to take care of a sick child or aging parent, is budgeting going to take care of the fact that your income is too low to pay all of your bills?

If you have an income problem, you already know it. A budget won’t help you manage money that you don’t have.

But what about people who have a decent income; wouldn’t a budget help them manage their money? As regular listeners to this podcast know, I’m not a big fan of budgeting, because most people don’t stick with it. What good is a spreadsheet or budgeting app that you abandon after three months, or three weeks?

Sure, a budget might help you identify some spending you can cut back on. But based on my experience a budget doesn’t keep people out of debt. If it was that easy, we’d all be doing it.

Managing money effectively means more than balancing your budget. It means:

  • Making sure you keep up with all your bill payments and, once you have reduced your debt, setting aside some savings for your future, and
  • Not getting in over your head in the first place.

I think there are a lot of better ways to manage your money than budgeting. I won’t go into those ways now, but I’ll put some links in the show notes to two You Tube videos I’ve done on the subject, and it’s also covered in Chapter 17 of my book Straight Talk on Your Money.

The second objective – not getting in over your head in the first place – is a lot harder.

The truth is that the cause of our money problems, if you actually have a decent income, is not that you aren’t budgeting, but that we don’t give enough thought in advance to the decisions we need to make.

Money decisions are difficult, because they involve math. Money is numbers, and numbers are math, and most of us don’t like math and think it’s just too hard. So when we are sitting with the mortgage officer at the bank, and we’re trying to decide if we should go for the 20 year or the 25 year amortization, we freeze. We don’t know how to calculate an amortization schedule in our heads, but even if we have an app that can do the math for us, we still aren’t sure how to make that decision.

  • Having some math ability certainly helps when answering mortgage questions like:
  • How much do I need for a down payment?
  • Should I choose a fixed or variable rate mortgage?
  • Should I make monthly, bi-weekly or weekly payments?
  • What kind of pre-payments can I make?
  • What’s the pre-payment penalty if I have to sell early?
  • What’s better a second mortgage or home equity line of credit?
  • Do I need mortgage insurance?

And here’s a math question almost no-one asks: What is the effect on my monthly payment if interest rates rise?

We have the same problem when we are trying to decide if we should get a car loan, or a car lease. Which is better? How long should the term be? How much interest am I paying?

Should I contribute to my TFSA, or RRSP? Should I pay down my mortgage, or put more money in my RRSP?

These are all, at least in part, math questions, and if we don’t think we are good at math, we don’t know how to make the correct decision.

So if we don’t know how to do the math to make the decision, what do we do?

We let our emotions decide, and we follow the crowd.

Should I buy a house, or rent? That’s partially a math question, and math is hard, so we let our emotions guide us. “I really want to buy a house, because all of my friends have one” is often how we make decisions. “If I don’t get into the market now, I never will” is letting our fear of missing out rule our decision making.

So what am I suggesting here? Math is hard, so we should just give up?

No.

I think there is a solution but it’s not just about teaching financial math.

If you listen to the financial experts, they will tell you that yes, they agree, we have a math problem, so we need to teach kids about compound interest, and amortization schedules, and lots of other money math.

But think about it: does it make sense, in Grade 10, to be teaching high school students about mortgage amortization schedules? What are the chances that a kid in Grade 10 is going to be buying a house and getting a mortgage anytime soon? Not very likely, I suspect.

Let me say it again: math is an issue, but it’s not our primary problem; our problem is that we don’t think through our decisions before we make them. We use our emotions, and we follow the crowd.

So here’s how I would teach financial literacy to high school students.

I would teach them using real life case studies.

Lesson #1: you want to buy a new cellphone, so you go to the kiosk at the mall, and they say “hey, here’s a phone, it’s free, you just sign up for this plan”. That’s a very common situation for a high school student. So here’s the lesson: what questions should you ask to evaluate how good a deal you are getting?

My guess is that most people think “free phone, this is great!” and that’s it. That is obviously an emotional response, and we are following the crowd because we want a new cellphone because all of our friends have the latest phone.

So what questions should you ask? That would be a great class discussion. Off the top of my head, I would want to ask:

  • What would the phone cost if I bought it without a plan?
  • What would the phone plan cost per month if I provide my own phone so I don’t need to buy a new one?
  • What is included in the monthly fee?
  • How many cellphone minutes?
  • How much data?
  • What are the long distance charges?
  • What are the overage charges?
  • What is your service coverage area?
  • What does the phone’s warranty cover?
  • What if my phone is lost or stolen?
  • How much is the security deposit?
  • How do I pay the bill each month? Can I pay electronically?
  • How long is the contract for?
  • What if I want to cancel early?

Off the top of my head I just came up with over a dozen questions that you should ask before signing on the dotted line for a new cellphone. I’m sure if I thought about it longer I could come up with another dozen good questions to ask.

How many of those questions would a high school student know to ask?

The class project could be to compare contracts from different providers.

Obviously there is some math involved here, but it’s mostly critical thinking. At the end of the course the students will have created a questionnaire they could use in real life to help them make a cellphone buying decision.

That’s the first section of the course. I’m not a professional educator so I don’t know if that’s one class or many, but that’s where I’d start: using a real-life example to teach critical thinking.

Lesson #2: payday loans. Students aren’t getting payday loans, but one class could be spent walking through the concepts. It’s scary, so if done correctly it would make an impression on them. If you understand how high payday loan rates are, you would be less likely to try to access them in the future.

As an aside, almost 4 in 10 graduates with student debt have a payday loan in our bankruptcy study. So teaching this lesson early is way more important than teaching them about mortgage amortization.

As I said earlier, most of my clients who get payday loans have an income problem, so just understanding how high the payday loan rates are is not a solution. People get payday loans because they think they have no other options.

So here’s the project for the class: Your parents get paid on the 5th of the month, but the rent is due on the 1st of the month. How do you pay the rent without having to resort to a payday loan?

That would be an interesting class discussion, and I know that that is actually a situation that many student’s parents will have faced. And it’s a situation that some of them will face soon after graduation, so it’s a very practical and useful discussion topic.

The obvious answer is to save money up in advance, but that’s not always possible. What else can you do? My answer would be to talk to the landlord and work out a plan, which is a lot cheaper than getting a payday loan, but it would be interesting to see what ideas the students come up with.

Lesson #3: credit cards. The question for the class: if your parents let you use their credit card to buy a new pair of jeans, and the deal is they will give you one year to pay them back, but you have to pay the interest, how much do those jeans cost you? How is interest calculated? What’s a minimum payment? How much money can you save by saving up to buy the jeans, instead of putting them on credit?

Lesson #4: Student loans. How do they work? How do you qualify? How does repayment work? What if you can’t find a job after you graduate; how do you repay the loans? What is financially better: college, university, or learning a trade?

You get the idea. I would pick areas that students are likely to encounter, and then I would teach them how to think through the decision. There would be some math, but the math would be secondary to learning how to ask questions and think critically.

Of course, these same concepts could apply to adult financial literacy education as well.
Instead of spending our time teaching an adult how to make a budget, perhaps a series of case studies on the rent vs. buy decision for housing, or how to evaluate a car loan, would be more productive.

These wouldn’t have to be in class sessions. A series of You Tube videos, done properly, could easily demonstrate these concepts.

In fact, there are already a lot of good videos out there. For example, Preet Banerjee has a You Tube video called Is Renting Always a Waste of Money? …that’s had more than 2.5 million views, and it does a great job of explaining the math and other factors in the buy vs. rent decision.

Now of course you can’t blindly believe every video you see on YouTube, but if you watch a few of them you’ll start to see some basic themes and understand the concepts, and you can learn a lot, for free. You just need to spend the time and effort to do your own research.

That’s how I would tackle financial literacy education, but I suspect we’ll be having this same discussion again next year.

That’s our show for today. Full show notes, including a full transcript and links to everything I mentioned today, include a link to Preet Banerjee’s You Tube video, can be found on our website at hoyes.com, that’s hoyes.com

Thanks for listening. Until next week, I’m Doug Hoyes, that was Debt Free in 30.

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