Can you become financially literate?

May 15, 2020   ·   0 Comments

By Hemant Sangwan

I believe managing finances in a DIY way is still a dream for many of us. I think the most common hesitation to DIY personal finances is the lack or perception of the lack of knowledge we have on the topic. The other misconception around DIY financing is it can be easily outsourced to someone who can manage it better than us. However, think for a moment- if we cannot trust others to make simpler choices for us (food, clothing, activities for kids, etc.), how can we be comfortable in outsourcing money matters to others and believe it is in our best interests? I think many of us believe we need a degree in finance and understanding of various technical terms used in finance and accounting to manage finances in a DIY way. In this article, I share my perspective on these questions and suggest a few tips based on my experience and subject matter knowledge and expertise. 

I want to start by saying that most of us (if not all), can be successful at DIY finances without having a degree in finance. Yes, you need to have motivation and willingness to  invest some effort but you do not need technical expertise in finance and accounting, though having such knowledge is better than not having! What you need is the ability to understand BASIC finance terms e.g., cash flow, interest rates, etc.; ability to read and understand documents at difficulty levels of no more than high school; treating income and expenditure as two sides of the same coin. And most importantly, you need to treat DIY finance as long term wealth building activities, not something which can make you rich overnight! 

We live in a country where about ~50% people live paycheque to paycheque, with many just a few hundred dollars away from going bankrupt. The financial illiteracy also translates into savings (if any) tied to low interest accounts or managed by “advisors” who charge significant commissions and hidden fees. At an individual level, we can educate ourselves to manage our finances in a DIY way and build wealth for the future. For the start, I am listing a few suggestions below – 

1 – Breakdown your DIY approach in two ways —  A) lowering costs of subscribing services such as insurance, credit cards, etc.and B) increasing the value of savings and investment.

2 – Lowering costs approach requires you to be on the top of key services you subscribe to and finding ways to remove features which are nice to have or optional. For example, I recently changed my car insurance policy to remove certain features and saved more than $500 in annual premium. This is not the first time I found ways to lower the cost  on expensive services I subscribe to. If you still have some “free-time” left, you may want to focus on saving $0.50 on a juice box or $0.05 on gas because they are on “sales”, but certainly those practices will not add much to your wealth and they are time consuming! 

3 – How about you avoid brokers or “middle people” for important financial transactions or have their roles dictated by you? For example, you do not need to have a mortgage agent when applying for a mortgage. All you need is “functional” understanding of key parameters involved (e.g., interest rate, down payment, monthly payment, etc.). If you do choose an agent, you can limit the agent’s role to find you all necessary information, which you can use to make the final decision. 

4 – You can improve your knowledge of DIY investment tools (ETFs, index funds, self-directed investment accounts, etc.) which can enhance the value of your savings and investments. There are many great resources freely available. Historically, investing in equities has provided average returns exceeding 10% in the long run. You also have flexibility to make small contributions, even $50, at any time using some of these tools.  

Note: a $500 investment with 10% average return becomes $3300 in 20 years, compared to $900 from a return from a savings account at 3% interest rate (4 times difference). If you invest and pay 2% fee in commission, your wealth is going to be around $2300. The numbers speak for themselves. 

Finally, I also suggest maintaining a healthy skepticism and recognize that someone offering you to manage your finances may have interests completely opposite to yours. No one can predict the future or have a scheme which can make you rich overnight! Your success in maintaining a healthy financial life is more about your motivation and desire to learn, and not the lack of availability of resources on the topic. 

Hemant Sangwan is a full-time professor at School of Marketing, Seneca College.

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