The Wealth Facade

When it comes to personal finances, one of the most damaging problems that most people actually see as a blessing is low credit interest rates. Low interest rates have a huge impact on our psychological attitude toward purchasing and also impact the value, or lack there-of, of our purchases. Low interest rates are also directly associated to savings interest rates. In the last decade, as loan interest rates dropped, savings interest rates have naturally followed. Canada savings bonds are offering a pathetic return of 0.65% for one year. 0.65%? That's approximately 1.45% below the average rate of inflation. In reality, your investment would be worth less at maturity. But who are we kidding? Does anyone really save or invest money any more anyway?

When interest rates are low, it aids to create the illusion of wealth, or what I call the wealth facade. The most obvious example of this in automotive sales. How many people do you know that actually paid cash for their automobile? Most people in our society finance or lease their cars and it seems to be a common, acceptable practice. The problem with it? When people don't have to save their money to buy a car, the line between their reality and their illusion of wealth is blurred. Low interest rates make it possible for lenders to offer customers the option of purchasing a more expensive car, as the cost of borrowing is made to look appealing. Psychologically, people get tricked into being fixated on the idea that 0.9% financing with no down payment over 5 years is a great deal. The reality in most cases is that people who don't honestly sit down and look at their finances, drive a car off the lot that is at least 1.5 times more expensive than they should. What does it matter? Well, when people are made to feel wealthier than they are, they act wealthier than they are. Sales people have a great vocabulary when it comes to making products seem amazing and also when it comes to making financing seem affordable. When we feel wealthy, we act wealthy and we spend like we're wealthy. Although it might feel good at the moment, the next 5 years could be anything but. That great deal you got on that amazing car eventually turns into regular maintenance service visits and looming monthly payments that you wish would end.

So, to stress the problem that low interest rates create is that they simply make people feel okay about taking on large debt loads. People who live in $350,000 houses with a $330,000 mortgage, drive a $40,000 car with $600 car payments and earn a $60,000 salary are not wealthy, they are under the illusion that they are wealthy. This idea is evident in the statistic that 43% of Canadians are living paycheck to paycheck. I should also mention, under assumption of course, that when we try to live up to an illusion of wealth, there are many other purchases and life style related costs that go along with the major expenses. Clothing, electronics and outing choices can also become large expenses.

So, what has contributed to this epidemic in our society? What has changed? Statistics show that in the 80's, the average Canadian was saving around 13% of their after-tax income. Today that figure has dropped to about 1.2%. Fixated on instant gratification, we simply don't save for purchases anymore. We would rather take that big screen plasma TV home now and pay for it later. Put into actual numbers, a Canadian who earns $50,000 per year, takes home around $2,600 per month after taxes. 1.2% of $2,600 is about $31. As shocking as that figure might seem to people, what's more stocking is the $2,569 that moves in and out of the average account every month. Where is all that money really going? What would the average Canadian do if a sudden financial crisis came upon them or God forbid, they lost their job? The wealth facade is a dangerous thing.

What needs to happen to combat this is for people to wake up to the reality that carrying a debt load is actually a bad thing. The latest statistic is that the average Canadian's debt load is 131%. That means we are spending way more money than we earn. The banks and lenders have fooled the average Canadian into thinking that their credit rating is of great importance and taking out credit cards and loans will help them. The truth is that if you have money saved, you don't need the banks money. If you have a down payment for a house that exceeds 25% of the purchase price, you can dictate the terms of your mortgage in stead of searching for a bank that will help you and dictate their terms to you. People who have money don't have to worry about service charges or interest rates because they don't have to pay for them. Banks cater to people with money because they know that there is at least 43% that don't really have any.

It would seem that there is a lack of financial education in our society. What I have come to realize is that we are actually getting a financial education, but it's coming from the wrong source. The banks and financial institutions used to be a part of the financial game, but now it seems that they have taken over the game completely and we have merely become players.

Money 101 – The Most Important Subject Youth Aren’t Learning

Our current education system is setting our youth up for failure. Sure, classrooms are equipped with modern tools such as computers and Smart Boards, teachers have to meet certain minimum educational requirements to be able to teach and course content is updated every few years to stay relevant, but there is one, huge, piece of the pie that's missing.

I asked myself, “what is the actual purpose of getting a basic education?”. Some say it prepares children with the basic knowledge they need to enter the "real world", some say it is a foundation for higher learning and some say it teaches children how to learn. All of these ideas may be valid and perhaps a combination of the three is more accurate to what a basic education actually accomplishes. What a basic education should do is prepare our youth with the tools they need to be fully functioning contributors to society.

The first and most important challenge for teachers is literacy. Children need to learn how to read and write before they can do anything in school. One cannot learn math if one doesn't know what the symbols for numbers are and one cannot learn from books or the blackboard if one cannot recognize letters that make up words and sentences. The success of our education system is first graded on literacy rates. A student needs this foundation in order to work their way through the system and eventually walk across a stage to receive their high school diploma. Perhaps our education system should also be rated on a follow-up grading of how well the graduates succeed a few years after going through the system. Sadly, for most students in our society, they will successfully graduate this system lacking an equally important foundation for success: financial literacy.

Financial literacy, or money management, is one subject that is not taught in our education system. The traditional course structure and requirements for attaining a high school diploma have merely become an exercise in attaining credits by passing minimum grade standards. Subjects such as math, english, history and science are required and thought to be the basic subjects a student should successfully complete to graduate. To fulfill the remaining amount of credits required to graduate, students also have the option to choose subjects such as computers, drama, art, gym, biology, physics, shop and music. These subjects may appeal to student’s individual interests, but are not necessarily as important for life after high school. In the last decade or more, classes with titles such as "health" or "life skills" have been made mandatory where students learn about topics like nutritional health, sex and parenting. Some would argue that these subjects should be taught at home, but because of an apparent lack of home education on these subjects, it has been added to the curriculum. Youth are suffering from eating disorders and obesity, unplanned pregnancies are happening and STDs are spreading like wildfire. If parents are too busy or lack the relational intimacy to teach their children about these important issues, the schools need to intervene, right? If our education system acknowledges the importance of these types of issues, it is surprising that they haven't taken an interest in the equally important financial crisis that is plaguing our society today. Could it be that maybe student’s health and sexual activity have a direct impact on the educational system while the students are enrolled, but that what happens following graduation is viewed with less importance? Most students graduating high school today are either trying to go to university or find a job. They are entering a world where money means everything, but don't have a clue how money really works.

Talking about personal finances has become taboo. Most people do not feel comfortable openly talking about their finances, as there seems to be an underlying spirit of competitiveness surrounding money. The thought that your neighbor makes more money than you or that your friend might find out that everything you have is actually owned by the bank must remain a secret. The unfortunate thing about it is that we live in a society where almost everything eventually comes down to money, so it’s not an issue of how much importance we put on money, it’s recognizing that it is actually of the utmost importance. Most people eventually fall face first into the rat race and try to keep up with the Jones’. Financial institutions know this and don't even have to try to sell credit anymore. To add insult to injury, government regulations are so lax that almost anyone can borrow more money than they ever should. The fact that only 3% of Canadians have no debt should be enough of a wake up call to make educators and leaders stand up and do something to save future generations from the same fate.

Next to basic literacy, understanding money should be our education system’s highest priority. It would be great if financial literacy could be taught at home, but most parents don't have a clue how money works for themselves. It has for generations been taken for granted that children will just grow up and somehow know what to do when they get out into the "real world". Well, the reality of life is that "real world" can't wait to swallow up new graduates with high interest, low payment credit cards and credit lines. Thinking of buying your first car? Don't worry, it's completely normal for a university student that works at Starbucks to drive a new, $20,000 car. And why should they worry? The payments can be extended over 5 years with a balloon payment at the end when they graduate university and become part of the work force.

The education system needs to acknowledge that our society’s financial system has become an extremely complicated and potentially dangerous game and people need to be educated at a young age to become equipped with the tools to not only understand how it works, but make choices that will set them up for real success. We need to understand that money is more than math. Calculating interest payments in a math class or learning how compound interest works is only a very small part of financial literacy. Youth need to learn that money has a psychological side to it and is directly connected to our emotions. I believe the actual value of money has been lost on recent generations. It is evident when people in their 20’s believe they should be living in houses like their parents or driving expensive cars because it represents “who they are”. The cost of things has changed from a one-time payment to a monthly minimum payment. We need to recognize that when you make $50,000 per year, you really can’t afford a $50,000 car. Considering the fact that the rest of our lives will revolve around our ability to manage money, it should be a mandatory prerequisite for graduation.