Up your financial literacy game
A confession: At nearly 28 years of age, I know very little about investing. Sure, I have a TFSA and an RRSP, and if I remember correctly they contain some mutual funds (“think of your accounts of financial baskets – they can hold things,” a well-meaning bank-appointed adviser once told me).
But if I were instructed to reorganize my baskets, even slightly, and maybe add another one or two to the collection, I’d be making blind, maybe disastrous moves.
A conversation with Shannon Lee Simmons made me feel better, and, inspired me to fix it.
The 32-year-old founder of New School of Finance, a fee-only financial planning firm based in Toronto, works largely with people between the ages of 25 and 45 and is well-versed in the struggles of new investors who feel intimidated about their low investing IQ.
“You’d be surprised at how often people self-deprecate and self-shame about how little they know. They’re embarrassed about it. And I’m like ‘How are you supposed to know this? That’s why I have a job,'” Simmons says.
But, she adds, that knowledge deficit about the when, where, how and why of investing poses significant challenges.
“I don’t know the first thing about the language or the jargon around brain surgery, but no one expects me to because brain surgery doesn’t affect my daily life. Finances do affect your daily life and therefore you’re supposed to be armed with all the understanding, jargon and intricacies of how this all works,” she explains.
“The lack of literacy is a huge problem for overall well-being because it makes finances intimidating and then people don’t want to move forward … They believe they’re bad with money, and that belief is so bad.”
It’s not just a lack of knowledge that’s hurting rookie young investors, it’s misconceptions about the urgency to invest and where to put their money.
“People think they should just be putting money into an RRSP and that’s the end of it, and if they can’t do that, they’re being fiscally irresponsible. But sometimes an RRSP is not the best thing for someone,” Simmons explains. “You have to make sure you’re using accounts strategically, in a way that makes sense for you.”
To begin investing strategically, responsibly and without the intimidation factor, Simmons offers advice that sometimes runs counter to what clients are used to hearing.
Maybe don’t invest at all
In an ideal world, we’d all be investing from the moment we took on part-time, after-school jobs. But, as Simmons reminds me, many under-40s have leftover debt from school, are experiencing precarious work arrangements, and live in cities with high costs of living. We have to prioritize our financial considerations.
“Investing is wonderful but it should be your third order of operation,” Simmons advises.
She recommends paying down debt first – consumer debt, like credit card bills, not a mortgage – and then building up a non-invested emergency fund that can be easily accessed if and when it’s needed. Once those items are crossed off the list, then look to investing.
Seek unbiased, personalized advice
Know the difference between what type of financial adviser whose help you are seeking.
With a commission-based financial adviser, for example,; instead of paying an out-of-pocket fee for his or her services, you’ll pay fees on the investment products that he or she suggests. A fee-only, on the other hand, charges a fee for the advice and assistance given.
It’s a distinction that Simmons says is important, depending on your particular situation.
Be smart about the accounts you choose
RRSPs are great – but only if wielded correctly, Simmons advises. However, they’re not a one-size-fits-all investment solution for everyone.
Simmons reminds me to keep three things in mind about RRSPs:
Money contributed reduces income tax charged, so a young person who’s earning a low income and adding to an RRSP is effectively wasting future contribution room on an income tax that doesn’t need lowering;
RRSP savings goals should be earmarked for first-time home purchases, a return to full-time school, or retirement; and because RRSP money is taxed upon removal, it makes it less accessible for other needs, such as a wedding or an emergency.
“One piece of advice is not good for everybody,” she says, later adding that investments should always be driven by personal financial goals.
Edited on 22 March 2017