How it works: Financial literacy for Canadian post-secondary students

Developing financial literacy

Financial literacy refers to your understanding of financial skills, topics and definitions. To develop financial literacy, students need to gain a basic understanding of personal finance.

For instance, are you aware of your spending habits? How does this relate to your income and earnings? These basic budgeting skills offer the best launching ground to develop higher levels of understanding when it comes to money management and personal finance decisions. From here, you can branch out into what you can do with that extra cash, whether that's learning to invest, paying off student loans, or even early retirement planning.

Why is financial literacy important for students?

Learning the ins and outs of money management begins at college or university since, quite often, this is the time when most young Canadians begin to take full control of their financial decisions.

The fact that your student years are often the most cash-strapped years of your life make it the perfect time to really appreciate the time/cost equation and the difference between needs and wants. It can also help you better assess how to stretch a dollar, or make better decisions about where to get funds.

For instance, data shows that the average debt for college students was $13,600 in 2005, compared to $16,700 in 2020. For those pursuing a Bachelor's degree at university, the average student loan debt at graduation was $22,800 in 2005, compared to $30,600 in 2020. Now, if a college or university student took the time to find non-repayable students grants, they could have reduced their overall debt by 10% or more by the time they graduated.

And this is only the start of the financial juggling act. While repaying student loans may not be a pressing problem while you're in school, other expenses such as rent payments and groceries will certainly demand some budgeting skills.

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5 key components of financial literacy

Financial literacy covers a wide range of topics, but they can be sorted into five key categories.

Here’s a quick look at each one, touching on some of the most important elements you’ll want to learn about.

Earn

While many people focus on cutting costs, the best place to start an accurate, helpful budget is with how much you earn. Knowing how much you make is key to helping you prioritize your spending.

To make this useful, learn how to read your paycheque. Key items to know include:

1. How are taxes calculated and deducted?
2. What is your marginal tax rate?
3. What is your average tax rate?
4. Do you incur any tax deductible expenses (and how can you track and use these expenses when it comes time to file your taxes)?
5. How do your earnings help you save and earn on investments? Note: This is when it's time to learn about Tax-Free Savings Accounts (TFSA) and registered retirement savings plans (RRSPs).
   
   

Once you know what you earn, it's time to list that in your budget. To avoid surprises, always calculate your after-tax income so you can budget accordingly.

Spend

Spending is a natural part of life, whether it’s groceries, debt repayment or housing.

Smart spending requires you to identify your needs and wants while setting a bit aside for savings and the unexpected. Your job — as a financially-literate student — is to correctly identify a need from a want, and to stay on budget while minimizing your costs and maximizing value.

To help with spending decisions — and sticking to a budget — many people will follow a budget strategy. One of the most popular budgeting strategies is the 50/30/20 rule. According to this strategy you put:

• 50% of your budget towards needs
• 30% towards wants
• 20% towards savings
  

A good place to start is by tracking your spending with an app like You Need a Budget (YNAB), which integrates directly with your bank account. With YNAB you can set goals, track spending categories and identify areas where you are spending off your planned budget. New customers typically save an average of $600 during their first two months. While there's an annual cost for the app of just under USD$105 (yes: it works for Canadian students, but the app bills in US currency), you can try YNAB for free for the first 34 days.

Save and invest

Saving incrementally in school is the first step to investing afterwards. Many students put off the investing portion of this financial pillar until after they graduate, but the principles behind saving and investing can be learned and applied at any time.

In general, the goal is to learn how to be consistent. Since, saving and investing are critical to long-term financial stability, your main goal should be to develop the habit of saving. That way, as your income increases, so do your savings, and this opens up the possibilities when it comes time to invest.

Another key aspect of saving and investing is to learn and use the power of compound interest. For instance, you can tap into the power of compound interest by stashing your cash in a high-interest savings account. Eventually, you can start to use dividend reinvestment plans, along with other forms of compound savings.

Borrowing

Even without student loans, borrowing is a common way of hitting key milestones like home or car ownership.

Understanding how loans work and the different options you have based on the type of loan is a critical part of smart money management. For example, credit cards offer convenience due to their widespread acceptance and ease of use. The use of a credit card also helps build good credit, which is essential for applying for loans and getting access to better financial products. But rack up a big balance on your credit card and you could end up in debt spiral — massive interest payments that keep you stuck in high-interest debt. Knowing how to use debt and when to pay off debt are critical steps to borrowing money in a smart, strategic way.

Protect

Part of financial literacy is preparing for the unexpected. For most people this can mean setting up an emergency fund — cash-on-hand that's set aside for unexpected financial needs. Typically kept in a bank account, this emergency fund can help you avoid expensive debt and absorb unexpected costs, such as replacing a stolen laptop, bike, or trip to the mechanic.

Another form of financial protection includes insurance. Car insurance and tenant’s insurance are often required (either by law or by landlord), but protect you from catastrophic events such as losing everything in a house fire. As you get older, other forms of insurance protection may be necessary, such as travel insurance, life insurance or critical illness insurance.

In the end, the key aspect of this component is to learn that protecting your assets is part of smart money management. While it can be a balancing act — you don’t want to be overprotected and overspend, or underprotected and underspend — learning how insurance works is critical for protecting your assets and financial well-being.

6 statistics on financial literacy

Struggling with finances is common and can have cascading consequences for physical, mental and financial well-being over time. To illustrate, here are six sobering statistics on financial literacy that may act as motivation and convince you to put the time and effort into growing your financial literacy:

1. Canada’s household debt to disposable income ratio is the highest in the G7 at 185%
2. A total of 70.4% of Canadians carry some form of debt
3. Almost two-thirds (63%) of millennials and Gen Z say that financial worries are negatively impacting their mental health
4. Only 35% of Canadians aged 50 or older are in a position where they can retire on their terms
5. In any given month, almost half of Canadians carry credit card debt for at least two months
6. PISA (Program for International Student Assessment) scores in math and reading are continuing to decline, although Canada still ranks high globally
   

Financial literacy is a long road and most Canadians — not just students — need a bit of guidance. To help, here are five places to go to improve your financial literacy.

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5 places to go to improve your financial literacy

If you haven't had any financial education until now — and that applies to plenty of young people — you may not know where to turn. There isn’t one right answer, so here are just a few of your options to get the financial knowledge you need.

Take finance courses as electives

Most degree programs allow you to select a few electives — courses that are not required in order to obtain the degree or diploma. When selecting these electives, check to see if your school offers financial literacy or economics courses, such as Finance 101, that help help guide you when it comes to making smart money decisions. What makes this option ideal is that you get to learn a practical life skill and earn a couple credits in the process. If you don’t have this option, consider auditing a class or finding on-campus events promoting financial literacy.

Leverage government and nonprofit resources

To supplement your financial journey, you can also look to the Government of Canada for help. The federal government offers a number of resources for answering specific questions and learning about personal finance. Resources can be found on the Government of Canada’s financial literacy page including financial literacy programs and financial planning tools.

Other agencies that can also help include the Financial Consumer Agency of Canada, the Canada Securities Exchange and the Canada Revenue Agency.

Turn to financial institutions and experts

Banks and credit unions provide a trove of financial information to customers and the public. Check your bank’s website to see which services can help you. Usually, tools and educational material can help with budgeting, debt management and calculators that can calculate savings, cost of debt and long-term investment goals.

You can also consult financial professionals, either through your bank or independently, to help with tasks like setting up investment accounts. Keep in mind: Not all advice is free, and not all advice is unbiased. Be prepared to ask a lot of questions and always compare with other resources before accepting what you hear.

Consider less traditional resources

Not everybody has the time or patience to take a class or poke around on government sites. Sometimes you can get good investing tips from friends, family or online. But beware: Social media is infamous for pushing misinformation and even well-meaning friends and family can give poor advice. That said you can still find people who know their stuff. Just do your due diligence when consulting online sources, and always look at a person's qualifications and background.

Being on social media doesn’t mean someone is impartial, and having a lot of followers doesn’t mean they’re giving good advice — no matter the hype.

Follow personal finance sites

Money.ca isn’t your only option, but we try to provide easy access to tools and resources to help you master essential money matters.

We’re not know-it-alls. In fact our staff try hard not to become know-it-alls. We’re always curious and always learning, and we like to take our readers along for the ride as we discover new ways to get the most from your money.

— with files from Romana King

Sources

1. Government of Canada: You've been lied to, Ramit Sethis says, by Vishesh Raisinghani (Dec 8, 2023)

2. Statistics Canada: Student debt from all sources

3. Statistics Canada: Housing, wealth and debt (March 27, 2024)

4. Statistics Canada: Percentage of Canadian families that are debt-free by age group (Dec 7, 2017)

5. Ipsos Reid: Four in 10 (40%) Canadians Have Trouble Sleeping at Night due to Financial Stress (Oct 26, 2023)

6. Financial Post: Posthaste: Retirement out of reach for almost 40% of working Canadians over 50, survey finds (Feb 1, 2024)

7. Bank of Canada: The reliance of Canadians on credit card debt as a predictor of financial stress (July 2024)

8. CBC: Canadian students' math, reading scores have dropped since 2018 — but study says it's not all COVID's fault (Dec 10, 2023)

9. Government of Canada: Financial literacy in Canada

10. Financial Consumer Agency of Canada: Home page

11. Canadian Securities Exchange: Home page

12. Canada Revenue Agency: Home page