Anna Voskuil | News Editor
Featured image courtesy of EduBirdie
Starting off, I can already assume that you’ve zoned out as soon as you saw the word “finance” at the top of this page—to be honest, I likely would’ve done the same. If you’ve stopped reading and already turned over to the next page, I can’t blame you.
However, if you’re still here, I encourage you to keep reading.
When it comes to our personal finances, we as students often feel lost when attempting to make financial decisions. With the exception of finance or commerce students, or those who have taken a course on the subject, the financial world can feel like a complicated one to navigate.
We often leave it in the hands of professionals, with little to no concern about our direct involvement in our personal finances—after all, it’s ‘too hard’ to understand.
Simply put—these dollars don’t make cents.
If you can relate to that sentiment, you are not at all alone—in fact, the recent “Generation Why” report—which reported on financial literacy amongst millenials—has shown that only 24 per cent of millennials have basic financial literacy, and a mere eight per cent have advanced financial literacy.
With higher financial literacy comes a knowledge of subjects such as: taxes, how to use different bank accounts, how to properly invest money, and how mortgages function. However, with basic financial literacy, one would only know about their personal assets, income, and expenses.
In layman’s terms, financial literacy is the comprehension of topics in finance including money, investments, and personal finances. It stresses an ability to manage personal finances in an efficient manner, including learning how to make wise decisions on investing, real estate, budgeting, paying for post-secondary education, personal insurance, retirement planning, and tax planning.
As well, financial literacy increases one’s proficiency in fundamental financial concepts and principles such as compound interest, debt management, the time value of money, profitable savings techniques, and financial planning.
Overall, a lack of financial literacy can cause many to become victim to fraud and high interest rates—which could result in bankruptcy, foreclosure, or bad credit—subprime mortgages, and predatory lending.
It can also lead to poor financial decisions and result in large amounts of debt. These poor decisions can result in the damaging of one’s credit, and financial well-being.
However, stronger financial literacy skills in fundamental elements of finance, such as the advantages and disadvantages of variable and fixed interest rates, ensure individuals are prepared when making informed monetary decisions.
Most significantly, poor financial literacy can negatively impact one’s overall health, due to significant financial-related stress.
In short, financial stress can be defined as the result of economic and/or financial events that create worry, a sense of scarcity, or anxiety, bringing with it a psychological stress response.
If this worry continues, it can lead to “chronic financial stress,” which can have a detrimental impact on one’s physical health.
Moshe Milevsky, a finance professor at Schulich, expresses why he believes so many students are financially misinformed: “They get their information about money from the three worst possible sources: one, friends; two, media; and three, family.
“Also, the financial services industry—such as banks, insurance companies, or mutual funds—have an incentive to maximize their own profits as opposed to your financial well-being. All of these conspire against those who want to live a healthy financial life.”
Chris Robinson, a finance professor with the School of Administrative Studies, speaks on one of the biggest mistakes he sees students make in their financial planning.
“Students—and just about everyone else—underestimate how much they are spending,” he says.
To this, Milevsky adds: “I find that most students don’t spend enough time thinking about their personal finances in a careful and rigorous manner, and in particular don’t think long-term when it comes to managing their money.”
As well, the Generation Why report found that only 39 per cent of millennial men were concerned about their level of financial literacy, along with 29 per cent of women.
Further, it shows that most millennials tend to prioritize their job security, relationships, and living situations over improving their knowledge of finances.
For university students, the average cost of tuition is approximately $6,500 per year—before the cost of travel, supplies, and books—which is a 3.1 per cent increase in tuition costs from last year. For higher-cost programs, however, this number can balloon to anywhere from $8,000 to $22,000.
Overall, students face much higher financial burdens than ever before, both in and out of school. Besides high tuition costs—which often rely on taking out loans—after graduation, students often face bleak career prospects with seasonal contracts and no benefits, as well as higher housing prices.
In fact, graduates often find themselves taking minimum-wage employment, temporary work, or unpaid internships, making their debt considerably more stressful to tackle.
A report from the debt firm BDO Canada found that out of all Canadian graduates under 40, about 77 per cent regret the money they spent while in school.
This report also found that only 30 per cent of graduates had more budgets with an emphasis on frugality, 25 per cent would have stayed away from credit cards and car loans to prevent debt, and approximately 28 per cent would have earned their own income during school.
Out of all Canadian students, approximately 67 per cent reported they had debt when they graduated. This means only 33 per cent reported to graduate debt-free.
Further, of those who graduated with debt, about 62 per cent are still paying off loans.
In Ontario, many students often rely on OSAP funding to aid with these high tuition payments.
In 2016, OSAP statistics showed that the overall loan rates were 7.5 per cent for OSAP’s default rate, and 33.4 per cent for OSAP Repayment Assistance Plan (RAP) usage rates.
OSAP’s RAP is made to assist those having difficulty in paying off their student loans. In determining one’s eligibility for the RAP, the borrower’s family size, amount of student loan debt, and family income, are all put into consideration.
If an application for RAP is approved, either the borrower is qualified for a six-month reduced payment, or no payment is required.
At the end of this six-month term, it’s possible to re-apply for a second term.
As well, OSAP mentions these other loan default mitigation initiatives: credit screening, income verification, collections, and closing the bankruptcy loophole.
Credit screening is where students who have been in arrears for 90 or more days on three or more personal loans or credit account in the previous three years and are 22 years old or older, with each account holding $1,000 or more, cannot be eligible for student loans.
Income verification is where the ministry confirms information on income that students and their parent(s)—or, if applicable, their spouse—provide to OSAP with the Canada Revenue Agency.
Collections refers to contract private collection agencies and set-offs against income tax refunds, through which Ontario collects money owed from student loans.
Finally, closing the bankruptcy loophole includes a federal legislation where, in a seven-year timeline following a student’s graduation, federal and provincial student loans are excused from bankruptcy proceedings.
Robinson advises: “Students need to understand how OSAP works if they are getting it. The most important thing to remember is that most of what you get is a debt that you will have to repay.
“You may need OSAP to go to university, but you should try to incur as little debt as you can.”
Speaking to the post-graduation stress, Robinson advises: “When you begin working after graduation, other issues like insurance, home ownership, and the cost of having children will become important.
“But the basis for all your personal financial planning is still keeping track of spending, budgeting sensibly, and avoiding too much consumer debt.
“Never go to a payday lender or cheque casher.”
Many in Canada also rely on the Registered Education Savings Plan (RESP), a unique savings account made for parents who wish to save for their child’s post-secondary education.
An RESP typically involves a subscriber, promoter, and beneficiaries.
The subscriber is the one who makes contributions to the RESP, and cannot deduct any of them from their income tax and benefit return. A promoter tends to pay both the income earned from said contributions—as well as the contributions themselves—to the beneficiaries.
This earned income is paid as educational assistance payments (EAPs).
If contributions aren’t given to the beneficiary, at the contract’s end, the promoter tends to pay them to the subscriber. Once returned, the subscriber doesn’t have to include these contributions in their income.
From the promoter, beneficiaries will receive any contributions and EAPs they have provided. Beneficiaries must include any EAPs in their income for the year they are received. However, contributions received in their income do not have to be included.
When it comes to the language of finance, unless one is studying or teaching finance themselves, and/or whose career is within the industry, it can often feel as though one is wrapping their head around a foreign dialect.
Milevsky adds: “Having a good idea of your ‘family balance sheet’ and ‘personal income statement’ are the first step towards healthy personal finances.
“If those two phrases sound like Greek or Latin, I’d recommend taking a course in personal finance.”
On improving student financial literacy, Milevsky says: “I have argued for having a mandatory course in personal finance in my home faculty—Schulich—so that all students would be required to learn about how to manage their financial affairs over their lifecycle.
“A required course would equip students for the next 50 to 70 years of their financial life, and is just as important—if not more so—than many of the other required courses students must take.”
Despite the fact this required personal finance course is not currently in place, Milevsky mentions an elective course that he now teaches: “I am proud to say that we do offer Personal Finance as an elective course—which I teach—with very high enrollment each semester (I know that for a fact), and satisfied students (I hope).”
Beyond improving one’s financial literacy, budgeting properly is fundamental in managing not just money, but also in decreasing potential debt.
Robinson advises: “Keep track of your spending on everything for a month: from your bank, cash purchases, credit cards. Separate it into categories that are meaningful to you, and into two groups: things you have to spend money on, like groceries and rent, and things you could defer or not buy at all.
“Think about it. Are you getting the best value for your money? Are you spending more than you can afford and building up overdue credit debt? Maybe you need to stop using a credit card altogether. For students and for most people, controlling spending and avoiding credit card debt is the behaviour that matters most.”
Onto more basic budgeting tips, Robinson advises students to use programs that specialize in organizing their money.
He says: “Small cash purchases—coffee, a chocolate bar, buying lunch instead of bringing a lunch to school—these are the items you overlook. There are many apps you can use on your phone, or on a computer, to create a record of spending and then a budget or plan for future control of spending. Many of these apps and programs will capture your bank and credit card data automatically and put it into categories.
“The banks have software, or you can be old school like me and create an Excel spreadsheet, or even use paper. The Financial Consumer Agency of Canada have all kinds of practical advice on its website, but so do hundreds of other sites.”
Further, in helping students visually map out their budget, the Financial Consumer Agency of Canada provides a budget worksheet where students can fill out the expenses and income sections.
When going through these numbers, they advise on multiplying the monthly amount by the number of months one has the expense, which should show a yearly dollar amount.
The worksheet is split up into four separate sections: one-time expenses, such as tuition, student fees, course materials, et cetera; ongoing living expenses, divided into food, housing, transportation, yearly health, and other miscellaneous expenses; income, which can include part-time work, school grants, scholarships, RESPs, et cetera; and total yearly expenses.
The webpage says: “If your expenses are greater than your income, you can start looking for ways to save.”
This can significantly help students in being more thorough with their personal finances, as well as encourage a long-term assessment of their budget.
Long-term planning, such as retirement, may appear to many students as something they shouldn’t worry about. However, in furthering financial stability and overall financial health, looking into long-term plans has a significant impact.
This can come from the choices one makes now with their spending and financial planning.
Furthering this, Robinson says: “By far the most important area is keeping track of spending, planning for sensible spending in the future that will meet your goals and avoiding too much debt.”
When it comes to your finances, your own contribution, time, and knowledge matters—down to the last cent.
