The importance of financial literacy in balancing money and mental health

Few investments in life pay bigger dividends than a sound financial education. Learning how to make a budget, manage debt and plan ahead — lessons that are surprisingly hard to come by at an early enough age — are the foundation for a healthy financial future. It’s an education that spans a lifetime, and the sooner you learn the basics, the healthier both you and your wallet could be.

What is financial literacy?

Financial literacy is the understanding of key financial concepts, such as saving, budgeting, investing, debt management and retirement planning, and the ability to use them to achieve your financial goals.

Why is financial literacy important?

While being financially literate isn’t a fail-safe against financial challenges, it can certainly help you make better decisions about your money. Understanding how to make your money work for you is a learned skill — whether you’re allocating resources toward multiple goals, protecting your credit score or planning for the future and unexpected expenses.

Poor spending habits, for example, often result in the kind of debt that can crater your credit score and, with it, the ability to achieve your goals. A bad credit rating may make obtaining a loan with a large financial institution more difficult, which may lead some people to non-traditional lenders who charge interest rates that are typically well above average, making matters worse. When you’re financially literate, you could be more resilient in the face of adversity.

Financial literacy and mental health

According to the TD Financial Health Index, around 40% of Canadians are struggling financially. Despite their struggles, many of those same people said they are reluctant to seek advice or talk about money with a professional.

It may not be discussed as often as it should, but financial literacy can also give you greater confidence. If you struggle to manage your money, you may find that stress and anxiety carries over into other areas of your life too. One way to improve your mental health is to take charge of the things you can control and have a solid plan in place for those you can’t — which is exactly why being financially literate is so important.

Financial literacy in Canada

Overall, Canadians score well for financial literacy, but there are still many who lack a basic understanding of their finances. According to a survey by the Ontario Securities Commission, Canadian investors, on average, were only able to answer 53% of questions related to financial literacy. Nearly one in three were found to be overconfident and had rated their financial knowledge higher than they should. ¹

Financial literacy for kids

Planning for your financial future is a lifelong journey, and it can pay to get a head start. If you have kids, you may want to consider looking for opportunities to talk to them about money. Even letting them in on some of your own discussions in a limited fashion and answering any questions they have can help.

Once they’re old enough, consider giving your kids an allowance and encouraging them to save some of that money for things that are important to them. The more they learn about saving when they’re young, the more likely they’ll continue the practice of saving once they’ve left the nest.

Key pillars of financial literacy to consider

Debt

What is it: Debt is money you borrow from a person or institution after agreeing to pay it back, usually with interest. Debt isn’t necessarily a bad thing, particularly if it helps you achieve your financial goals and you’re able to manage it appropriately. Student and business loans, for example, can be good investments as they help you earn more in your career — provided you pay them off in a timely fashion. However, when high interest debt accumulates it can quickly become a problem if it grows too quickly or you’re unable to manage your payments.

How to manage it: Part of the process of becoming financially literate is learning how to assess which credit products are right for you. When it comes to picking out a credit card, for example, you may want to look for those with lower interest rates so that if you need to carry a balance, it won’t balloon out of control. Likewise, when it comes to paying off your debt, focusing on accounts that carry the highest rates of interest first is often a good idea.

Budgeting

What is it: A budget is a bit like a roadmap that will help you achieve your financial goals. Setting up a budget allows you to keep track of the funds coming in (income) and those going out (expenses). It can help you modify your habits to pay off debt, save for a major purchase or plan for retirement. It can also help prevent you from spending more than you have.

How to manage it: A good budget serves as a foundation for your financial health and may help you become a smarter, more empowered consumer. When creating your first budget, try to keep it simple and only add more categories as you gain a better understanding of the things you truly need. Following a budget takes time and discipline, but the knowledge you’ll gain is often well worth the effort.

Saving

What is it: Putting money aside for your financial goals, no matter how big or small, is a key component of a good budget. It also helps ensure you’re better prepared for the unexpected expenses life may throw at you.

How to manage it: How much you save will depend on your current situation, but a common rule of thumb suggests setting aside roughly 20% of your income for debt repayment and savings. If you experience an unexpected influx of money, you may want to consider putting aside a similar amount. You may need this money sooner or later and you’ll be glad it’s there when you do.

Investing

What is it: Investing is the process of using some of your income to purchase financial products that are expected to grow in value over time. An investment portfolio can help you achieve your short- and long-term goals by allowing your money to work harder and grow faster than it would if it were sitting untouched in a regular savings account.

How to manage it: TD Direct Investing offers a wide range of services, support and products that will help investors of all levels of financial literacy learn how to use their money wisely.

How financially literate are you?

Managing your money can be a daunting experience, not just because of all the elements involved but because your future is literally on the line. How aware are you of the current state of your finances? How much money do you have coming in and out each month? How much debt are you carrying and at what interest rate? Answering these questions can start you on the path to a healthier financial future. Think you’re ready to invest? This quiz will help you find the answer.

Ways to improve your financial literacy

The more time you put into managing your finances, the easier it may become. Here are a few ways you can boost your financial health:

• Start with a budget and think about the things you want for yourself.
• Make sure you pay your bills on time and focus on paying off debt.
• Find out if your employer offers a financial wellness program or other benefits, such as Registered Retirement Savings Plan (RRSP) matching, that could put you in the fast lane to financial health.
• Seek out reliable sources of information and educate yourself on ways to trim your expenses and maximize your savings.

Remember, you’re on a lifelong journey. It’s OK if you make some mistakes, just be sure to learn from them.