Charged Up! Podcast: Becoming financially literate

Episode 2 with Professor Arshad Ahmad

By  |  Published: January 30, 2017

Charged Up! with Jenny Hoff

 



Professor Arshad Ahmad has been teaching finance for 25 years and has a course on mastering financial concepts for free on coursera.org. In this episode he talks about what financial literacy is, what you need to be able to do in order to be financially literate, the motivations behind our spending mentality and the kind of actions you should take in order to get on the path to financial security.

Full transcript below. 

Jenny Hoff:

Welcome to Charged up! I’m your host Jenny Hoff. This month Charged Up! is all about tackling debt. And one important tool in that is understanding what debt is, how we fell into it and how we can avoid it in the future. That all falls under the heading of being financially literate.

So, who better to teach us about how to become financially literate than a professor who has been in the business of teaching about finance for 25 years? Professor Arshad Ahmad is the associate vice president of teaching and learning at McMaster University in Canada. He also teaches a course on finance and debt on Coursera, which offers free courses taught by top professors from around the world. So if you really want to become financially literate, then I highly recommend checking it out. Coursera courses are usually free to view and charge a small fee if you want to get certification for taking he course.

Financial literacy, for people who’ve never heard the term before, is really about understanding something that affects your lives in a very deep way. We all know that money affects us, debt affects us, our finances affect us, and yet many of us probably are not totally literate in finances and may not understand where our money is going and how to best use our money.

So, thank you for joining us today, Professor Ahmad.

[1:40] Professor Arshad Ahmad:

It’s my pleasure. Thanks for inviting me.

Hoff:

You talk about financial literacy in your work. Can you explain what that means on a personal level? What should we know to consider ourselves financially literate?

[1:50] Ahmad:

What is financial literacy? Very simply stated: It’s about money. It’s about understanding money, how it flows and having the confidence to manage it. Really, when we think about money, there are two kinds of money: “your money” which is debt and “my money” which is equity.

At a personal level, to be financially literate I think you need to be able to do some basic things without getting into definitions and stuff like that. Rather than saying most people might be financially illiterate, let’s just say what financial literacy might involve and how people might be engaged with it.

Let me give you some examples of what I mean:

  • Ask yourself if you can come up with a personal balance sheet on a back of a napkin in two minutes. This would show what you own, what you owe and the difference, which would be equity. So that would be one thing.
  • What about talking to an expert like a banker? This is probably someone you visit or used to visit if you’re doing everything online and being able to ask and understand questions about your own borrowing capacity. How much can you borrow so that you can also sleep well and not just think about eating well? That’s something I’ll come back to about sleeping well and eating well. That’s a big trade-off we make in decisions that allow us to do more than one, trading off with the other.
  • How about your credit card? People who use this tool in order to get things then maybe have regrets. And, if we have regrets we better insure against them. So there’s a whole bunch of decisions about how we are managing risk that come with making financial decisions.
  • And then let’s not forget doing this throughout the year. This is not something we should do at one point in time, which is something actually a lot of people do – which is make investments. So if you have money, if you’re not borrowing and you're making some investments, are you able to evaluate your decisions? And if you don’t want to make those decisions, is someone else going to make them for you? Do you have the confidence to evaluate their decisions?
  • Think about some notions of planning. You know we are all getting older, I certainly am. So think about retirement; that’s another huge part of financial literacy. 

All of these involve decision-making. So that’s how I would define it: being able to do these kinds of things.

Hoff:

That’s a pretty hefty list. What percentage of Americans would you say are financially literate? We take on mortgages and credit cards, and we have retirement funds, as you said. All these finances impact our lives in a big way. Do we know what we are doing?

[4:54] Ahmad:

I don’t have the figures for the U.S. handy, but I’d ask you, I’d ask everyone who’s listening to the podcast about their own circle of family and friends. How many people in this circle would you trust to have a handle on the types of decisions I just mentioned? And my guess would be, not that many.

And if your do look at surveys, there’s one on global financial literacy that McGraw-Hill came up with. They suggest that 2 out of 3 people around the world are basically financially illiterate. That’s a lot. And I think in my own circle, I would say that’s not exaggerating in the least.

Part of the problem for most people is that these decisions are really not that interesting. They are not something where you get up and go, “Hey, I can’t wait to figure out my insurance choices!” or compare credit cards or have conversations with a banker or make a personal balance sheet and retirement plan. 

Maybe it’s because – if we dig deeper a little bit – because people associate financial literacy with math or quantitative skills. A lot of people, if you ask them, “Hey! Do you like math?” would say, “Sorry, that’s one area I don’t feel very confident about. And please don’t talk to me about numeracy skills” and may be, unfortunately relating it to the kind of jargon they also encounter.

Money matters are more in our mind’s eye, and that’s something that we face for a few reasons:

  • People are learning less. For individuals, the medium income – if you take all the levels of income and go right in the middle – those levels of income have decreased or stagnated. 
  • Add to this cheap money. We’ve never had it better in terms of money being so cheap, and that’s reflected in interest rates.
  • That leads us to borrow. When you have an abundance of cheap money and not enough income coming in, what are you going to do? You are just going to borrow.

When you borrow more and more and more, that’s when money matters stare you in the face. When you start having this dependency on debt, then financial literacy takes on a new meaning.  

And yes, it does appear that we do not know what we are doing.

Hoff:

As you said, there is this general feeling that it’s cheap to borrow money. And that’s when people get themselves into trouble. Because they borrow money, especially when you borrow money on credit cards and you are associating them with low interest rates, which are what we see with mortgages and what you get at the bank for savings, you think “Oh, I can borrow as much as I want.” Then you have the high interest rates credit cards offer, and you find yourself in a hole that you can’t dig out of.

What is the debt that people should be very aware of and what can they do to avoid getting themselves in a hole like that?

[8:18] Ahmad:

Whether the source is credit cards, auto loans, student loans, whatever it might be, you are in the situation that you find yourself in. What are you going to do about it?

Well, it’s like finding yourself sick. You’re not feeling really good, so how are you going to start feeling better? People have to sort of think about the real symptoms or the deeper issues. They have to tackle those issues if they are going to change things in the long run. In the short run, they might be able to do a whole bunch of stuff to help themselves. But short-run fixes are only going to are only going to result in a short-run fix. They are not going to solve the problem. They are going to put a Band-Aid on it just so that you are going to get through the day or get through the week or get through the month. So we have to think about attitudes, and we have to think about beliefs. We can talk the short run or we can talk about the long run.

Let’s start with the short run. I would suggest that you start with a group of people that you trust, a group of family or friends who are going to support you. And what I mean by support right now is you need the emotional support as you find some of the more technical sort of solutions that you get from a financial adviser.

But before you go to the financial adviser, have someone else that you trust, that you can speak to about your conversations with the financial adviser. I think of this as an approach that is reasonable, so you are able to look in the mirror and you have someone to speak to. You need to look in the mirror when you have a problem like this. And looking in the mirror doesn’t often happen when talking to a financial adviser. They are just going to tell you what to do, and you may find that very unreasonable. But if you have someone else in your life, that is going to unpack the kind of issues you are dealing with, it becomes a lot easier.

Hoff:

When you say looking in the mirror, what do you mean by that? Is it confronting, perhaps, our bad habits that we may have that we keep repeating over and over? What do you mean when you say “Look in the mirror’?

[10:25] Ahmad:

That is exactly what I mean. I hate to say this, but debt is almost like an addiction. But, people label that as a bad thing. We are all falling into all types of addictions, whether it’s food addiction or chocolate addiction. Doing something in excess that we can’t help is an addiction. And you find yourself saying, “I’m doing it again. I’m doing it again. I can’t seem to get out of it.” That’s addiction.

This has to do with habits. And changing attitudes and changing the ways which we go about dealing with money. Let’s come back to that.

So you may get a technical answer to the kind of issues you are confronted with concerning credit cards, such as having too many credit cards, too many bills. Someone tells you “consolidate your debt.” But you may be able to do that and then have one credit card and come up with a rescheduling plan that your financial expert suggests to you. Then along with it, rework your budget perhaps to come up with a short-term solution. So, you can make that payment and move on.

But that’s not going to solve your problem. Because you got here not because you had a short-term problem. You got here because you’re constantly faced with this problem.  And when I say you, I mean me, I mean us. Many of us are in the same boat.

So it’s not like someone picked you out and said you’re a bad person and that’s why you’re in the situation. As I explained earlier, there are systemic issues that have led a lot of us into this particular dilemma. We are all facing it for a number of reasons. I’ve mentioned income, I’ve mentioned cheap money, etc. But now that we find ourselves in this situation, how are we going to get out of it?

If we are going to recognize that it’s an addiction, well, I think any addict will tell you – me included – that you have to start off by looking in the mirror. Looking in the mirror means admitting you’ve got an issue and talking to someone about it. And if you want to defeat that then you have to work with attitudes.  You have to work with emotions, with some lessons learned – lots of scars that will help, lots of mistakes that were made need to be talked about. That’s really important. People will try to ignore it and say, “Ah, that doesn’t apply to me. That applies to someone I saw in a movie or that’s someone else’s story.” But this is your story, and there is a lot of wisdom in that kind of learning.

Hoff:

You’ve mentioned in an article that you’ve written for The Huffington Post, how financial literacy is a lot like dieting: We all know the steps to take – they’re simple steps that we have to take, such as not spending money on your credit card, but we don’t do them.

Are we more impulse-driven where it is harder to change our habits than we think? Can we change? A lot of people say, “I’ve spent a lot of money,” so they cut up their credit cards once they’ve paid them off. Low and behold a year later, they’re signing up for new credit cards and repeating the same mistakes. I’ve seen it happen in family, in friends and in people that I know. So, are we changeable? And if we are changeable, how do we make that change?

[13:48] Ahmad:

Well this is really addressing the core issue of change. I would go back to the example you just gave, and I often give this one. I love to eat french fries. I know if I have a few of them, I’m going to be OK. If I’m going to eat them every single day and gorge on them, I’m going to have a problem, you know? I already have a weight problem!

Now if you have a weight problem, how do you tackle that? It’s the same way we are going to tackle our financial well-being problem.

If you’re going to go on a diet or you’re going to get some prescription from somewhere, which you can also get for your financial problem, that doesn’t change things. So, what do you do?

Well, you work on the things that are going to help you to change. One of them is motivation and the other thing is to be able to sustain that motivation, right?

I’m going to suggest something: Someone convinces you that if you drink five liters of water a day, your hormonal balance will change, you are definitely going to have weight loss, and in fact, your circulation will change. A lot of good things will happen if you increase the amount of water you drink every day.

And you might say, “I’m convinced. I’m going to do it.” Well, are you going to do it? How are you going to do this? You might say, “I’m going to drink one liter more water in one month,” not even each day. “I’m going to give myself a month, so that I can have one liter more water until I’ve hit that five-liter mark.”

There you go. You’ve taken a step toward your well-being with your diet. That was just drinking water.

It’s the same things we have to think about with money. There are several examples like these where we start changing our habits. You change your habits by thinking about doing something that is going to become enjoyable.  Financial habits have to change the same way our well-being for health habits change. And these habits have to do with thinking more positive thoughts that will reinforce your changes rather than dwelling on the negative that gets you depressed, and that make you feel helpless. Turning that piece around has to do with the kind of emotional changes that are as important as taking the steps for being financially independent.

Hoff:

So a lot of it is actually just releasing that anxiety. Because it’s a little bit of this cycle where you think about your finances, you think about your debt, you get anxious about whether you have too much money, too little money, too much debt – whatever it is, you get anxious and you often do detrimental things because you are trying to make yourself feel better.  

What are some ways we can look at it positively and help get rid of our debt? Or change those habits? Is it every time you don’t spend money you treat yourself to something you might like? What are some ways that people can just stop repeating the same mistakes over and over and over again?

[16:55] Ahmad:

I think you could do small things. I give the example of drinking more water. You can do small things with money like making that personal balance sheet, trying to figure out: “Where am I at right now? How much am I worth? What do I have? What am I borrowing? And what is my equity, if anything?”

You’ve got to take stock first. One of the problems with taking stock is we don’t have the tools, we don’t have the language, and we don’t have the people around us to do this activity. So set that up. Talk with people, and get literate. There has never been a better time than today in acquiring really fantastic information that is really at everyone’s fingertips, literally. Your mobile phone will give you that information and your laptop certainly will. If that doesn’t work, go to your library. They will have these tools where you can get this info.  

Choose a good place that is at least going to get you a road map. And don’t worry so much about “tips and tricks.” The short-term things are not going to change your attitudes.

Your attitude is going to change first through reflection. That’s one thing I would advise to every single person. Find out why you are where you are and find out some of the deeper reasons. Let me give you a few examples that I’ve done a lot with my own students and my own self:

  • What was your attitude toward money when you were younger?
  • We were all introduced to money at some stage in our life. Was it talked about in a healthy way at the dinner table?
  • Was it a taboo subject?

Those reflections are really important. Try and unpack why you have this kind of inertia inhibition about talking about money as you would your own health. And once you start having this kind of discourse and you start looking at some courses, I would mention my own here, because I’ve spent 25 years of my life trying to help people navigate through some of these basic decisions that I’ve talked about. You can start getting more confidence with the language.You need language to be able to tackle financial illiteracy. You need to be able to listen to someone else who is giving you financial advice and cut through all of the nonsense just so you can make sense, common sense, out of money coming in and money going out.  

There are so many apps that can help you track your money. It doesn’t mean that you have to sit down and create this long budget that – ugh!  – that makes you feel like you are going to the dentist.

Do one little thing and open the conversation so that you create a learning environment for yourself. Create the condition so that you are going to succeed. Create conditions you control. The other stuff will take time. There’s no such thing as a substitute for practice, so start practicing a few things that are under your control.

For example, you can explain to someone how much you own and how much you owe. Focus on your loans for a moment:  

  • Where did they come from?
  • What are you going to do with the particular loan that is constantly a source of frustration for you?
  • What are some of the possible solutions?
  • What lifestyle changes do they imply?
  • What does it mean? Maybe instead of the big house you have, you can live in a smaller house.
  • Does it mean that the car you drive alone in – could your transportation issue be solved in a different way?
  • What are those life choices that you need to make?

Those life changes are going to be the key that unlocks the constraints that are holding you back from making the changes you need to make. This is always the solution. It’s a question of how you approach it. It’s a question of how you equip yourself to deal with it. And please don’t do it alone.

Hoff:

I think that’s really good advice. To recap:

  • Open up the conversation
  • Take stock of how you view finances
  • Make a simple balance sheet:
    • How much do you owe to somebody?
    • How much are you bringing in, and is it negative?
    • Do you owe a lot of money that you can’t afford to pay off?
    • And what life changes can you make to start lowering those payments?

So, just so that we all feel better, have you ever made a bad financial decision you came to regret, and what would you have done differently?

[21:09] Ahmad:

Not only have I made them in retrospect, I’m still making them. That’s part of being human. Just because you have knowledge doesn’t mean that you’ve figured out what is really sort of a wicked issue.

Money is something that you can deal with, but it doesn’t mean that you’ve solved it forever and ever. It just doesn’t work like that. Even when you have lots of money, people are very sad with their financial decisions. Even when they have a lot of money, and we know that from all the people who win money for example through lottery and so on, these people end up being really miserable many, many times.

And you might be saying, “What an idiot. If I had a million dollars tomorrow, all my problems would go away.” Well, frankly speaking, the evidence says otherwise.

I’ll give you my own example. One of my first big mistakes was overpaying for a house. I just overpaid. Why did I overpay? When I think about this mistake I see that I did that because in a way It was an identity issue.

I wanted to live in a certain place, impress the sort of people I was hanging out with and I was thinking about my family: They need this kind of space, they need these kinds of amenities and so on and so forth. I had an excuse, I had so many excuses to spend very quickly the kind of money I did to buy this house, not realizing that it was something I couldn’t really afford.  I mean it was because I could borrow money, and there was a future potential of earning more income. That’s the typical mistake people make – they get over-optimistic and they are not hard-nosed about the money that is coming in.

There’s a reason our parents and grandparents told us to “live within your means.” What the heck does that mean? It means that you don’t work morning until night doing 10 jobs so that you could pay your debts. That’s just insanity. And I mean saying that, “Oh, I’ll just pay my bills because I’ll just get another job” you’re going to ruin your health along the way if you do that. That’s just not good common sense.

I think that’s when I say we need to step back and review our decisions that we made and be honest about it. I’ll admit I’ve done that on so many occasions. I still do it.

 Hoff:

That’s a great note to end on, talking about really thinking bigger than just your next payment or your next credit card payment or your next bill. It’s more about your overall satisfaction in life and how you view money. How do you view what you’re spending? And how are you spending what you’re spending?

Finally before we go, what charges you up about personal finance? About educating people?

[23:43] Ahmad:

What charges me up is attending to those guests, to remind people there’s so much we can do. Asking “What is really going on here? What’s the big question?”

Just like the questions you asked me today, Jenny. They were excellent questions. They got me talking, I don’t talk as much, by the way normally. I am very excited right now speaking to you because you asked good questions. But what are the good questions that you are going to ask yourself about money-related issues?

When you ask a good question, answers are much easier. If you ask a bad question, you’re going to get bad answers. But that requires thinking, it requires practice, it requires informing yourself, it requires listening to others and creating this kind of a social network where you feel you have some significant people in your lives who you can talk to and influence you. That’s what I’m trying to do in my own little way as a teacher.

Hoff:

For people who want to learn about finance you have a course on Coursera, which is a website where you can get free courses. You can at least sit in and listen to the free courses and watch them, or if you pay a little bit of money you can become certified. You have a course called “Finance for Everyone” where you cover issues like debt.

[24:57] Ahmad:

It’s about literacy. The whole course is not just for personal finance, it’s not just for people working in a business, it’s not just for people in NGOs or not-for-profit places.

It’s the kind of tools you need to be able to have that conversation, so that you can do stuff for yourself and empower yourself to ask those good questions. And to be able to take those next steps so you’re better informed. You are looking after yourself, you’re looking after the ones that you love.

Hoff:

Thanks for joining us today It’s been a very fascinating discussion, and we learned a lot.

[25:33] Ahmad:

Thank you so much, Jenny, and I hope I can learn more from your good questions.

Hoff:

And thank you for joining me for this episode of ‘Charged up! – How to become financially literate.‘ Every week I’ll be interviewing experts within the CreditCards.com family or authors or inspirational individuals who can teach you about money stewardship and how to become finically successful.

Remember this isn’t just about money, this is about life. If we can control our anxiety around money and learn to master it, we can start controlling other aspects of our life as well. And learn how to enjoy life a little bit without having to swipe our credit card all the time.

If you have questions that you want me to address on the show, email me at chargedup@creditcards.com. And don’t forget to rate or review ‘Charged up! with Jenny Hoff' on iTunes.

Let’s get charged up about your financial future!

And, please, if you enjoyed this episode rate and review us on iTunes!


See related: Charged Up! podcast: Keeping your financial resolutions, Charged Up! with Jenny Hoff: podcast archives

 


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Updated: 10-24-2017

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