Understanding Canadians with the weakest financial fitness

As a result of the pandemic and current economic environment, many Canadians are feeling greater financial challenges, particularly in light of the rapid rise in inflation impacting the cost of living, especially food and fuel. A growing body of research shows that some Canadians are in a better financial fitness position to weather these storms than others. Financial services organizations that serve a broad cross-section of Canadians for credit, mortgages and loans will likely begin seeing the latter in increasing numbers. Taking a moment to learn who these struggling Canadians are, including their values and mindsets, will prepare financial professionals to help them in meaningful ways, and get them back on track and up the financial fitness ladder.

The tightening economic environment

As I write this, the Bank of Canada has just announced that it’s raising the benchmark policy rate by 0.5 percent, its sixth increase since the depth of the COVID-19 crisis when it bottomed at 0.25 percent – now the highest it’s been since early 2008. Further rate hikes are anticipated in December to adjust persistent inflation.

This comes on the heels of the largest fiscal stimulus in Canadian history to counter the dire economic threat caused by the COVID-19 crisis. As global economies ground to a halt, government supports like CERB played a critical role. Statistics Canada notes that, over the first three quarters of 2020, disposable income for the lowest income quintile increased by almost 37 percent, more than any other quintile.

Statistics Canada also notes that our national savings rate, which averaged 1.35 percent between Q1 2018 and Q4 2019, peaked at 27.2 percent in Q2, 2020 – and has averaged more than 10 percent from Q3 2020 to Q2 2022 (when it dipped to 6.2 percent). In May, The Globe and Mail reported that some $300 billion in excess consumer reserves were sitting on the sidelines. If Canadians, in aggregate, are heading into a recession, they’ve never done so with such a healthy balance sheet – so why all the worry?

The pain is always in the lower end of the distribution

Here’s the rub: “in aggregate” is not what everyday people experience. Latest estimates of average household wealth pegs Canadians at $940,558 as of Q2, 2022, which sounds impressive until you see that a closer approximation of the median, or midpoint, of Canada is the average of the 3rd quintile ($443,453), and that the bottom two quintiles have a net worth of $131,439 and -$1,852, respectively. Suddenly, the averages don’t look so healthy.

What statistics like these fail to describe is the human experience. Brand new insights from Environics Research bring fresh understanding about those struggling with weaker financial fitness.

While many of our clients are in the wealth management, insurance and retail banking sectors serving a wide range of Canadians, for more than a decade I’ve had the pleasure of working with the Canadian Association of Credit Counselling Services, in conjunction with Sagen Inc., to field the annual Financial Fitness Index. As explained in the linked white paper and video, featuring CACCS Executive Director William Moores, the Financial Fitness Index was designed as a self-assessment tool to track Canadians’ financial well-being over time, and to look at subgroups at any given moment.

With November being Financial Literacy Month, we wanted to showcase our latest research on the Alert segment – those whose financial fitness is weakest. As of 2022, they represent 16 percent of adult Canadians, relatively unchanged from 14 percent in 2011 when tracking began, despite a decade of national economic growth and prosperity. In the current economic environment, it’s likely that this segment will grow in coming years, making it critical for the financial services sector to understand them and how it might be able to help.

Social Values and Decision-Making Mindsets (DM3’s)

As might be expected, those in the Alert segment tend to be somewhat younger; have lower educational attainment; and are more likely to be unemployed, students or at home full-time. They’re also more likely to be renters and are facing rent inflation in many Canadian markets.

Demographics tell only part of the story – and our social values research identifies that many struggle with feelings of Fatalism, lack of Personal Control, and detachment from life purpose and goals. Many experience time Stress and struggle to take care of their well-being. Importantly, they don’t over-index on ostentatious or impulsive spending – their low incomes and high cost of living are genuine constraints they need to work within.

Brand new, this research shares insights on their decision-making and mindsets, inspired by the field of behavioural economics, pioneered by my colleague Susan Seto. These findings show that those struggling financially have a Fear of Missing Out and motivation to Avoid Loss, and are prone to both Simplifying and Overthinking their choices. Most importantly, they have a very low score on Trusting First, meaning they fear judgement and criticism from those in positions of power and authority, making it very difficult for them to seek help when they need it most.

Our paper and video seek to help financial practitioners understand the values and decision-making mindsets of this segment, so they might engage with them with greater empathy and support, and guide them to greater financial empowerment. As our colleagues at CACCS explain, small positive steps can lead to life-changing outcomes and healthier financial fitness. In the current environment, the need to understand this population has never been greater. 

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