1. Lack of Financial Knowledge – Our schools interestingly enough don’t teach personal finance concept at any level other than as university courses. Unless your parents have a good basis in personal finance knowledge, and teach it to you, you don’t have a mean to learn it other than teaching it to yourself.
2. Taxes – People need to understand the different types of taxes that are levied on them, and do tax planning to minimize the effect of tax on their incomes and earrings. Not maximizing your tax shelter can overtime add up to a large amount of money lost.
3.Inflation – Another effect that can overtime erode the value of money is inflation. The average rate of inflation in Canada is approximately 3.9%, based on inflation data from 1950 to 2009.
Let me demonstrate the effect with an example. $1000 today will equal in:
10 years = $682
25 years = $384
50 years = $147
As you can see, if someone didn’t understand the effect of inflation, and decided to keep their retirement savings in a chequing account that earns very little interest, the value of their money would have eroded significantly by the time retirement arrives due to inflation !
4. Life Challenges – such as:
A person has to understand the effect such events can have on their finances and plan for it accordingly. Most of these items are not pleasant to think about, however they are crucial in planning one’s finances.