Financial Literacy – The What, Why and How?

Albert and Jack belong to urban middle class families. Both of them had a decent upbringing, studied in private English-medium schools, performed well in college. Even though his family discussed their financial matters at length, Jack never took a liking to it. Neither did he take much interest in financial lessons or news. On the other hand, Albert was very active in his family affairs. He always discussed about his school and college expenses with his parents and aimed to be financially independent. So, he took up a financial education class while he was in college.Now, 10 years after college, Jack is doing well in his job and has a family to take care of. However, he is still paying his debts in lieu of a property loan and does not have much savings either. Now when the economy is in turmoil, Jack is having sleepless nights, thinking of ways to sustain his family. Albert, on the other hand, was well-prepared for all situations. He took good investment decisions, has manageable debt and a healthy amount of emergency funds saved up.

Even though Albert and Jack grew up together, both are in two entirely different situations financially.

 Why is this so? This is because Albert chose to be financially literate. He realised the importance of financial education, which helped him prepare himself for good and bad days.Financial literacy is having and applying the knowledge and skills required to make informed, viable and effective financial decisions. It means having the correct knowledge of various financial products and services to help you take wise decisions related to savings, expenditure, investments and borrowings. 

Let us know how financial literacy plays a vital role in our everyday lives.

        Understanding the concept of Money Management: Financial literacy enables you to take prudent financial decisions. Money management is all about understanding how to save more, control debt and make wise financial decisions. Understanding money management is a long-term, continuous process that helps you bring about a positive change in your financial behaviour. Not managing your money effectively can also have brutal impacts on the economy. An example of poor financial decision is when a person takes up a loan which exceeds way more than what their financial capacity allows them to. The person’s inability to repay the loan not only affects them but also burdens the economy in the form of bad debts. 

        Knowing how to channelize your funds: Proper channelization of funds will help you optimize your hard-earned money. It is vital to allocate your money into four major divisions: ongoing expenses, savings, investment and debt repayment. Knowing how much of your income should be allotted to each of these divisions will steer you towards financial wellness and freedom. Money not being invested and left lying idle will rob you of generating more revenue or income streams. Let your money make more money for you. 

        Good debt v/s. Bad debt: Having proper credit understanding is another crucial aspect in financial literacy. Let us consider this, if you take a loan for some purpose, without prior knowledge and understanding of: 

      –          How you plan to repay the loan?

      –          Is the interest rate charged viable enough for your financial capacity?

          Will the credit raised yield you any return?

          Is there any other better source for raising the funds?

 …then, you might fall into more trouble. Financial literacy saves you from falling into a vicious debt trap and helps you understand the difference between good and bad debt. It helps you analyse your risk-taking capacity, manage your risk well and push you towards a lifetime of financial security.

        Futuristic in approach: Not all days are alike. All of us have our share of happy and gloomy days. But, being financially literate means planning ahead for your future. Always keep some funds aside for emergency purposes. It is advisable to save up to 6-12 months’ worth of finances to help you sail through tough times. This also includes planning for your retirement. This will help you create a sustainable and sound financial environment for yourself. It provides you financial stability to positively respond to the dynamic environment and circumstances.

        Savings and Investment: Financial literacy encourages smart spending which ultimately increases our savings. It helps us gradually improve our financial behaviour by understanding the nooks and crannies of savings and investment. It helps in taking conscious and confident decisions after analysing the available data and interpreting it. It will ensure less financially induced stress and more of financial sustainability.

        Protection from frauds: Being financially literate makes us self-reliant. It gives us the ability to consciously take decisions without getting negatively influenced by other parties. It prevents us from falling into frauds and dubious schemes. You will be able to gauge your financial position and form your personal, unbiased opinion before falling prey to any misconceptions or herd mentality. It also prevents you from being too cautious and stereotypical about certain financial products and services. For instance, a lot of elderly people advise against investing in mutual funds. This might be due to any past losses generated by a miscalculated financial decision or a result of mere hearsay. Having the adequate financial knowledge enables you to take balanced financial decisions and not shy away from profitable and calculated financial decisions.

Now, we understand how financial literacy should be an integral part of our education. It should be included in both school and college curriculum. You can even start it yourselves at home. Read newspapers and financial books, attend finance workshops, online classes and tutorials. Actively engage in financial discussions to enrich yourselves with more financial knowledge. Your future is in your own hands. Educate yourselves and make it a better one.

Team Investoday