Financial Literacy :- A must for every individual!

written byRAJESH ISRANI

Financial literacy is regarded as an important requirement for the effective functioning for any economy and society. Over the years, financial literacy ensures quality of social inclusion and enhances the well being of our communities. While financial inclusion is the primary criteria while evaluating the level of development & progress of any economy, true financial independence cannot previal in absence of literacy. In this article, we shall be taking a closer look at what financial literacy truly means and the advantages of it.

What is financial literacy?

Financial literacy refers to the ability to make informed judgements and to take effective decisions regarding the use and management of money. It thus includes the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner. In other words, financial literacy would mean that you understand the risks & rewards associated with every monetary decision and are also aware of the other options available to you.

Signs of financial illiteracy:

• Lack of awareness upon the need for and importance of various financial services/ products.
• Lack of access or knowledge as to how to access to services/products.
• Lack of knowledge and understanding of financial services/ products Inability to 'rightly' choose between alternate financial services/ products Inability to make proper assessment of the present & future financial situation Inability to understand the risks & rewards of any financial decision

Why is financial literacy needed?

The need for financial literacy is felt in developed and developing countries alike. Even if you have financial inclusion wherein you have easy and fair access to banking, investment and credit products, the real benefit can only be enjoyed if you are financially literate. There are many cases and even high chances that in absence of proper knowledge, one can be exploited by intermediaries and manufacturers, alike, leading to grave financial loses or crisis. In a world with growing financial inclusion, rise in number and complexity of financial products and a need for financial independence, financial literacy has become a must for everyone. From a regulatory perspective, financial literacy empowers the common man and reduces the burden of providing protection and even grievance redressal to the common man by the regulators. It thus makes the entire financial system more efficient, disciplined and progressive. Financial literacy not only marks an improvement in the quality of life but also on the integrity & quality of the markets.

Who needs financial literacy?

Financial literacy is for anyone who has something to do with money. Thus, there is no one who doesn't need it since all of us are either engaged in earning, borrowing or spending money and do take financial decisions in our daily lives. Perhaps only infants, lunatic, godly men or old age dependents may be excluded from this group. The focus of this article is on financial literacy that relates to you and your family members. Financial literacy is important for you, your spouse, parents and even children. Though one may argue upon the level and depth of the financial literacy knowledge required between different groups, an overall understanding is a must for all. With financial literacy, we have the following advantages:

• Clarity of financial concepts and terms
• Making better financial decisions related to savings, investments, borrowings, etc.
• Accessing financial products & services easily, without fear or prejudice
• Building assets and wealth over time, leading to better financial health.
• Overcoming vulnerability and avoiding exploitation by people around us.
• Planning towards economic security for self and for family

Components of Financial Literacy

The next question that arises is to what does financial literacy comprise of? You, most probably, may consider yourself as financially literate but may not be able to clearly outline the required knowledge surrounding it. We are presenting the broad outline to test oneself on financial literacy. The following, together, can be considered as comprising financial literacy for any individual.

Financial Planning (FP)

• Lifecycle needs and goals
• Advantages & need of FP
• Components of FP
• Current Status V/s Planned Status

Borrowings / Credit

• When, how, why & from whom?
• How much debt should one take?
• Borrowing for productive purpose
• Pre and post borrowing factors
• Reducing vs. flat rate of interest

Savings & Investments

• Concepts of ‘Savings’ & 'Investment'
• How to save & invest
• Relationship between income/ expense and savings
• Assessing Risk & rewards in savings, investments & spending decisions
• Wealth creation concept Types of risks Post-tax / Real returns (after inflation)

Financial Products & Services

• Concept of bank and types of bank services / bank accounts
• Operating bank accounts & bank instruments
• Types and sources of loan
• Need & types of insurance products
• Types & features of asset classes
• Types & basic features of financial products available
• Credit / Debit cards
• ATM operations / Netbanking / Online payments Equity markets

Understanding finance

• Financial independence
• Time value of money
• Terms (Inflation, Income, Interest, Tax, Capital Gains /losses, Market Risks, Returns, CAGR, Absolute Return, Insurance, EMIs, etc)
• Practice of budgeting & planning
• Insuring assets / future (life, health, car, property, etc)

General calculation skills

• Future value from present value
• Present value from future value
• Absolute Return
• Simple & Compound interest

The above may seem to be a very comprehensive outline but the idea is to cover all the major aspects of money that one has to deal in their lives. While detailed knowledge may not be necessary under each heading, one should however have the broad conceptual understanding of the idea and/or knowledge of options, as the case may be.

Conclusion

Financial literacy is the primary step for financial inclusion since introspection changes behavior, which in turn makes people seek and receive financial services and products. Financial literacy can lead to financial wisdom and financial independence in knowledge. It will give the ability to manage money not just deal with it and to use skills & knowledge to take wise decisions for the future. We advise all our readers to ensure that they are 'financially literate' in the truest spirit. We also encourage all the readers to make their family members, especially spouses, parents and growing children financially literate. One may use the outline shared to impart such knowledge. Indeed, it would be a great learning for anyone that would otherwise take great time & experience to gain. This would help increase the economic space, self-esteem and the confidence level of any individual and make him/her ready to easily engage in the mainstream of the financial systems.