Power of Financial Literacy

Introduction

This is the Generation of being Financial-Savvy. However, when talking about overall financial literacy in India, we are only 27 percent in such a huge population. In today’s world of instant gratification, being Financially Literate holds great importance. It is an essential life skill, which helps you in making informed financial decisions. This article delves into the concept of financial literacy, its components, and the importance it holds and challenges of financial inclusion.

What is financial literacy?

Financial literacy is a critical skill which has a significant impact on an individual’s life. It refers to the ability of understanding and managing one’s personal finances effectively and making sound financial decisions. In easier words, it teaches you how money works. Financial Literacy, in itself is an art which not everybody possesses.

It involves learning about savings, spending, budgeting, investing and even retirement planning. It also helps you become aware of the financial frauds and makes one a financially-savvy individual.

With an abundance of financial products, easy availability and access to credit, investment opportunities, and financial frauds being committed at an all-time high, it is necessary to have a solid foundation in financial literacy. It is indeed the complex reality of 21st century. Thus, It is crucial to take conscious decisions regarding one’s hard-earned money and avoid getting into debt.

As quoted by Atkinson & Messy “Financial literacy is a combination of awareness, knowledge, skill, attitude and the behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing”

RBI, defines Financial literacy as, “providing familiarity with and understanding of financial market products, especially rewards and risks, to make informed choices”

Components of Financial Literacy

Financial literacy encompasses a plethora of concepts and skills allows and empowers an individual to navigate the dynamic financial world and get on their path to achieve financial success.

At its core, it includes understanding basic financial concepts, such as saving, budgeting, investing, taxes, retirement planning, and insurance, etc. We will explain them in detail.

1. Budgeting: A budget is a financial plan which contains a record of income, expenses & savings. Budgeting is the process of creating a systematic plan managing an individual’s finances.

2. Saving: Saving refer to keeping aside the surplus money left for an individual after meeting all the expenses.

3. Investing: Investing is the act of distributing resources into something to generate income or gain profits. Knowledge about investment avenues allows an individuals to make smarter financial decisions leading to an increased inflow of income.

4. Borrowing: A loan is money borrowed for some purpose, which one has to pay back with some interest. An understanding of interest rates, compound interest, time value of money, payment periods, and loan structure is essential to use credit as financial support or else it may become a burden and may lead to long-term financial stress.

5. Tax planning: Having knowledge about taxation and their impact on an individual's net income is a crucial component of financial literacy as each source of income is taxed differently.

6. Retirement Planning: Retirement is one of the most crucial life stages, and proper financial planning is needed for the same. Financial knowledge is vital for effective retirement planning.

7. Insurance: Risk is the probability that actual results will differ from expected results. Insurance is a product that helps us secure ourselves against future uncertainties. The concept of Risk and Insurance are important components of financial literacy as a proper understanding into mitigation of financial risks is essential to make wise financial decisions.

8. Personal Financial Management: It is the most crucial aspect as it involves all of the listed components. One must budget expenses to save and invest in suitable financial products, while keeping the debts at lowest to ensure financial security and over wellbeing.

These are some of the foundational concepts which serve as building blocks for more advanced financial strategies.

Power of financial literacy

1. Personal Empowerment: Financial literacy empowers individuals to take control of their financial well-being. It enables them to set financial goals, create budgets, manage debt, and plan for major life events like buying a home, paying for education, or retiring comfortably. Without financial literacy, individuals are more susceptible to making poor decisions that can lead to financial stress and insecurity.

2. Safeguarding against frauds: A lack of financial literacy can leave individuals vulnerable to scams and fraudulent schemes. Knowledge about common financial frauds, like phishing, Ponzi schemes, and identity theft, helps individuals identify red flags and protect themselves from falling victim to these scams.

3. Informed financial decisions: Financially literate individuals can make informed decisions when choosing financial products and services. They can compare interest rates, fees, and terms, ensuring they select options that align with their goals and preferences.

4. Wealth accumulation: Understanding investing strategies empowers individuals to grow their wealth over time. Whether it's investing in stocks, bonds, real estate, or retirement accounts, financial literacy equips individuals with the knowledge needed to make sound investment choices.

Despite its undeniable benefits, Financial Literacy is really low worldwide as it faces several challenges:

1. Lack of Formal Education: Financial skills are not taught or prioritised in schools & other educational institutions, leaving children to learn about money management, much later in life, on their own.

2. Complex and Dynamic Financial Landscape: The financial world keeps on changing. There is an abundance of financial products and services, readily available in the market. Thus, it is challenging for individuals to grasp their implication.

3. Behavioral Biases: Many factors affect the financial decision-making process for an individual. For example, individuals might not prioritize long-term financial goals and succumb to immediate gratification.

4. Digital transformation: The rise of fintech requires an individual to be well versed with digital transactions and the potential risks associated with the same.

Conclusion:

Financial literacy is a fundamental skill that empowers individuals to make informed and responsible financial decisions. It has far-reaching effects, from personal empowerment and reduced financial stress to a more resilient and prosperous society. Despite the challenges, promoting financial literacy through education, digital tools, and collaborative efforts can create a brighter financial future for individuals and the global economy. As we navigate an increasingly complex financial landscape, investing in financial literacy is an investment in ourselves and the generations to come.