Financial literacy: having the knowledge and skills to manage one’s money and make better financial decisions.
Advantages of being financially literate
Financial literacy gives us knowledge about below topics so that we can take care of our present and future finances:-
- Concept of money, earnings and expenses
- Inflation and its effect on purchasing power
- Saving and investing money, different investment options
- Bank accounts and services, debit/credit cards, NEFT/RTGS/IMPS
- Borrowing money(loans, credit cards, credit score) and repayments(EMI etc.)
- Interest rates and benefits of compounding
- Type of taxes, tax liabilities, tax saving instruments, filing ITRs, paying taxes
- Preparing for emergencies with different insurance options
- Use of technology, types of frauds/scams, securing your transactions, raising complaints, consumer rights
- Stock markets and mutual funds, associated risks and returns, demat accounts
- Budgeting, financial and retirement planning
From my personal experience, the level of financial literacy in India is not at a very high level. For instance:-
Example 1
“So, hope you are saving some amount from your salary.” I asked my cousin who was visiting us during a weekend. She is a bachelor, working in NCR for 2-3 years now and does not have any loans to pay-off. While I was not interested to find out the exact amount she saves(or has saved), her answer surprised me “I haven’t saved any significant amount so far.”
“Really! Any specific reason for that?” I asked. “Well, first the salary isn’t too high. Second, I don’t know where to invest so I transfer some amount in a different savings account each month‘ replied my cousin.
“Good! so you must be creating FDs/RDs in the other account.” I sighed in relief. “No, it’s in the saving account.” said my cousin calmly. For the next 10-15 minutes, I explained the difference in interest rates of savings account, FDs and RDs to my cousin and provided some recommendations to her.
Example 2
Every year, most of my friends and colleagues struggle in filing the Income Tax Returns even after having the required documents. In the end they take help from someone else resulting in sharing confidential information about their salaries.
Example 3
During the month of Jan-March, we start getting marketing calls for investing in tax-saving schemes. In addition, numerous advertisements flood the print and electronic media. Financial companies are aware that majority of population makes investment decisions at the end of financial year. As ‘haste makes waste’, such investment decisions may prove to be bad in the future.
Example 4
All my financial mistakes mentioned in the post
https://finfreefamily.blogspot.com/2018/09/financial-mistakes-i-regret_16.html
Example 5
Most of us find it difficult to manage our expenses. Further, the expenses tend to increase in proportion to the salary increments or business profits which makes savings and investments even more challenging.
While many other examples come into my mind, the lack of financial literacy is evident. As per a worldwide survey done in 2015, only 24% adults in India were financially literate. Moreover, worldwide financial literacy rate was lower in women by about 5%.
Source – https://gflec.org/wp-content/uploads/2015/11/Finlit_paper_16_F2_singles.pdf
What can be done to improve financial literacy
While growing up, our primary source of knowledge are parents, schools and colleges. In my childhood, there were no dedicated courses on financial literacy in the school. However, I do remember a chapter on ‘income tax calculation’ in Class 10th Maths. In addition, there were topics on simple interest and compound interest. I still thank those lessons while filing ITRs or creating FDs/RDs after checking the interest rates.
There is a strong need to include courses on financial literacy in India’s school curriculum. It seems there were efforts to do this but I’m not sure if it has been implemented already.
https://www.telegraphindia.com/states/odisha/financial-literacy-in-syllabus/cid/1659724
https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/NSFE016072012.pdf
Parents also need to play a strong role in imparting financial knowledge in the children. Leaving this crucial topic at the mercy of schools would be a serious risk. In my observation, children in the families running businesses(small scale to large enterprises) are financially more aware than the one where families are into jobs. This might be due to two reasons. Firstly, businesses require effective money management and parents want their successors to have the right financial knowledge and skills. Secondly, children tend to learn quickly by observing their surroundings.
It goes without saying that improvement in financial literacy is dependent on improvement in overall literacy rate, as well as reduction in poverty.
Thanks to the digital world, it has become relatively easy to improve the financial literacy nowadays. There is a lot of free and useful information(although data charges may apply) on the internet in form of websites, blogs, videos etc. All it takes is some interest, time and dedication.
Please do share your thoughts and opinions about this important topic in the comments section.
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