Introduction
Despite the recent rise in the importance of personal finance, there is still a tremendous gap in financial literacy rates in India.
It is intriguing to note that even though around 20% of the world’s population is Indian, only 27% of people in the country are financially literate. Comparing these rates to those of other countries, like the UK (67%), Singapore (59%), and the US (57%), the rates are very low.
Have you ever wondered why it is so important to become financially literate? Well, some things are better left unplanned or unforeseen, but financial literacy can save you from unnecessary struggles.
For many people, the idea of money and finance can be confronting. Although it is a subject that is frequently avoided, it can lead to big mistakes like poor spending decisions or making bad investments.
However, financial literacy does not have to be scary. Once you get into the habit of paying attention to your finances, it is easy to see how they affect your life.
What does being financially literate mean?
Financial literacy has become a buzzword these days. What exactly does financial literacy mean?
Financial literacy means having the skills and knowledge necessary to comprehend one’s financial condition and how their decisions can affect it (both favourably and unfavourably).
As such, it requires understanding basic concepts related to personal finances, such as saving and investing, budgeting, insurance, taxes, and banking, to make an informed decision.
Being financially literate involves mastering prime principles that allow us to make decisions that support our long-term and short-term goals. Understanding these principles enables us to achieve higher levels of financial security, which ultimately helps us live better lives.
What are the components needed to understand financial literacy?
A person can learn about the efficient management of money and debt by using various financial skills and components that make up financial literacy.
Some of the essential elements of financial literacy that need to be learnt are listed below.
- Budgeting
Budgeting is a crucial part of managing your finances. It is the practice of estimating income and expenses, thus, enabling you to make savings.
Income must outweigh expenses as a general guideline when creating a budget. The difference between the two (income and costs) facilitates putting money aside as savings.
Budgeting can assist you in setting aside money to achieve short and long-term financial objectives, such as buying a home or car or saving for college or retirement.
You must begin budgeting early if you want to efficiently manage your finances. Once you get into the habit, you can track your spending and ensure you never exceed your limits.
- Debt
The definition of debt is simply borrowing. Most of the time, debt is seen negatively, which makes it crucial to comprehend debt. However, it is essential to differentiate between good and bad debt. Additionally, it is better always to try to minimise bad debt.
Borrowing money for necessities of life is considered good debt. Conversely, bad debt is when you borrow money for unneeded spending—for instance, using a credit card to purchase expensive things like clothes, electronics, etc.
Thus, it is essential to distinguish between bad debt and good debt to avoid falling into a debt trap. Moreover, understanding the terms related to debt, such as interest rates, loan structure, and payment schedule to ensure borrowing effectively is vital.
- Saving
For a better and safe future, it is essential to save money. One can save money by monitoring spending habits and keeping aside a part of their monthly income.
Saving money can help reach significant financial objectives, establish an emergency fund (an emergency fund serves as a safety net for unforeseen life catastrophes), and encourage financial discipline.
- Investing
Investing is all about placing money into an instrument that will assist in producing significant returns over time. A person can simultaneously accomplish their financial objectives and set money aside for retirement savings.
To become financially literate, individuals need to understand the different instruments available for investment, the risk they hold, and the return they might generate. They must also understand how to invest, how diversification can help minimise risk, etc.
People can make better financial decisions and boost their income by learning about prime investment components.
Why is it crucial to be financially literate?
Financial literacy is crucial because it helps us understand basic financial concepts, such as debt and savings, the role of money in our lives, how to manage a budget and investments, how to save for retirement, and how to avoid common financial mistakes.
Moreover, it helps you make better financial decisions, manage your finances effectively, achieve your financial goals and prepare for any financial emergencies.
For instance, if you want to start saving for retirement early but are not quite sure how much money you will need at retirement age, financial literacy can help you determine the amount you should set aside each month into an investment account.
Some other reasons why financial literacy is crucial are:
- It empowers you to take control of your situation and reduce anxiety during periods of economic uncertainty.
- It offers comprehensive information on financial education and methods, which are essential for achieving financial success and growth.
- It allows you to identify potential risks and opportunities before they arise.
- Most importantly, financial literacy gives you peace of mind.
Conclusion
Financial literacy is essential for your well-being. If you do not know how to invest, save or spend wisely, then you might be putting your future at risk. A lack of financial literacy can leave you vulnerable to scams and predatory lending practices.
Learn how to manage your finances properly and live a life free from debt. By becoming financially literate, you will earn more money over time, build wealth and create savings habits that can serve you throughout retirement.
References
https://www.majority.com/en/community/article/why-financial-literacy-is-so-important/
https://www.experian.com/blogs/ask-experian/what-is-financial-literacy-and-why-is-it-important/
https://scripbox.com/pf/what-is-financial-literacy/
https://www.bankrate.com/personal-finance/why-financial-literacy-is-so-important/
https://yourstory.com/mystory/why-is-financial-literacy-important-in-india-58xfag1ewi/amp
https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-literacy/