Financial literacy is the understanding and acquiring the necessary skills to apply financial components like budgeting, investing, borrowing, taxation and personal financial management in everyday life.
In India, especially, it is assumed that if a person is "literate," they automatically are financially literate. Unfortunately, that is not the case. Many adults who earn do not know how to spend their resources efficiently. It is essential to understand how to spend to maintain stability in the longer run.
Financial literacy enables individuals to better their decision-making skills. Often we are told that debt is bad. However, it can be beneficial in some instances. If it can generate an asset that will yield high returns, it is beneficial. Financial literacy covers how to manage personal borrowings efficiently. Some loans like home loans and education loans can be considered good loans. Not paying credit card dues on time and taking loans to live a lifestyle that is not affordable are deemed to be bad loans.
It also helps in reducing stress and anxiety caused by uncertainty. Financial planning is a necessary skill to have in the current times. Setting short-term goals, long-term goals and an emergency corpus in times of need help allocate funds in a structured manner, decreasing stress in unforeseen and unfortunate circumstances.
Setting up financial objectives and goals can also help one understand how to manage their expenses accordingly, thus setting a habit of keeping a check on expenditures. This practice can reduce unnecessary spending. It also provides clarity on how you prioritise your financial goals, which will help optimise your budget in a way that suits your needs with maximum efficiency.
An efficient financial plan can provide stability in the long run. Based on the stage of life, different permutations and combinations of savings and investments can help secure a retirement fund, children's higher education, marriage, owning a house, and other important life events. Risk-averse people can invest in fixed deposits with banks that offer higher interest rates, debt funds, high-interest savings accounts, etc. For people with higher risk tolerance, invest in equity, stocks, etc.
The lack of this knowledge makes a person "financially illiterate". The downside of being financially illiterate is the higher probability of making ill-informed decisions. The consequences of these decisions can lead to anywhere from simply losing out on opportunities to becoming victims to predatory loans or spiralling down a debt trap.
It is not difficult to become financially literate, and it is never too late to start. People can learn financial literacy from a young age as well. Involving them in day to day household expenses can imbibe the value of money. Giving pocket money on a weekly or a monthly basis can demonstrate the importance of budgeting.
For adults, it is advisable to begin by referring to different resources exploring topics like money management, savings, and investing for short-term and long-term needs. Besides these, it is also essential to take care of things such as the effective use of credit cards. It is worth exploring financial instruments, as different instruments cater to various long-term and short-term financial goals.
Various newspaper publications cover personal finance. It is a great way to keep track of new investment options and any opportunities. When it comes to financial planning, many financial management apps and financial advisors curate investment plans. The best way to learn financial management and to invest is by doing. Implement the learnings to realise which methods fit best for your ultimate financial objectives.
The author, Archit Gupta, is Founder and CEO at Clear. The views expressed are personal
First Published: IST