Importance of Financial Literacy

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Financial Literacy is the cognitive comprehension of financial concepts and abilities, such as personal financial management, borrowing, investing, budgeting, and taxation. Financial illiteracy is the absence of such knowledge and abilities. Because it gives us the information and abilities we need to properly manage our finances, financial literacy is vital. Without it, we lack a strong basis for success in our financial choices and our behaviours, both positive and negative.

Knowledge and comprehension of various financial products are referred to as financial literacy. It supports people in managing their money, personal finances, investments, and tax preparation. Its main goal is to protect people from financial fraud and scams.

Ways to Improve Financial Literacy

Individuals should be given appropriate skills and information at many stages, but primarily in school and college, to help advance financial literacy in India. Through their capacity and self-efficacy, they should be able to put their knowledge and abilities into practise. At the intermediate and college levels, fundamental financial education must cover:

  • A thorough knowledge of Financial Planning
  • Understanding of how to use Fundamental Financial Goods
  • Efficient Financial Management
  • Managing Debt
  • Putting necessities above desires
  • Recognising efficient Investing tools like SIP
  • Recognizing EMI Terminology

Need for Financial literacy

All parties involved, including policymakers, practitioners, bankers, researchers, and academics worldwide, have come to understand the need of financial literacy in order to embrace financial inclusion.

  • Creating a connection between new users and the financial industry by raising knowledge of basic financial products like bank accounts.
  • Assisting in the financial sector’s current users’ decision-making through education.
  • Making customers cautious will ensure their protection from threats and fraud.

The Advantages of Financial Literacy

The following is a list of the many advantages of having financial literacy:

  1. Improved capacity for Financial Decision-Making
  2. Managing Finances and Debt Effectively
  3. Greater ability to achieve Financial Objectives
  4. Reduction of Costs due to improved Regulation
  5. Less worry and concern about Money
  6. Choosing Insurance, Loans, Investments, and using a Credit Card will need more Ethical Judgement.
  7. Making a Planned Budget in an efficient manner

8 Major Importance of Financial Literacy

1. Increase Investment Awareness

Financial education does not take place in a vacuum. It is not an uncommon occurrence. One person’s education starts a chain reaction. Such a person would work hard to educate their loved ones, friends, pupils, coworkers, etc. A person who is financially literate may run seminars, instruct at universities, produce books and articles, mentor students, etc.

Everyone has an interest in money and is a stakeholder. As a result, financial literacy is a movement; “FIRE” is an excellent example.

2. Avoids following the Crowd

Financially savvy people don’t go along with popular opinion at random. They delve deep into each financial trend. They can withstand bad market speculation better. Although they are cautious investors, they end up making money over time.

3. Facilitation of Business Transactions

The introduction of Pradhan Mantri There is now 280 million more bank accounts as a result of the Jan Dhan Yojana. These accounts have made running business easier and have greatly encouraged cashless transactions.

4. Pay off Debt and stay out of Debt

When comparing loan conditions, looking for the lowest interest rates can result in significant long-term savings, as can paying off credit card bills in full each month to avoid interest costs. Financial literacy may assist you in selecting the most effective debt relief strategies, whether you decide to do it on your own or with the guidance of a trustworthy professional like a nonprofit credit counsellor.

5. Planning for Succession

The affluent supposedly prepare for three generations, while the impoverished just plan for Saturday night. People teach their children important lessons by practising financial responsibility. They also prepare their succession and leave enough money for their successors.

6. Be Aware of your Income and Expenses

Making a budget is a crucial step in developing financial literacy since it allows you to truly grasp your earnings and outgoings. Once you’ve established a budget, you can keep tabs on your spending and routinely review it. Choose the budgeting strategy that you’re most likely to follow, such as the zero-based or 50/30/20 plans, among the several available.

7. Borrowing is Simple

42.9 percent of the population borrows money from unofficial sources and pays higher interest rates, according to a study by the RBI. Small traders can make the greatest use of their resources and make educated decisions with the aid of a solid financial education.

8. Strive towards a Secured Retirement

Whatever other short-term goals you may have, start saving for retirement at the same time. Financial literacy can help you make smarter decisions about how much to save, what kind of retirement you want, and how to get there.

How to Become Financially Literate?

You may make baby steps and use tools to assist you along the path.

  • Consider seeking Credit Counselling

Credit counselling organisations, which hire counsellors skilled in budgeting and debt-payoff strategies, are another source of expert assistance. You can also think about seeing a qualified financial planner if you have the resources for it. Setting financial objectives, managing taxes, putting money aside for retirement and college, and paying off debt are all things they can assist with.

  • Find Free Resources

Use any free tools that are perhaps currently at your disposal as a starting point. Your bank, credit union, or credit card issuer, for instance, could monitor your purchasing habits on its website or mobile app. Experian, a number of institutions, and others also provide free credit score monitoring. These tools might help you gain a basic understanding of your financial situation and credit standing.

  • Verify with your Employer

Find out whether the organisation you work for provides free financial counselling or an employee financial wellness programme. As part of your package of workplace benefits, you might be able to speak with a financial expert who can provide you with early insight into the areas you need to concentrate on (like saving, retirement, budgeting or debt reduction).