Financial literacy is important for every individual’s financial growth. Financial literacy is the knowledge of managing your finances, debt, investment and savings. This education enables you to make informed decisions, which have a direct relation to your financial stability if not a financial goal.
Components of financial literacy
Budgeting: Remember those pocket money days, when every expense has to be limited to monthly or weekly pocket money. This was nothing but budgeting, wherein you spend only what you have. Debt and savings should always be priority deductions from income. After reducing debt and savings whatever residue is left, could be called 'feel free to spend money'. This money is just like pocket money, which you can spend without any guilt because your present and future are being taken care of. However, if expenses are made without budgeting, it may result in unnecessary debt or lack of savings.
Debt: Money owed to someone is called debt, which is to be repaid sooner or later. First, you should not spend the money which is not yours, because sooner or later it has to be returned with a certain additional amount (interest). Second, debt creates additional pressure on your budget. Last, debt can affect your credit profile, because actions like late payment or non-payment could derail your future borrowing. Financial needs and economical conditions are vastly responsible for unnecessary debts, but financial literacy could be a potent antidote for it.
Savings: If financial literacy was a syllabus, the importance of savings would form nearly half of it. Savings are the oxygen in any individual’s financial health. Savings can be anything from storing coins in the piggy bank to storing money in a bank account. However, savings can be done only by those who know their importance, and such importance can be gathered either from past mistakes or financial literacy. Nobody has a permanent source of income, but money is essential until your last breath, so the only solution for the inevitable is savings.
Investing: Investing is the next step after savings and the simple reason for that is the reducing value of money. Prices of commodities keep on rising year on year, therefore if Rs 100 could have fetched you two litres of cooking oil last year, it may only fetch you one litre of it next year. Therefore, saving money in the piggy bank is not going to help in the future. To keep your purchasing powers intact, your money shall be put to work. Once you save the money, you may divert the same into vast options such as mutual funds, fixed deposits, real estate, gold, debt instruments, etc. Choosing any options depends upon one’s risk-taking appetite and financial objective. The natural target in any investment option should be the earnings from such investment to beat the inflation rate.
Why financial literacy is important
1. Securing your and your family’s future: Financial literacy creates a self of belongingness, where individual plans not only for onself but also for loved ones. Financial literacy inculcates a habit of saving and investment, which creates financial strength for tackling emergencies.
2. Achieving financial goals: Financial goals can be anything like buying a house, child education, marriage or retirement corpus. Financial literacy helps you achieve those systematically without creating hurdles in your lifestyle.
3. Wealth creation: Wealth in personal finance is nothing but all assets owned by an individual at the time of his retirement. Debt might have accrued while acquiring such assets. However, with the help of financial literacy, all these assets shall be debt-free. In return after retirement, this wealth becomes a considerable source of income which negates any kind of financial dependency. Thus budgeting, debt control, savings and investing followed at a consistent rate in long term helps in the creation of wealth and thereby achieving financial independence.
To conclude, financial literacy possesses the power to impact a nation’s economy at large. Like when you ride a bike or a car you must know the road, similarly, when you earn or have any passive income, it is a must to have the basic financial literacy to grow not just as an individual but together as a nation.
(Viral Bhatt is the Founder of Money Mantra — a personal solutions firm)
