by Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning. The earlier you start, the better off you will be, because education is the key to success when it comes to money.
Financial literacy also requires the experience of financial principles and concepts, such as financial planning, compound interest, debt management, efficient investment strategies, and money-time value. Financial illiteracy can lead to poor financial choices which can have negative effects on an individual’s financial well-being.
Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. Raising interest in personal finance is now a focus of state-run programs in countries including Australia, Canada, Japan, the United States, and the United Kingdom. Understanding basic financial concepts allows people to know how to navigate in the financial system. People with appropriate financial literacy training make better financial decisions and manage money better than those without such training.
The key steps to improve financial literacy include:
- Learning the strategies to pay off debt
- Learning the skills to create a budget
- Ability to track expenses
- Planning for retirement effectively
National Centre for Financial Education (NCFE), a non-profit company, was created under section 8 of companies act 2013, to promote financial literacy in India. It is promoted by four major financial regulators Reserve Bank of India, SEBI, IRDA and PFRDA.
NCFE conducted a benchmark survey of financial literacy in 2015 to find the level of financial awareness in India. It organises various programs to improve the financial literacy including collaborating with schools and developing new curriculum to include financial management concepts. It also conducts a yearly financial literacy test. The list of topics covered by NCFE in its awareness programs includes investments, types of bank accounts, services offered by banks, Aadhaar card, demat account, pan cards, power of compounding, digital payments, protection against financial frauds etc.
Fundamental components of financial literacy that should be learned.
- Investing
To become financially literate, an individual must learn about key components in regards to investing. Some of the components that should be learned to ensure favourable investments are interest rates, price levels, diversification, risk mitigation, and indexes.
Learning about crucial investment components allows individuals to make smarter financial decisions that may result in an increased inflow of income.
- Budgeting
In budgeting, there are four main uses for money that determine a budget: spending, investing, saving, and giving away.
The right balance throughout the primary uses of money allows individuals to better allocate their income, resulting in financial security and prosperity. Generally, a budget should be composed in a way that pays off all existing debt while leaving money aside for saving and making beneficial investments.
- Taxation
Gaining knowledge about the different forms of taxation and how they impact an individual’s net income is crucial for obtaining financial literacy. Whether it be employment, investment, rental, inheritance, or unexpected, each source of income is taxed differently.
Awareness of the different income tax rates permits economic stability and increases financial performance through income management.
- Borrowing
In most cases, almost every individual is required to borrow money at one point in their life. To ensure borrowing is done effectively, an understanding of interest rates, compound interest, time value of money, payment periods, and loan structure is crucial.
If the criteria above are understood sufficiently, an individual’s financial literacy will increase, which will provide practical borrowing guidelines and reduce long-term financial stress.
- Personal Financial Management
The most important criteria, personal financial management, includes an entire mix of all of the components listed above.
Financial security is ensured by balancing the mix of financial components above to solidify and increase investments and savings while reducing borrowing and debt.
Financial literacy focuses on the ability to manage personal finance effectively, which requires experience of making appropriate personal finance choices, such as savings, insurance, real estate, college payments, budgeting, retirement and tax planning.
Those who understand finances should be able to answer questions concerning transactions, such as whether an item is required, whether it is accessible, and whether it is an asset or a liability.
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