Why Financial Literacy is Essential for an Individual in Today’s World

The range of financial products available to you today is different than in the past, and the financial choices you make today will have an impact on your financial well-being in the future. Individuals that have financial knowledge would be well equipped to use these financial products wisely.

In this context, it is important to understand that an essential indicator of your ability to make informed financial decisions is your level of financial literacy.

Financial literacy consists of your understanding to effectively manage your personal finances with budgeting exercise, implement saving strategies, effective debt management, and awareness about the various asset classes that comprise of investment avenues to suit your financial goals.

Financial literacy and wealth creation are strongly correlated, because with adequate financial knowledge, you will have the assurance to construct a financial plan that emphases on wealth accumulation to secure your financial future.

Financial literacy will help you comprehend the various elements that create a roadmap of your journey towards wealth creation. Moreover, it focuses on your ability to process economic information/news that influences the varying market conditions so that you make sound informed financial choices.

While it is important to concentrate on earning a high income, having the financial skills to efficiently allocate these earnings toward achieving your desired financial goals and create wealth gives you the edge.

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Here are some components that highlight the importance of financial literacy:

1. Budgeting

   Financial literate people know the importance of creating and sticking to a budget that takes care of living expenses, saving a for contingency plan and investment purposes, and efficiently planning to reduce / pay off debt if any.

   You will be required to distribute your earnings effectively, financial literacy will provide the knowledge to create an actionable plan that will help in tracking expenses, segregating the unnecessary ones, and investing wisely.

   In addition, keep in mind the financial goals you have planned while performing the budgeting exercise, it will enable you to save accordingly. Remember, the thumb rule of budgeting is that your income has to exceed the expenses.

2. Debt management

   When you are financially literate, you will recognize the importance of lower interest rate loans and how the frequent use of credits cards and payday loans create a debt burden due to higher interest rates.

   However, not everyone can afford buying a house or car or manage their expensive educational expenses easily or get out of a financial crisis and therefore consider borrowing. As amid the COVID-19 pandemic, many of you faced financial difficulties and some borrowed through the online applications offering payday loans, which resulted in creating a debt burden due to higher heavy interest rates.

   Financial literacy will help you differentiate between necessary and unnecessary borrowing, which will keep you from falling into any debt trap. It will help you understand that regularly paying off your debt and preventing the use of credit cards will reduce your existing debt and help you maintain a good credit score.

   If you currently have a debt burden, financial literacy will help you with various methods to get out of debt through debt consolidation and how to maintain your debt-to-income ratio below 50% to avoid any negative effects on your credit score.

3. Saving

   To inculcate the financial discipline, you must save on a regular basis and financial literacy will help you understand how through savings you could maintain a contingency fund for unforeseen circumstances and emergencies.

   This emergency fund will be handy in times of need when uncertain events take place, like the pandemic. A financially literate individual would have been prepared, because they would have set aside 6 to 12 months of regular monthly expenses including EMIs on loans into their emergency fund account.

   Besides creating a rainy day fund, saving for your retirement should be a concurrent long-term goal. It will be to your advantage to start building a retirement corpus from an early age. You may also save towards an insurance policy that protects your health and life; it will support your family members in your absence or in time of any medical emergency.

4. Investments

   Investing your hard-earned money is all about generating and growing wealth to build a secure financial future. Financial literacy will help you understand the available investment avenues and the various asset classes to diversify your investments for better risk-adjusted returns.

   As you know, there are multiple complex financial products in the market and choosing the right option is a daunting task. However, if you are financially literate, you will refer to the relevant information documents (SID, KIM, Factsheet etc.) of that particular financial product for better understanding.

   While some of the widely used investment options are fixed deposits, PPF, NSC, equities, mutual funds, debt instruments, real estate, and gold, you need to ensure that your investments are aligned to your financial goals. The most suitable options for you will hold the adequate investment horizon required to achieve your goals and the risk profile must be in line to your risk tolerance.

   Investing in the right options lead to achieving your envisioned short-term and long-term financial goals such as; retirement saving, children's education, buying a dream home or car, etc. Thus, financial literacy plays a vital role in wealth creation through building your investment portfolio.

5. Protects from financial frauds

   Financial literacy will prevent you from various financial frauds that take place in today's fast-paced environment that is dependent majorly on digital transactions.

   Many of you have witnessed the transition in 2020 of how businesses and corporates have adopted the concept of work from home, banks promoting digital means for banking requirements. Moreover, the basic food and essentials are now being ordered online via e-payments. Although this change has brought convenience, it is important that you proceed with prudence and financial awareness.

   Financial literacy will help you safeguard your financial confidential information by alerting you to take the necessary steps such as not clicking on unfamiliar links in text messages or e-mails and not revealing any financial information over the call. During the early stages of the pandemic, there was an increase in coronavirus-related phishing attacks, with numerous fraudsters impersonating bank representatives and requesting sensitive financial information.

   If you lack financial literacy, you will fall prey to the financial advisors or agents that take advantage of novice investors and misrepresent, mis-sell financial products and services. You need to be financially conscious and ensure the features of these financial products suit your investment objective. Read the investment related documents carefully in case of insurance policies and go through the clauses mentioned for you at the time of receiving claims. The devil is in the fine print.

   Financial literacy will improve your financial knowledge and skills, allowing you to understand these financial products to a certain extent and spend your hard-earned money wisely.

   Therefore, by attaining financial literacy you will be able to overcome the challenges you may faces while managing your personal or your family's finances. Financial literacy teaches an individual to make informed financial decisions, develop financial discipline, and build long-term capital.

PersonalFN encourages you to increase your financial literacy and make informed financial decisions for your and your family's financial wellbeing. We understand that not everyone in your family may be well equipped with financial knowledge, but you could guide them by becoming your family's 'Financial Guardian'.

Empower yourself with the weapon of financial knowledge to understand the nuances of financial management. In case you are wondering how to enhance your financial literacy, PersonalFN's latest special initiative, the "Certified Family Guardian" offers you an exclusive opportunity to learn the finer nuances of money management.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management and making informed financial decisions for yours and your family's secure financial health.

It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to start and enhance your financial literacy to face these challenging times, enrol for "Certified Family Guardian" course today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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