The importance of financial literacy has risen to the top of people's priority list, especially in recent times. People are increasingly becoming ambitious, exploring multiple avenues of sources of income and investment, being more prudent with their finances.
With the digital disruption, there are numerous platforms and avenues that allow people to earn from the comfort of their homes, at the same time doing what they like the most. And this has further propelled people from across demographics to understand the meaning and importance of being financially independent and to undertake measures to strengthen their financial foothold.
The government along with the various regulators (RBI, IRDAI & SEBI) are also consistently working to enhance and grow financial literacy through courses, workshops, and other outreach schemes. This is evident in the country's financial services users’ range, both online and offline. As awareness and ease of insurance and banking increased, India's financial literacy has improved. While India has traversed a certain distance in terms of financial literacy, one will agree that there is still a long way to go.
On the account of World Literacy Day, it is important to upgrade one’s familiarity of managing one’s finances that includes sound knowledge of various options/avenues of investments, budgeting, planning retirement and avoiding any financial burden. There is a need to enhance financial literacy at the micro-level of the society. Introducing financial literacy in the educational system is imperative as it builds a foundation of an individual at an early age that has a positive impact on their financial health in the long run.
Financial literacy is one of a country's most valuable assets as it determines the economic growth of a country as well as makes individuals financially stable.
Five reasons why it is important to gain financial literacy in recent times:
Planning & Budgeting
Financial literacy helps in proper planning & budgeting with the correct and analyses of the expenses. A proper budgeting exercise makes it simpler to pay bills on time, accumulate an emergency fund to meet the unforeseen expenses, and save for significant costs. It also helps in keeping track of one’s expenses and sticking to a plan.
Overall, having a budget gives a person better financial stability in the short- and long-term. A monthly budget channelizes the finances and improves saving habits. But if expenses are incurred without a budget, it could lead to unnecessary debt or a lack of savings.
To avoid being misled
Due to lack of knowledge on the subject, people tend to take “advice” from many people. In such a situation, it is possible that they are then misled. Hence, enhancing financial literacy leads to personal growth. People should ideally seek a professional’s assistance but at the same time be financially literate which also aids in comprehending a financial advisor's explanation or recommendations.
In terms of personal finance, wealth is simply all assets the person owns at any point of time, more so, the time of retirement. These assets may have been acquired using debt. However, all of these assets can be debt-free with the help of financial planning gained through financial literacy.
Post retirement, this wealth becomes the corpus based on which a substantial & steady source of income can be received to meet all the increasing financial needs. Planning, budgeting, debt management, diversity in financial planning, continuous long-term savings, and investment are therefore key to building wealth and achieving financial independence.
Financial literacy fosters a sense of self-identity where individuals make goals for both themselves and their loved ones. When people are financially literate, they understand the basics of market operations, they can analyse their “needs” and “wants” and also develop the habits of saving and investing, which gives them the resources they need to manage their expenses including handling emergencies.
Achieving financial objectives and independence
Understanding financial objectives is very important in financial planning. Some essential questions are, why are you saving, what is your goal for saving, will the savings one is doing now be enough to take care of evident future expenses, but how should one plan when the amount is not known now (Example: Child education, marriage, health expenses, retirement corpus, etc.). In short one can categorise their financial requirements into three categories:
- Immediate requirements – The expenses that one has to meet immediately
- Unforeseen non budgeted expenses - Like house repairs, large medical expenses, etc.
- Retirement Planning - Post retirement expenses – Financial literacy enables a person to accomplish all the three objectives methodically.
Financial abilities may contribute to overall economic growth and raise the standard of living. India's workforce, combined with strong financial education, has the potential to propel the country to great heights. A financially savvy India would have a significant global impact, getting closer to the dream of a Rs. 5 trillion economy.
Anand Pejawar is the Deputy Managing Director at SBI General Insurance.