What is Financial Literacy? | Spring Money

The world of finance has ample concepts in it, right from basic budgeting to complex finance terms. Acquiring apt knowledge about the same is extremely essential to make informed decisions. This knowledge is known as financial literacy. Financial literacy is the ability to manage resources and income for wise consumption and saving. It also refers to the skills and understanding of finance that may be utilized to make decisions. Simply put, financially literate people are better able to assert themselves and make more effective decisions in their daily financial dealings. India is home to over 20% of the world's population, and only about 27% of its citizens (Source: RBI) are knowledgeable about fundamental financial principles. Governments and institutions have time and again promoted financial literacy in order to spread awareness and knowledge amongst its youth.

Fundamental concepts of financial literacy:

Financial literacy majorly consists of five significant concepts including budgeting, investing, borrowing, taxation, and personal finance management. One could term the same as the ABCs of Financial Literacy.

Budgeting:

Simply put, a budget is an estimate of your expenses versus your income during a specific time period. It is essentially a spending plan that allows you to better strategize your spending and saving habits for both short- and long-term goals. Creating a budget has multiple benefits. It can help you keep control on your spending to help you make progress towards goals like getting out of debt or buying a house. It also helps in ensuring the availability of funds when needed. It can also give you an idea of what you can afford to spend on things like rent, a mortgage or car payments to ensure you do not take on too much debt or cause yourself financial stress.

Investing:

Investing is like gardening. You plant a little seedling that grows into a beautiful enormous tree over time. There are plenty of types of seeds you could plant- be it the leafy spinach or the grumpy cacti. Similarly, there are various types of products one could invest in. Just like plants, products may take time to mature. Thus, it is important to diversify investment choices through a variety of products offered to achieve financial goals. Investing is a successful approach to use your money and possibly increase your fortune. It helps fight the consequences of inflation as the money invested grows over the period. Simply put, we invest money to generate more money. This in turn helps to achieve financial goals.

Borrowing:

We all know one of the important functions of a bank- lending money or giving out loans. Borrowing here refers to the act of receiving money and promising to pay back the same within a fixed period of time. Understanding interest rates, compound interest, the time value of money, payment terms, and loan structures is essential to ensuring that borrowing is done efficiently. It is extremely crucial to understand the importance of debt and how to manage the same effect without facing pitfalls.

Taxation:

Where do you think the government gets the money to make everything around you? They certainly do not have a magical genie. Right? This is where tax comes to the rescue. So, what is it? Tax is a mandatory financial charge levied by the government to meet expenses incurred for public welfare. It can be charged by the central government, the state government, and local bodies. When you hear the word tax the two keywords that come to your mind are Income tax and GST. This is exactly the elephant in the room when we talk about taxes. Tax may be direct or indirect. Direct taxes, Income tax, for example, is directly borne by an individual whereas indirect taxes like GST is levied on goods and services, not individual payers, and collected by the retailer or manufacturer.

Insurance:

We Indians are highly familiar with this term. From LIC advertisements to general news, insurance plays an important role in financial planning. It focuses on the ‘protection’ aspect that acts as an efficient risk management strategy. Life Insurance, General Insurance, fire insurance, and a lot of other types are covered under this umbrella term. Insurance promises financial security in one’s life and hence needs to be considered by all households. Another important aspect that cannot be missed is Personal Finance Management. Personal financial management is the process of analysing your financial condition in order to maximize your resources in both your daily life and your future planning. Income, spending, saving, investing, and protection comprise the five fundamental components of personal finance. Planning and managing personal financial activities including income generating, spending, saving, investing, and protection fall under this heading.

Benefits of Financial Literacy

Financial Literacy is of utmost importance and is essential for the effective management of one’s assets. Some of the key benefits of financial literacy include:

• Knowledge and skill: Financial literacy equips a person with the apt knowledge and skill regarding finance that is essential to effectively manage money. One can implement various strategies and invest in diverse investment products only if one has good knowledge in the field of finance.

• Frauds: A financially literate person is highly likely to not fall for traps and frauds. Financial literacy opens minds to a lot of diverse topics which in turn helps an individual identify possible threats and frauds.

• Emergency: Financial planning as a means of financial literacy helps individuals be prepared for rough unforeseen situations.

• Smart Investments: Financial literacy helps us identify potential opportunities and tailor make decisions according to our own requirements.

Financial Illiteracy

Financial illiteracy refers to a lack of adequate knowledge about finance. The lack of financial literacy can lead to large amounts of debt and poor financial decisions. India has a high amount of financial illiteracy which impacts productivity in a way. The government has been taking various steps to spread awareness and help mobilize funds. The illiteracy factor is evident from the portion of investors.

Financial literacy, especially in a country like India, demands grave importance and can help us grow as a community while spreading awareness. From basic to complex concepts, financial literacy is the need of the hour. Various initiatives have been taken to ensure the same. We at Spring Money also build on this very action plan through our mobile application. We might help you discover a new finance concept, or help you properly understand a concept you know, but are confused about.

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