Three reasons why financial literacy is important
Financial literacy is important for the financial growth of every individual. Financial literacy is the knowledge of managing your finances, debts, investments and savings. This education allows you to make informed decisions, which have a direct relationship with your financial stability if not a financial goal.
Components of Financial Literacy
Budgeting: Remember those pocket money days, where every expense should be limited to monthly or weekly pocket money. It was nothing but budgeting, in which you only spend what you have. Debt and savings should always be priority deductions from income. After you’ve reduced debt and saved any remaining residue, you might call it “feel free to spend money.” This money is like pocket money, which you can spend without any guilt as your present and your future are taken care of. However, if expenses are made without budgeting, it can lead to unnecessary debt or lack of savings.
Debt: Money owed to someone is called a debt, which must be repaid sooner or later. First of all, you should not spend the money that does not belong to you, because sooner or later it must be returned with some additional amount (interest). Second, debt creates additional pressure on your budget. Finally, debt can affect your credit profile, as actions like late payment or non-payment could derail your future loan. Financial needs and economic conditions are largely responsible for unnecessary debt, but financial literacy could be a powerful antidote.
Savings: If financial literacy were a program, the importance of savings would make up almost half of it. Savings are the oxygen of the financial health of any individual. Savings can range from storing coins in the piggy bank to storing money in a bank account. However, savings can only be realized by those who know their importance, and this importance can be obtained either from past mistakes or from financial knowledge. Nobody has a permanent source of income, but money is essential until your last breath, so the only solution to the inevitable is savings.
Invest : Investing is the next step after saving and the simple reason is the reduction in the value of money. Commodity prices continue to rise year on year, so if Rs 100 could have got you two liters of cooking oil last year, it may only get you one liter l ‘next year. Therefore, saving money in the piggy bank will not help in the future. To keep your purchasing power intact, your money must be put to use. Once you save money, you can divert it to vast options such as mutual funds, term deposits, real estate, gold, debt securities, etc. The choice of options depends on risk appetite and financial objective. The natural goal of any investment option should be the income from such investment to beat the rate of inflation.
Why Financial Literacy Matters
1. Secure your future and that of your family: Financial literacy creates a self of belonging, where the individual plans not only for themselves but also for those close to them. Financial literacy instills a habit of saving and investing, which creates financial strength to deal with emergencies.
2. Achieve Financial Goals: Financial goals can be anything like buying a house, raising kids, getting married, or retiring. Financial literacy helps you achieve them consistently without creating barriers in your lifestyle.
3. Wealth creation: Wealth in personal finance is nothing but all the assets held by an individual at the time of retirement. Debt may have accrued when acquiring such assets. However, with the help of financial literacy, all of these assets will be debt free. In return after retirement, this heritage becomes a considerable source of income that denies any form of financial dependence. Thus, budgeting, debt control, saving and investing followed at a constant pace over the long term contribute to wealth creation and financial independence.
In conclusion, financial literacy has the power to impact a country’s economy as a whole. Like when you ride a bike or drive you need to know the road, so when you earn or have passive income, having the basic financial knowledge is a must to grow not just as an individual but together. as a nation.
(Viral Bhatt is the founder of Money Mantra – a personal solutions company)
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