Lack of Financial Literacy in India 2021

The number one problem in today’s generation and the economy is the lack of financial literacy In India. Basic money management skills are required to secure a healthy financial future. Financial literacy works while you have functional financial literacy. As today’s financial products are complex, both functional literacy and functional numeracy are absolutely a prerequisite for the attainment of financial literacy. Financial literacy without navigation is useless.

Lack of Financial Literacy in India

Lack of Financial Literacy in India

In India, there is lack of financial sophistication. Many people are unable to manage their cash flow (Income & Expenditure). Cash flow helps you to determine your net cash flow. A positive cash flow means you have earned more than you have spent and a negative cash flow means you have spent more than you have earned. If you don’t manage, it means you are unable to track your earning, spending, saving, and investment which are surviving principles. Children should be taught the benefits of good money habits.

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What are good money habits in  Financial?

Make a budget and stick to it
Set achievable/realistic goals
Credit Cards management
Get out of bad debt
Don’t keep too much cash in your wallet
Don’t use ATM cards in an undisciplined manner
Don’t give too much focus on personal assets (impulse buying)
Save for retirement.
Avoid costly gifts
Check the mortgage interest rate — even after you buy a home. If you fail to do so you may be a good loser
While you buy extended warranty check the benefits carefully
While you plan to invest don’t imitate others, try to understand your objectives
Never sign on dotted lines before you go through the form
Maintain an emergency fund
You are like a business entrepreneur, manage your finances accordingly

Most of the parents are uncomfortable teaching their children about money for many reasons. Some parents think that their children are learning about money management themselves while they study in school/college. They may learn it but may not apply prudently in their personal lives. Financial literacy is nothing but the foundation for savings and investment and it helps you to differentiate between needs and wants.

Just having a job and earning income are key factors towards financial well-being. But can your income alone guarantee your financial independence? If you rely upon the income statement, you can see and estimate only about your income for today and for tomorrow. There is no guarantee whether you will be earning in future or whether you can keep pace with your expenditures. If you do so then you will be doing it at your own risk and at your own complacency. Do you think your income is the only factor which will cater to your future inflated family commitments without savings and investments? If you think so, there would be risk associated with your reliance.

But people, who strive for a more stable financial life and want to fulfill all unfinished financial goals on time, develop a keen interest in personal finance. They become more proactive about their retirement, children’s educations etc.

It is wise to know – ‘how money works’ irrespective of any age. If you have interest in financial matters, you may have experienced how you or your friends, relatives are buried in debts, stuck in foolish mortgage or wrong investment decisions due to sales pitch.

Financial Literacy in India

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In India, people still buy insurance as investment; they invest more for income tax benefit than investment; they invest in shares, mutual funds without considering their risk tolerance capacity and time horizon; they may invest more in bank, post offices, real assets, they will buy something to get a rebate — to them cash back is more attractive incentive.

You may need functional financial skill, functional numerical skill, thinking skill and conceptual skill. If you have lack of time or lack of expertise you may hire a professional financial planner. A professional financial planner writes financial plan, which includes cash flow, education planning for children, investment planning, retirement planning, risk analysis and insurance planning, tax planning, estate planning and business succession planning (for business owners).

Just answer the following questions:

Suppose you have Rs. 3, 00,000 in your bank savings account and if the interest rate is 4 per cent per year. After 2 years how much do you think you will have in your savings account if you kept the money to grow?

Think that the interest which you earned was 4 per cent per year and inflation was 6.5 per cent. After one year what would be the inflation adjusted return or how much would you be able to buy with the money- more or less? What would be your post-tax return if you are a tax payer?

  • Do you want to earn more return with maximum risk or you want to maximize return by reducing risk?You have been experiencing phone calls where the callers claim about fabulous guaranteed return. For some people such claims are appealing for others they are suspicious. These claims or phone calls are genuinely fraudulent schemes. If someone guarantees 12 per cent or more return, have you ever thought where from the claimant will generate the return?Due to the lack financial literacy a person can’t take any informed financial decision. Financial literacy means understanding money and personal finances and being able to confidently implement that knowledge by designing a plan and then implementing the plan into action. Financial education is like telling people how to maintain their health.