This article has been written by Sunil Kumar Pathak pursuing an Executive Certificate Course in Corporate Governance for Directors and CXOs from Skill Arbitrage.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
Financial knowledge is the ability to understand and employ different sets of financial skills in an efficient way, including personal financial management, savings, and budget management. Financial literacy helps an individual achieve financial stability in his life.
In the ever-changing dynamics of the financial environment, financial literacy since early childhood has become of paramount importance for making an individual financially independent. Financial skills like budgeting and saving go a long way toward creating wealth for an individual. Early financial knowledge allows an individual to traverse the path of financial dynamics and plan their savings, fund the education of their kids, and plan a retirement corpus for themselves in an efficient way. By navigating the intricacies of personal finance, helping adolescents with the avenues to make informed decisions, and nurturing a sense of financial responsibility.
The present article looks into how financial literacy empowers individuals to take on challenges, seize opportunities, and secure their financial lives in the long term.
The importance of early financial education/literacy
In a rapidly evolving world, financial education is important to secure younger individuals financial goals from an early age. The RBI data manifests a critical gulf in financial literacy among adults, emphasising the urgency of financial education in schools.
Dr. D. Subbarao, former Governor of RBI, is of the opinion that financial literacy strengthens individuals with knowledge and skills necessary to make informed decisions about finance, investments, and future planning. A prudent financial decision is critical to economic well being. Financial literacy and its importance for making investment accessible across India. A financially illiterate individual without any knowledge of credit scores, interest rates, responsible borrowings, or the magic of compounding may find himself in massive debt.
Dr. Swati Bhatt, a lecturer at Princeton University, believes that early financial literacy lays the groundwork for responsible financial behaviour and empowers people to make informed financial decisions throughout their lives.”
India is making progress in closing the gap in financial literacy, but there are still many obstacles to overcome.
There are many obstacles that rural dwellers must overcome in order to build wealth from their savings. For rural investors, the lack of financial literacy and accessible investment avenues provides a challenge.
A significant portion of savings in rural areas are invested in non-traditional savings vehicles such as gold, chit funds, real estate, and mostly bank accounts.
This gap can only be bridged by building a financial curriculum from an early age for individuals, which will impart the necessary financial skills throughout each stage of their career.
Financial literacy will inspire increased involvement among the youth in the financial markets and other investment avenues to set financial goals and objectives, develop credit discipline, and avail facilities of financial avenues from the institutions.
The risk of illiteracy
Financial literacy, a crucial skill that equips individuals with the knowledge and abilities necessary to make informed financial decisions, plays a pivotal role in empowering people to manage their finances effectively. Among the fundamental aspects of financial literacy is the understanding and management of debt.
One of the common pitfalls of financial illiteracy is the amalgamation of debt. This occurs when individuals accumulate multiple debts from different sources, such as credit cards, student loans, and mortgages, without a clear plan for repayment. This can lead to a cycle of debt that becomes increasingly difficult to break free from.
To avoid such pitfalls, it is essential for young people to be aware of the different types of debt and their potential consequences. By understanding the terms and conditions of each debt, such as interest rates and repayment schedules, individuals can make informed decisions about borrowing money. It is also important to establish a budget and stick to it, ensuring that debt payments are prioritised and do not exceed a manageable portion of monthly income.
Effective debt management and financial governance are essential for long-term wealth creation. By developing good financial habits early on, individuals can avoid the burden of excessive debt and build a solid financial foundation for their future. This includes setting financial goals, such as saving for retirement or a down payment on a house, and creating a plan to achieve those goals.
Incorporating financial literacy into educational curricula and providing accessible financial resources can help young people develop the knowledge and skills needed to make informed financial decisions. This can empower them to take control of their financial future and achieve financial success.
Examples of successful financial education initiatives
In recent years, there has been a growing recognition of the importance of financial literacy at the grassroots level. Some organisations and government initiatives have taken the lead in promoting financial literacy among children, recognising that it is a critical life skill that can empower them to make informed financial decisions and achieve financial well-being in the future.
One such initiative is the National Institute of Securities Markets (NISM), which is a public institution under the Ministry of Finance, Government of India. NISM has been actively promoting financial literacy in children through its various programs and initiatives. These initiatives aim to provide children with a strong foundation in financial concepts and equip them with the skills they need to manage their money effectively.
For example, NISM’s “Financial Literacy for Children” programme is designed to introduce children to basic financial concepts such as budgeting, saving, investing, and responsible borrowing. The programme uses interactive workshops, games, and activities to make learning fun and engaging for children. NISM also collaborates with schools and educational institutions to integrate financial literacy into the school curriculum, ensuring that children are exposed to these concepts from an early age.
Another notable financial literacy initiative is “Money Smart Kids,” launched by the Securities and Exchange Board of India (SEBI), which is the regulatory body for the securities market in India. Money Smart Kids is a comprehensive financial literacy program that introduces schoolchildren to basic financial concepts through interactive workshops and games. The programme aims to foster a culture of financial responsibility among children and empower them to make informed financial decisions as they grow older.
Money Smart Kids covers a wide range of topics, including budgeting, saving, investing, and financial planning. The workshops are conducted by trained facilitators who use engaging activities, videos, and games to make learning fun and effective. The program also provides resources for parents and teachers to help them support their children’s financial education.
These initiatives by NISM and SEBI, along with other organisations and government efforts, are playing a crucial role in promoting financial literacy among children at the grassroots level. By equipping children with the knowledge and skills they need to manage their money wisely, these initiatives are helping to create a generation of financially literate adults who are better prepared to navigate the complexities of the financial world and achieve their financial goals.
Long-term effects on financial stability
By teaching financial literacy to young minds, the long-term effects on financial stability can be leveraged. This is because a financially savvy mind will invest wisely by creating a diversified portfolio, managing debt wisely, using mental budgeting, and exercising self control for long-term financial goals. Mental budgeting lets you calculate and evaluate future and present savings expenses and debt. This helps in the non-accumulation of debt. This financial literacy metamorphoses into prosperity and justifiable development and creates financial sustainability in individuals, society, enterprises, and national economics.
Responsible spending habits
A financial education since early childhood in an individual inculcates a sense of responsibility and ownership in him that prioritises his needs over his wants and checks his overspending. It is a natural habit for an individual to overspend and thus accumulate debt without much income.
Boosts saving
Financial literacy is a crucial skill that empowers individuals to make informed decisions about their finances, a journey that should commence in early childhood. By instilling a solid understanding of financial concepts and decision-making processes from a young age, children develop a sound foundation for navigating the intricate world of personal finance. In this endeavour, schools and parents have a pivotal role to play as motivators and educators, shaping young minds’ outlook towards money matters.
By integrating financial literacy into school curricula and promoting it at home, children can gain insights into fundamental concepts such as budgeting, saving, investing, and responsible borrowing. This knowledge equips them to make prudent financial choices, manage their resources effectively, and plan for their future financial security. Moreover, it cultivates a habit of financial responsibility, helping them avoid common pitfalls such as impulsive spending and excessive debt.
Empowered with financial acumen, individuals can harness their earnings to their best advantage. They become adept at creating and sticking to budgets, setting financial goals, and making informed investment decisions. This financial literacy not only boosts their savings but also increases their financial worth over time. By avoiding costly mistakes and making wise choices, they can accumulate wealth, secure their financial future, and achieve financial independence.
Furthermore, financial literacy has a positive impact on overall well-being. Individuals who are financially literate experience lower levels of financial stress, anxiety, and depression. They are more confident in their ability to manage their finances, which contributes to their overall sense of control and well-being. By equipping young individuals with the tools and knowledge they need to make sound financial decisions, we empower them to lead financially secure and fulfilling lives.
Preparing for emergencies
There are lots of challenges and unpredictability when traversing daily chores, and it’s mainly due to money matters. When an individual is empowered with knowledge and resilience in money matters, the path to financial success becomes easier. A financially savvy person can gauge any unseen eventualities beforehand, like a recession, a job loss, or any financial emergency. Only people who are equipped with financial knowledge have the preparedness or know the importance of creating an emergency fund to weather storms from any unseen eventualities, and that too without compromising their financial status.
Early financial education is the stepping stone to creating a knowledgeable group of individuals. The idea of inculcating and enshrining money habits, planning for future financial goals, understanding debt and credit, and being prepared for future uncanny events cannot be underestimated. A financially savvy person recognises the significance of creating an emergency corpus. In the present market scenario, we should always be prepared with an emergency fund with at least six months of expenses. It is a decisive way to avoid debt.
Parental saving socialisation
We all develop financial education through parental financial socialisation, which inculcates and develops financial skills and knowledge to make responsible financial decisions throughout our lives. Its parents who first impart financial knowledge through conversation converging on money matters by sending kids to markets to buy household articles to gain first-hand knowledge of financial intricacies. This can include:
- Discussing budgeting, savings, and financial goals
- Setting up bank accounts
- Monitoring spending
- Imparting financial education and habits
- Help them create a home budget
- Saving and investing for the future
- Increased saving
A financial education since the nascent age goes a long way in creating a good investment and amassing wealth. Most people are not financially savvy and lack knowledge of financial terms such as interest rates, compounding, credit scores, debt, and budgeting. Any individual with a solid financial mind can calculate the good financial value of their investment with a set of good financial skills. So, we may make the assumption that early financial literacy helps in making informed financial decisions, which helps in wealth creation and financial security.
Facilitates debt reduction
A financially savvy person is less likely to fall into the trap of debt and financial loss compared to a financially uninformed person. A person with a sharp mind and savvy financial skills can avoid garnering unnecessary loans or splurging more than earning. This can only be achieved by educating young minds in all spheres of finance to save them from the debt trap. It is with good financial acumen that a person achieves debt reduction in his financial goals.
So, a financially savvy individual is less likely to fall into the trap of debt accumulation and financial stress over a period of time. Any individual can ward off financial stress, debt, and scams and minimise tax burdens by skilfully investing and thus improving their credit score.
Enhance financial planning
Financially literate individuals are equipped with the knowledge and skills necessary to navigate the complexities of personal finance. They possess a deep understanding of financial concepts, including budgeting, saving, investing, and debt management. This financial literacy empowers them to make informed decisions that align with their long-term goals, such as retirement planning and ensuring the well-being of their families.
Early financial education is paramount in shaping financially savvy individuals. By introducing financial concepts at a young age, children and young adults develop a solid foundation for future financial success. They learn the importance of delayed gratification, responsible spending, and the power of compound interest. This early exposure to financial education helps them develop healthy financial habits, such as regular saving and mindful spending.
One of the key benefits of financial literacy is the ability to plan for retirement effectively. Financially savvy individuals understand the importance of saving for their golden years and making wise investment decisions. They create a retirement plan that considers their income, expenses, and risk tolerance. By starting to save early and investing wisely, they increase their chances of enjoying a comfortable and financially secure retirement.
Furthermore, financially savvy individuals are better equipped to handle unexpected financial emergencies. They have an emergency fund in place to cover unforeseen expenses, such as medical bills or job loss. This financial cushion provides them with peace of mind and protects them from falling into debt.
In addition to retirement planning and emergency preparedness, financially savvy individuals make conscious decisions to ensure the well-being of their families. They set up education funds for their children and plan for their marriages. This financial planning demonstrates their commitment to providing their loved ones with the opportunities and resources they need to succeed in life.
Improved credit management
From a young age, a financially educated individual recognises the significance of responsible credit management as a cornerstone for securing a promising future. Through prudent financial decisions, they leverage their creditworthiness to make wise investments, building a solid financial foundation.
In contrast, a financially illiterate person may fall into the trap of impulsive spending without considering the long-term consequences. This reckless behaviour can lead to the accumulation of significant debt, jeopardising their financial stability. The lack of financial knowledge and poor spending habits can result in a negative credit score, which serves as a red flag for lenders. This unfavourable credit history can make it challenging to obtain loans, secure favourable interest rates, and even hinder employment opportunities.
Furthermore, the absence of financial literacy can escalate into severe financial pitfalls, such as bankruptcy. Bankruptcy not only carries legal implications but also damages an individual’s creditworthiness for an extended period. It becomes increasingly difficult to rebuild trust with lenders, making it challenging to secure loans or credit cards. The financial fallout from bankruptcy can linger for years, affecting a person’s ability to secure housing, obtain insurance, or even open a bank account.
Increased financial inclusion
The government has some schemes running for financial inclusion for vulnerable sections of society to uplift them socially. Early financial inclusion can close the gap in India by equipping them to make informed financial decisions for their own good.
Mitigates financial stress
An early financial education creates an informed investor and strengthens his ability to manage his finances in a prudent manner. This makes the individual financially well off due to prudent investment.
Provides long-term financial stability
Early exposure to financial tools for an individual creates financial independence and wealth accumulation in the long run. The accumulated wealth and satisfaction of it are ingrained in a person’s personality. As a kid, after being educated in financial matters since his early days, he makes well informed financial decisions and manages his resources later efficiently.
Conclusion
In the context of the Indian scenario, early financial education is imperative for fast-track economic growth and urbanisation, accelerating access to credit and financial products . By introducing the finance curriculum in school education, our country can prepare and equip with practical skills to thrive in the adult world and create more financially literate citizens. Making them well-versed in financial acumen to navigate the intricacies of personal finance and achieve long-term wealth creation.
References
- https://www.linkedin.com/pulse/impact-financial-literacy-long-term-stability-berhan-financia-t9jmf/
- https://www.investopedia.com/terms/f/financial-literacy.asp
- https://www.linkedin.com/pulse/key-financial-prosperity-importance-starting-education-early/
