As per the data published by Asian Development Bank (ADB), only 27%* of Indian adults are financially literate. Despite the importance of financial literacy, many people lack this critical skill.
It is the education and understanding of various economic areas, including topics related to personal finance, investing and money borrowing. It gives you the ability to make sound financial choices so you can manage and grow money.
Financial literacy is especially important for young people. They need to learn ways to manage their money to build a solid foundation for their future. But it is not just young people who benefit from being financially literate. People of all age groups can learn how to manage their finances better.
Importance of financial literacy
With the advent of new technology and ever-changing markets, the need for financial literacy has never been greater.
The important thing to remember is that, just like everything else, your financial situation can change at any time. So, proper financial stability will ensure your peace of mind knowing that you can rebound if something unexpected arises.
Various reasons show us why a personal understanding is vital in today’s economy.
Financial literacy helps you understand your money
It helps you understand how your money works and what your money can do for you. For example, suppose you need to make a big decision about whether to buy a house or car or whether to save for an emergency or retirement, you can take a close look at your income and expenses and help you see if you have room to make a large purchase or how making such a purchase would affect the rest of your financial life.
Financial education helps to end the debt cycle
If you feel overwhelmed by debt or are struggling to make payments on your loans and bills, learning how to manage your financial wealth is the first step to gain control. The second advice is putting the advice to use and working to eliminate your debt. Learn to understand what you can realistically afford and need to trim from your budget. Financial education can offer you a way out when debt feels overpowering.
Planning your future
When planning for the future, you need to understand the different savings options and how they may impact your goals. Financial literacy helps you know how to save and invest based on your current income, the timeline to reach your financial goals and plan for your retirement.
For instance, if you want to go on a vacation, it can help you figure out how much you need to set aside each month to cover your trip.
Ability to make better financial decisions
You can make the right financial decisions with the right kind of knowledge. It will now be easier for you to answer questions like: Where to invest? How to save? What is the interest rate? How much am I going to get? What is compounding? Among others.
Only when you know these questions and how they work, you can make better decisions.
To avoid misselling
Many people might want to take advantage of your financial ignorance by selling financial products that does not match your risk profile or financial goals. This is called as misselling.
Investing in the wrong products might do you more harm than good. So, being financial literate will make sure that you are not taken for a ride.
Conclusion
In today’s disruptive environment, it is more important than ever for people to be financially literate. People with better financial understanding are more likely to make sound financial decisions and are less likely to fall prey to scams and other pitfalls. They are more likely to be able to weather economic disruptions, such as job loss or unexpected medical expenses.
