Financial Literacy - Why it is important and what are it's benefits.

What is Financial Literacy?

When you earn money, what do you do with it? Do you manage your expenses properly? Do you save some amount or get debt ridden?
A person who can manage his hard earned money (salary/profits) in such a way that he can save some amount for future and also become debt-free, is a financially literate person.
So "Financial literacy" is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing to save money for the future, become debt-free and attain financial freedom.
When you are financially literate, you have a smart relationship with your money. You can have a clear picture of your future ambitions in your mind, and you can start saving money effectively with proper planning, investment and budget for completing your ambitions.
The earlier you start to become financially literate, the richer you'll be because education is the key to a successful financial future.

Financial management includes skills like:

•Budgeting: A budget is an estimation of revenue and expenses over a specified future period of time that is re-evaluated on a periodic basis. In simple words; when you make a list of your monthly expenses, and categorise them into essential and non-essential expenses, and allot a specific amount from your salary for your essential expense and reduce your non-essential expense, keeping your future goals in mind, then you're actually preparing a budget. And this entire process is called budgeting.

•Savings: Identifying essential expenses and reducing non-essential expenses, leaves some unused amount of money, which can be used in future. This amount is called savings.
Savings = Income - Expenses
Savings can be increased in two ways:
1. Increasing source of income.
2. Decreasing unnecessary expenses.

• Investing: Investing means putting money into assets with the expectation that the value of those assets will grow over time. Investments can be long-term (more than 1 year) and short-term (less than 1 year), based on their duration. In India, most common type of investment is Gold, Bonds, FD (Fixed Deposit), RD (Recurring Deposit), and Life Insurance. They are common because they have low risk and guaranteed returns, and hence provide some stability to your money. But they don't give high returns. For higher ambitions, you need high returns, and for that you have to take some risks, and invest in moderate to high risk mutual funds, share markets, crypto currency, futures and options, etc.

•Setting financial goals: Budgeting, saving and investing without a specific goal is useless. You should have realistic future ambitions and financial goals. Setting goals and ambitions gives you a better insight of your finances, and you have a clear picture in your mind about how much money you want to save, and what path of investment you need to achieve your goals, etc. All of this becomes clear after setting financial goals.

•Debt Management: Making a planned budget and saving enough money to pay your instalments regularly, and repay all your outstanding amount on or before time, without using a new loan, is called debt management. A good debt management also includes taking loan only when required, and not taking the amount which you can't repay.

•Building Emergency Savings: Apart from investing for your financial goals, you should also save some money for emergency. You should keep some uninvested amount in your savings account for any medical/financial emergency. For example, if you lose your job, then it will take you about a month to get a new job, and then again, another month to get your salary, then in this situation, your emergency savings will help you to survive.


Why is Financial Literacy important?

Being financially illiterate has many disadvantages, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation, which in turn, can lead to poor credit, bankruptcy, and other negative consequences.

With financial literacy, you have a better insight of your monthly expenses and you can reduce your unnecessary expenses to save some money, set future financial goals, and invest your savings for achieving them. By being financially literate, you understand the importance of having emergency savings, which prevent you from taking unnecessary loans. You also make budgets to save more and also repay your loans on time, thereby saving yourself from bankruptcy.

Being Financially Literate, not only makes you future ready, but also reduces chances of financial frauds, and helps in saving yourself from paying more taxes.


Benefits of Financial Literacy:

1. It empowers you to take control of your finances and navigate the challenges and opportunities that arise.
2. It makes you able to differentiate between necessary and unnecessary expenses.
3. Helps you in making a budget and saving some amount of money.
4. Helps you in setting a realistic financial goal and achieving it.
5. Prevents you from any kind of ponzi schemes or financial frauds.
6. Prevents you from taking unnecessary loans and bankruptcy.
7. Helps you in repaying your loan installments on time.
8. Helps you in growing your hard earned money and attaining financial freedom.
9. Helps you in saving taxes (by investing in NSC, PPF, NPS, Life Insurance, ULIP, etc.)
10. Helps you in being ready for emergency situations.