Why is financial literacy important for everyone? | Motilal Oswal

financial literacy important for everyone

As the Indian economy is gradually trying to recover, there is a distinct surge in investments, especially in the sector of retail investment. However, there is one thing in the investment landscape that is a glaring fact - the country’s citizens lack financial literacy. The case of “half-knowledge is more dangerous than no knowledge” applies to financial acumen in the Indian demographic today. 

If you ask some people about the share market today, you won’t get a straight answer, as many don’t know what to think or say. This goes for just about any financial investment or product available, let alone asset classes. Recent years have impacted Indians in the worst possible way, as they have all over the globe. This has, in a way, made more people aware of the importance of saving for a rainy day and making sound investments. Irrespective of your age or stage in life, you should be well-prepared to tackle any financial burdens. Such realities can be life-changing, and financial literacy can act as a bridge between a person’s path to wealth creation and growth of the economy. 

Widespread Financial Illiteracy

The “better to be safe than sorry” mantra does not apply to most Indians where financial literacy is concerned. There is little or no understanding of finances and investment today. This may well be the reason why so many people face a struggle when it comes to investing and saving wisely. The worst part is, people tend to rely on hearsay regarding finances, often going in for investment in mutual funds or an upcoming IPO with no real logical thought. Moreover, this lack of financial knowledge is as widespread in a metro as it is in a small town in India. Whether finances have to do with choosing the right investment products to financial activities like online trading, most “literacy” depends on peer knowledge. 

The Knowledge that is Lacking

The lack of financial literacy is felt all over the globe. In fact, in the USA, FINRA, or the Financial Industry Regulatory Authority, issues a brief finance literacy test to consumers. The test offers a measure of the knowledge of consumers relating to interest, inflation, compounding, diversification, investment, bond prices, etc. The results of a recent test show that only about a third of individuals got four out of five responses right. It is understandable if you don’t understand certain products to invest in, or even the choice of asset classes, such as mutual fund investment. However, common terms like inflation, interest and the like should be grasped with ease by everyone in today’s world. 

We Know Less In the Digital Age

Financially speaking, individuals know less about finances now than their ancestors did in the past. There are obvious reasons why financial knowledge is of the utmost importance, and as grave as the issue is, people still tend to take it lightly. It's only when there arises a dire need for it, do people wake up. However, there is some change occurring, but this is slow. Changes in the habits of consumers may account for a lack of literacy. In earlier days, people used cash for any transactions. In the digital age, everything is easy and electronically undertaken. Credit card use is rampant, and online shopping is the need of the hour. This makes it very easy for individuals to spend, overextending credit, and accumulating debt very quickly. People live more for the present without any thought to consequences. 

The “Convenient” Lifestyle

Whether you want to invest in the share market today or take a loan, everything has been made convenient for you. All transactions and dealings are done online. Credit card companies, financial institutions and banks are all on the go to give consumers credit opportunities. Such are the opportunities given to people to borrow and spend freely, but not to learn to budget and save for eventualities and other vital life stages like retirement. For instance, in the current age, it's easy to pay off credit card debt with another credit card. However, you may have got out of one frying pan, only to get into the fire. This is why knowledge of sound financial planning and financial acumen, in general, is very important. 

Financial Knowledge Takeaways

Financial planning is a long-term activity. This is true for wealth accumulation too. Financial literacy is required for any kind of financial planning to take place. The initial step to take to gain some kind of financial knowledge is to know how much you spend yourself. Making a budget can help you in your plan to save and invest. Financial literacy and knowledge of how your wealth gets impacted by factors like inflation, is vital as you can know how to manage your daily expenses, while having a long view to save for the future or any emergency. Financial knowledge can also aid you in your investment decisions, and what ways of investment suit your needs. With knowledge, you get to know about different financial investment tools and instruments, like mutual fund investment or any upcoming IPO. 

Get Financially Savvy

From simple budgeting of your monthly expenses to personal financial wealth management, financial literacy represents the ability to grasp and apply several skills to do with finances. The primary reason to be financially literate today is because there is an increase in financial responsibility. People are compelled to tackle debt, retirement planning, home loans, online trading accounts, etc. 

Financial literacy has a material and direct impact on how you manage your life and that of your family’s. It involves, to a greater extent, a knowledge about financial investment instruments to invest in to meet financial goals. Mainly, whether you choose the share market today or any other investment avenue, you should ensure that your planning can meet your expenses, both daily and long-term. Balancing your budget, financing your child’s education and marriage and ensuring your retirement is taken care of all involve a fair amount of literacy of financial terms, products and instruments. The lack of financial skills affects people in all countries, from emerging economies like India to developing ones like the USA. If you think you lack knowledge or wish to gain more, you can always get rid of financial anxiety by learning from a good broker like Motilal Oswal. It's never too late to open a Demat account and start investing in other instruments and products too.

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