Life is expensive and we work hard to provide our family and children with what they need to succeed in life. Therefore, learning few skills to manage the finance is necessary if these skills are missing while managing finance then it can lead to financial crisis. Hence, learning about financial literacy is important.
Financial literacy is the cognitive understanding of financial management and skills budgeting saving interest and even personal financial management as well. People who lack these skills are considered to be financially illiterate. Financial literacy is one of the necessary steps towards a successful adulting.
Fundamental Components of Financial literacy consists of several components. Various skills were needed which helps an individual to gain knowledge regarding management of finance (money) and the debts.
Importance:
Financial knowledge one of the basic life skill that has direct impact on personal well-being. Studying about the personal finances and important skills at an early age provides with lot of opportunities to apply them in the real life.
In India 75% of the population are literate where in 24% of the population do not understand what financial literacy is.
Considering the covid-19 pandemic which has not only endangered millions of life around the world but also has made many people into a situation of financial crisis this shows that India lacks financial education among the citizens.
This pandemic has taught us one of the important lesson of been financially prepared for any situation which can be earned through financial literacy.
Being financially educated should be one of the courses to be taught in the schools and colleges students which can make them financially stable and habit of making money work and saving at an early age.
Budgeting is one the fundamental components of financial literacy. It is the basic aspects to stay on the top of your finance. Budgeting can help in spending your money efficiently and effectively.
Budgeting should be done in a proper manner were in creating a balance between the primary use of the money for the betterment of individuals assigning their income and resulting into financial security and prosperity.
Budget should be formulated in such a way that all the expenses one side while keeping money aside for savings and making beneficial investment. Overcoming the basics of budgeting is the way financial beginners should begin with.
Investing is another key component of financial literacy. To become financially literate one must learn the skill regarding investment which includes several other components for ensuring favorable investments as interest rates, diversification, risk management, price levels and indexes.
Studying about the crucial investment components will help the individual to make a smarter financial decision which may result in an increase in the inflow of income and make them more financially stable.
Understanding the inner components of investment assist in learning the different aspects like the compound interest. Investment is concerned with interest and interest can impact your finances. Such as if you take loan how much you are supposed to pay interest back to them.
Almost every individual at one point in the life is required to borrow money. Hence to ensure that the borrowing is done effectively one must understand the interest rate, compound interest and the time value of money and the loan structure is important.
The person who recognize various components such as compound interest, interest rates etc. individuals financial literacy will increase which in for the future will help their individual to provide practical borrowing guidelines and reduced long-term financial stress.
Taxation becomes important aspect when it comes to once individual net income. Gaining knowledge about the different form of taxation becomes an important aspect for obtaining financial literacy.
The source of income can be true investments rental inheritance or unexpected income but each source of income is taxed differently. Awareness with respect to the different type of income tax rate permits an individual economic stability and increases financial performance through income management.
Saving is one of the essential aspects of maintaining a healthy financial condition. Therefore, prioritizing saving should be the first preference when it comes to financial stability and financial literacy. Set of skills of saving can be utilized throughout the entire life of an individual.
Learning or practicing to save early on can help an individual to gain knowledge practice and inculcate new skills which is an essential part of financial literacy. It can work as achieving the financial goal such as buying bike or property.
The irony is that majority of students don't prioritize saving aspect as much as days should. When an individual conquers the saving skill set the patients practice and all quality comes from there doing this practice can be helpful in long terms when it comes to financial literacy in several ways ahead.
Awareness of all the fundamental components of financial literacy permits and individual to be economically stable and increases the financial performance through the income management. An individual should first personally financial management
Financial literacy can lead to financial security as it ensures by balancing mixture of financial components and increase in the investments while reduces the borrowing and debts.
Achieving and in the knowledge regarding the financial fundamental components guarantees an increase in an individual financial literacy which most of us don't have.
Taking small steps to become financially literate is an essential component of life that can ensure the financial solidity, the less of financial stress and can stimulate the achievements of financial goal and better standard of living.
Benefits:
Financial literacy is same as financial education or it can be said that it is a skill which is to be learnt which helps in improving the standard of living for an individual through an increase in the financial stability.
Financial literacy as various advantages of the skills are practiced or studied
1. Ability to make better financial decisions as well as effective creation of a structured budget.
2. It assist an effective management of money and debts and reduction of expenses through better regulation.
3. Leads to less of financial stress and anxiety while increase in the ethical decision-making while selecting insurance loan investment or using a credit card.
4. Understand the need of future and equipped to reach the financial goals.
Being financially literate not only allows a person to have a better life but to prepare for specific financial roadblock which in turn can decrease the chances of personal economic distress.
Realizing that financial literacy is necessity in today's society due to everyday facets of life and considering the pandemic as well. An individual who has financial education can understand the importance of emergency fund.
The current scenario of the covid-19 disease has made us realize that at any point of time in life we must have three to four months of expenses set aside as savings and not only one source of income but several source of income should be there this is a decisive way to avoid debts.
India is a developing country and it does not have a social security to the younger generation. So one need to start saving and investing as soon as possible at an early age so as to earn their financial freedom.
One can start developing the foundation of knowledge regarding the financial education through several books, videos on internet, online communication and several apps.
It is important to understand that controlling your financial situation is a way to growing your financial intelligence. Before spending too much in the world focusing on increasing the financial awareness can lead to the key to on life's freedom.
It is important to understand that financial literacy is the necessity but not a luxury.
Written by: Rakhi Sharma
Edited by: Gourav Chowdhury
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