Author : Aditya Patnaik
Meaning of Financial Literacy:
Financial literacy refers to the knowledge required for managing personal finance. It does not refer to formal education in finance. Instead it encompasses an understanding of how to use credit responsibly, manage money, minimize financial risks and derive long-term benefits of savings. Thus, it is the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner.
Benefits of Financial Literacy:
* A financially literate person can link his or her need for a product or service with those available within the banking system.
* A demand for financial inclusion is created through an appreciation for what is available.
* The formal banking system will find a financially literate person easier to approach.
* A financially literate person will seek information about available services to operationalise his financial decisions and hence access what is available.
* Self esteem increases when their productive lives include mainstreaming into formal systems.
* Financial literacy can lead to financial wisdom, i.e., ability to manage money and not just deal with it and the ability to take wise decisions for the future.Why do we need financial literacy?As per a comprehensive survey of over 63,000 Indian households to understand how India earns, spends and saves:
A rural household’s total annual expenditure, including both routine and unusual expenditure, amounts to Rs 41,000, resulting in a surplus income of roughly about Rs 11,000. An urban household in contrast has a surplus income of Rs 25,000. The survey also highlights disparities in saving habits. Levels of income, expenditure and saving related behaviour are linked to the age, education levels and type of engagement of chief earner.
Salary and wage earners account for a low share of the total households (18.4%) but highest share of the total earnings (30.8%) with an annual income of Rs 109,000. After taking care of total expenses of Rs 76,000, these households have surplus income of about 30% of their income.
By contrast, a third of households earn their income from labour, but this group’s share in the total earnings is only 16% and has surplus income just about 7.7% of their income. Similarly, households with chief earner in late middle age (46-55 years) accounting for 21% of all households have the highest surplus income (Rs 19,000 per annum) among all other age groups which is about 24% of total income.
The findings of this Survey clearly brought about a need for financial literacy in Indian households. An astounding 96% of Indians across rural and urban India felt they would not survive for more than a year in case of loss of their major source of income. However, when asked how confident they were about their financial stability, an overwhelming 54% answered in the affirmative. This misplaced financial optimism in most cases stemmed from knowing they had the support of a joint family system. However, this is and will not hold true in a fast-changing social fabric amongst Indian households.
More than half of the Indian households prefer to save by keeping their surplus income in commercial banks. However, more than a third of Indians simply prefer to keep their surplus money at home. Households opting for post-office deposits account for just 5%. While top 20% of income earners save up to 44% of their income, the bottom 20% borrows up to 33%. Although financial institutions (a bank or cooperative) constitute the main source of borrowing, a significant proportion of Indian households rely on informal sources — principally the money-lender in rural India — to make ends meet. Almost 40% of rural Indian households and a fourth of urban Indian households borrow from the money-lender to meet expenditures such as health, medical treatment and routine household expenditure.
Findings broadly confirm the fact that Indian households are in the habit of saving out of household income, and also that they are fundamentally optimistic about their financial future. Yet, for almost a quarter of households across the income spectrum, current income is insufficient for their routine and unusual expenditure, creating a need for a reserve of financial assets for them to fall back upon.
At the same time their awareness of strategic financial planning is relatively primitive. While governments have a role to play for the poorest households, in general, financial security is the responsibility of each household, and both the needs and the options available are more complex today than before. The survey points to a tremendous need for enhancement of financial literacy and education of households to do better in achieving lasting financial security.
Financial Literacy Promotes:
* How to Save
* Concepts in ‘Savings’
* Saver V/s Spender
* Deciding your goals
* Relationship between income/expense and savings
Mature Borrowings: * When-How and Why we borrow; from Whom
* Pre and Post Borrowing Factors
* Reducing vs. Flat Rate of Interest
* Borrowing for Productive purpose
* Options available for borrowings
* How much debt should one take
* Define consumption: Need vs. Want
* Avoid wants and spend judiciously on needs
* Managing Big-Ticket Expenses
* Creating a Need Account
* Financial Independence
* Make a Financial Plan
* Make a Budget
* Keep Investing
* Mitigate Risk
* Capital Formation