Lack of financial knowledge has painful consequences

MAHESH PAI elaborates on the importance of financial literacy

Today many consumers have very little understanding on finances; an essential indicator of people’s ability to make financial decisions is their level of financial literacy. The Organisation for Economic Co-operation and Development (OECD) aptly defines financial literacy as not only the knowledge and understanding of financial concepts and risks but also the skills and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life. Thus, financial literacy refers to both knowledge and financial behaviour. In India, only 24% of the people are financially literate because the rest of the people usually run to their family or any elderly person for financial advice who only know about conservative products, so the new generation also lands up with the same. Awareness about mutual funds, equity, new age insurance products or even crypto and effective financial planning is missing. Some changes in consumer habits and financial products have made it harder for people to manage their finances. In the past, most people used cash for daily purchases. Today, they use credit cards more frequently. Without proper knowledge, it is easy to get into financial trouble.

Saving vs Investing
It is important to understand whether people are equipped to effectively navigate the maze of financial decisions that they face every day. To provide the tools for better financial decision-making, one must assess not only what people know but also what they need to know, and then evaluate the gap between those things. With rising prices and increasing life expectancies only saving money in a bank account or a closet will not beat inflation, investing the money correctly is the key. When you want to multiply the money you put it in various asset classes such as stocks, bonds, real estate or gold, you are creating wealth but choosing the wrong product or the wrong time due to lack of financial knowledge will get your finances crushing down.

The Gender Gap
A gender gap in financial literacy is also present across countries. The survey highlighted the overconfidence among men and lack of financial knowledge among women; this is not just in India but also in other American and European countries, as well. Due to this, many people arrive close to retirement carrying a lot more debt than previous generations did.

What can be done to overcome this problem?
There is no question that financial education is a global problem. The real question is what can we do about it? As adults, consult professionals before you take financial decisions especially when it is related to investing or debt management. For children, it isn’t just governments and schools that can solve this problem; it is up to parents to educate their children as well. Your children are never too young to learn about financial education.
In fact, you can begin having conversations about money with them while they are still adolescents. Something as simple explaining what it means to save money, or, showing them what they can buy with a small allowance will get them started thinking about money in a healthy way. Habits like conscious consumption and saving which are developed at this young age can stick around for life. A key lesson is that when it comes to providing financial education, one size does not fit all. It is important to target students and young adults in schools and colleges to provide them with the necessary tools to make sound financial decisions as they graduate and take on responsibilities, such as buying cars and houses, or starting planning for their retirement and other financial goals. Planning is a very strong predictor of wealth; those who plan arrive close to retirement with two to three times the amount of wealth as those who do not plan. Thus the importance of financial education cannot be overstated.
To summarise, financial literacy is low across the world and higher national income levels does not equate to a more financially literate population. Moreover, the exponential growth in financial technology (fintech) is revolutionising the way people make payments, decide about their financial investments, and seek financial advice. In this context, it is important to understand how financially knowledgeable people are and to what extent their knowledge of finance affects their financial decision-making.
Thus, financial literacy refers to both knowledge and financial behaviour. Financial literacy affects everything from day-to-day to long-term financial decisions, and this has implications for both individuals and society. An uneducated financial individual armed with a credit card and easy access to loans with no proper financial knowledge can be just as dangerous as a person who is given a car to drive with ineffective training.

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