Knowing more about money is not just a skill; it is a game-changer for everyone

Written by Bina Thakur for Happiest Health, 30 January 2024 ,with inputs from Aparna M, Associate Vice President, PeakAlpha.

Money is essential in our daily lives. Likewise, gaining knowledge about money, called as financial literacy, can make a huge difference. It is not just about numbers but about making smart choices and securing a better future. Happiest Health speaks to experts to know more about the importance of financial literacy and how it can make lives better.

Understanding financial literacy

According to Neha Nagar, founder of TaxationHelp.in, financial literacy is essentially the knowledge and skills needed to make informed and effective decisions regarding financial resources. It goes beyond knowing how to balance a chequebook. “It involves a comprehensive understanding of managing money, debt, investments, and planning for the future,” she says.

Why is financial literacy important?

Aparna M, associate vice president at PeakAlpha Investment Services P Ltd. says that financial literacy is being aware and putting into practice a set of key financial learnings like budgeting, investing, and insuring from risks adequately. This ultimately leads to financial independence.

“Financial literacy empowers you to make the ‘choices you want’ than the ‘choices you should’, and this applies both professionally and personally,” says Aparna. She emphasises the importance of financial literacy and says that it can help build in people the confidence to leave jobs, relationships and situations that do not serve them well. It is a life skill most of us need to live our best lives. The absence of financial literacy can make people fall for scams and get conned by others.

Financially literate individuals are better equipped to manage the uncertainties and challenges that come with managing money. Here is why financial literacy is crucial:

Informed decision-making: Financial literacy empowers individuals to make informed decisions about their finances. Whether it is choosing a college, deciding on a loan, or planning a budget, a financially literate individual has the knowledge to weigh options and make sound choices.

Stress reduction: Understanding financial concepts reduces stress by providing a sense of control and confidence in managing one’s finances. It enables individuals to handle ups and downs with resilience, whether it is an unexpected expense or a financial setback.

Debt management: Financial literacy plays a pivotal role in managing and avoiding debt. It helps individuals understand the implications of loans, interest rates, and credit, enabling them to make wise choices and avoiding falling into the debt trap.

Savings and investments: Financially literate individuals are more likely to cultivate a habit of saving and investing. Whether it is building an emergency fund or planning for retirement, understanding the value of saving leads to financial security and the ability to achieve future goals.

Mistakes to avoid

Aparna recommends steering clear of the following financial management pitfalls.

Cutting corners on insurance: By trying to scrimp on premiums and not having enough/appropriate health/life insurance is like saving on airbags on a freeway. A lot of the times, nothing happens, but if and when it does, the damage is significant and sometimes irreversible.

Being highly risk averse early on in life: If you steer clear of ‘volatile’ investments which are also high-quality and high growth, you are giving up precious years where your money can grow in an inflation-beating manner.

Attempts to ‘predict’ the market without adequate skills: Trying to anticipate market movements without possessing the necessary skills or expertise, emphasising the potential risks associated with making uninformed predictions in the financial markets.

Tracking your expenses: Not budgeting the finances will lead to excessive spending. Tracking your expenses will help you manage your money efficiently.

Investing in products due to ’FOMO’ (feeling of missing out on opportunities or trends): When you do this, you end up with a portfolio that is hard to manage.  Even if you make impressive returns on one of your holdings, your stake can be way too low for it to make a significant difference to your finances.

Common misconception for individuals with low financial literacy

• Not asking the right questions and falling victim to aggressive sales pitches and scams
• Thinking financial literacy is hard and not trying to learn
• Viewing any investment with scepticism and avoiding them. You should view every investment opportunity objectively and clarify your doubts before making a judgement.
• Cutting corners on insurance
• Believing money management is for the ‘rich’. Financial literacy can help you change your financial status for the better

How to cultivate financial literacy

Becoming financially literate is an ongoing journey. Experts suggest some simple steps to start with:

Read regularly: Reading financial articles and news is a great way to enhance financial literacy. Daily newspapers often have dedicated sections that provide valuable insights.

Use financial management tools: Linking personal accounts to financial management tools streamlines the process of tracking income and expenses. These tools offer a clear picture of financial health.

Seek expert advice: Financial institutions often provide in-house services to guide individuals. Seeking advice from experts can set individuals on the right track.

Attend financial education sessions: Participating in financial education camps and sessions, whether online or in-person, enhances understanding through interactive methods, quizzes, and discussions.

Increase familiarity with personal finances:  Applying financial knowledge to personal finances is crucial. Creating budgets, managing debts, and planning for the future through practical application solidifies financial literacy.

In conclusion, financial literacy is not a one-time fix but an ongoing journey that leads to financial empowerment. With the right strategies, everyone can start a journey towards financial well-being. One can start from the fundamentals and gradually build a secure and prosperous future.  Remember that learning about finances is not just for experts but for everyone.