Financial literacy - An introduction

23 May 2021

Curtain Hug

Financial literacy is the ability to understand and effectively use financial skills. These financial skills are as simple as budgeting, investing, credit management, and financial management. In other words, financial literacy is the ability to manage money. A strong foundation of these financial skills will help in achieving various life goals like retirement, education, and even going on a vacation.

Financial literacy includes many skills. However, the most popular ones are budgeting, managing expenses, paying off debt and understanding the risk return trade off in investment products. Acquiring these skills would require one to understand the basic financial concepts like time value of money, compound interest, annual return and opportunity cost.

With an abundance of credit products available in the market like credit card debt, overdraft facility on debit cards, and EMI, financial literacy becomes important. Understanding debt and having basic financial knowledge will help individuals to use these products responsibly.

Financial literacy often teaches individuals how to make major financial decisions. Moreover, it increases financial discipline and financial capability. This will lead to major lifestyle changes like saving and investing regularly, managing debts effectively and fulfilling life goals efficiently. Additionally, financial literacy will ensure one’s financial wellbeing and also protect individuals from financial frauds.
Lacking the knowledge of these skills leads to financial illiteracy. Financial illiteracy leads to budget mismatch, higher expenses than income, accumulation of debts, poor credit score, being victims to financial frauds, and other negative consequences.

According to the report conducted by the Global Finance Excellence culture, only 24% of the Indian adult population is financially literate. In comparison to other major emerging economies, the financial literacy rate of India is the lowest. This is due to inter-state disparities, lack of formal training and awareness. While other emerging economies have better financial literacy rates, there’s still scope for more improvement.

Metropolitan areas like Maharashtra, Delhi, and West Bengal have financial literacy rates of 17%, 32%, and 21%, respectively. States like Bihar, Rajasthan, Jharkhand and Uttar Pradesh where poverty is rampant have low literacy rates. The data identifies inter-state disparities. While Goa has the highest literacy rate of 50%, Chhattisgarh is lacking financial education and has the lowest literacy rate of 4%.