Definition of Financial Literacy
Financial Literacy refers to the knowledge and understanding of various financial products which help the investor with their money management, personal finances, investment, and tax planning. It looks into how prudently an individual goes on to manage his finances thereby building the necessary requirements like an emergency fund, retirement fund and also how they plan to take care of insurance, estate planning, paying for education, etc.
Importance of Financial Literacy
It is very important to be financial literate as it has advantages which are listed below –
#1 – Won’t fall for Fake Schemes
In an era where fake schemes such as pyramid schemes are rampant, a financially literate person will not be a victim of such scams. He/she will well be aware of the hogwash that exists behind all the ‘get rich quickly’ schemes and will not fall prey to any of that.
#2 – Awareness of where not to Invest
With various schemes like chit funds that tend to lure individuals towards it, to make a big bang for their buck, the financially literate person will not fall victim to any of those. He would be very well aware and convinced that such avenues are not wealth enhancing in the long run
#3 – Succession Planning
It is often said that ‘Poor people plan for Saturday night whereas rich people plan for 3 generations’. By being financially prudent he/she will also make efforts to educate and create awareness among their children about being financially literate. They shall also tend to appropriately plan their succession and leave sufficient wills in place
#4 – No herd mentality
In an era where everyone is fond of insurance which goes on to be perversely sold as an investment product, a financially literate individual would not follow the herd mentality because any random Tom, Dick, and Harry did so. They are very well-groomed about their finances and are very well aware as to where to invest and where not to. Random public opinion is just music to their ears when they know the underlying truth of it all. They are pretty much clear in their approach knowing that it is important to have their own beliefs and not blindly follow or emulate someone just because everyone else is doing so.
#5 – Prudent Planner
A financially literate individual will be considerate towards his/her expenses and will limit them in the bracket that has been set. They will not be much of a victim to impulsive buying decisions. He will even go on to plan about his finances be it setting up an emergency fund or even retirement planning at an early age for that matter
#6 – An Educator
A financially literate individual is well aware of the tenets of financial planning will now tend to be an educator. He may conduct seminars, teach in colleges, write articles and books, mentor students, etc. Thus a positive environment of awareness and education will be created which will build up and thus have a chain effect in the society. They would make all the efforts to educate their family, friends, students, colleagues, etc so that the knowledge that they have is shared to the maximum people so that they too stand to benefit from it.
#7 – Scope for Business
Many self-educated individuals have set up their own offices and business in the financial consulting domain by venturing into personal financial planning. They tend to accept retail investors and educate and guide them on how to go about their finances. Thus it tends to provide a source to earn a living
Disadvantages of Financial Literacy
Below are some disadvantages of financial literacy.
- Anchored bias: A well financially literate individual may be anchored in his beliefs revolving around personal finance. For example, a person who believes in passive investing(such as tracking index funds to be in line with the market) may be of the opinion that his strategy is supreme and may not be open to new ideas on active management where one tries to beat the market by generating alpha(excess returns). Similarly a ‘buy and hold’ investor may not be open to the idea of profit opportunities through a sale in the short run.
- Pre judgemental: There tends to be a certain notion, beliefs, and policies that are well grained in an individual because of which he may be at times pre-judgemental about it without being open to new ideas. The cocoon shell may prevent him from being non-judgemental and accepting new ideas and opportunities
Limitations of Financial Literacy
One major limitation of financial literacy is the bias that tends to be anchored in an individual. He/she may hold on to the beliefs and may not be open to new ideas.
How to Become Literate in Finance?
Following are some of the ways in which financial literacy can be well imparted among the public.
|1||Short term courses on investing|
|2||Seminars on financial planning|
|3||Research papers on basic investing|
|4||Books on personal financial planning|
|5||Subjects in colleges|
|6||Internships in financial consultancies|
|7||Marketing and awareness to the general public|
|8||Personal face to face interaction|
|9||Groups that get together often and discuss|
|10||Online websites and articles|
Financial literacy tends to be a very important tool to help an individual not to fall prey to dubious schemes and thus be prudent in his/her personal financial life. They tend to create awareness in and around their circles be it friends, family, colleagues, neighbors, clients, etc. by making efforts to educate them in the domain of personal financial planning. They would now tend to be better savers and investors owing to the knowledge gained of such planning.
However, it becomes important that one is not caught up in his/her own preconceived notions which will not open up the door to further ideas and opportunities. It is imperative for a financially literate individual to not be pre judgemental in his/her views. It is then that one tends to gain maximum from the financial literacy that they have gained.
This has been a guide to Financial Literacy and its definition. Here we discuss some examples of Financial Literacy along with advantages and disadvantages. You may learn more about our articles below on finance –