Making smart financial decisions begins with financial literacy. It refers to understanding key financial concepts and applying essential skills like budgeting, saving, and investing. When you’re financially literate, you’re better equipped to manage money wisely and work towards long-term goals such as buying a home, funding your child’s education, or starting a business.
You need financial literacy to understand financial instruments’ rising complexity, pension system amendments, etc. With this overview of what financial literacy is, let’s now understand its importance.
Why Is Financial Literacy Inevitable?
The key components of financial literacy work as the building blocks for money management. These components include budgeting skills, investing and saving, debt and credit management, and risk management.
| Key Components of Financial Literacy | Details |
| Supports Financial Well-Being | According to a National Endowment for Financial Education study, only 24% of millennials have basic financial literacy. Financial literacy is required to manage your daily expenses and plan for critical life expenses. |
| Avoid Overwhelming Financial Mistakes | One of the key benefits of financial literacy is that it helps you avoid costly financial mistakes. For example, floating-rate loans in India may see interest rate changes based on RBI policies, while schemes like PPF and NPS limit early withdrawals to ensure long-term savings. |
| Helps Reach Financial Goals | Knowing how to save money and plan a budget helps you set clear financial goals. This is only possible when you are financially literate. For example, you may be incapable of affording a dream home currently, but you can create a plan to achieve this goal in the future. |
Tips To Enhance Financial Literacy
You can try these practical skills if you want to boost your financial knowledge, as small steps today can lead to smarter financial planning tomorrow:
1. Study Online Resources
- Plenty of websites, apps, and online platforms like Dhan provide resources targeted to financial education.
- These resources include articles, tutorials, courses, and tools. They help you grasp all key aspects, ranging from the basics of budgeting to comprehensive investment strategies.
- You can explore your scope of financial literacy by using resources like webinars, podcasts, and video tutorials.
2. Prepare a Budget
- Studying online resources is not enough. You need to practice preparing a budget to track your income and expenses.
- This approach will gradually familiarise you with the basic financial terms you will encounter while budgeting.
- You can use a budgeting app or an Excel spreadsheet to prepare a budget.
- Your budget must include fixed expenses (like loan payments, utilities, etc.), income, and expenses (like travel, dining, shopping, etc.).
- Aligning your budget with an expense tracking app will let you recognise areas where you make unnecessary expenses and where you save.
3. Avoid Delays in Bill Payment
- Ensure you do not miss the deadline for monthly bill payments to avoid penalties.
- Setting up automatic debits from your checking account can make this easier.
- Alternatively, you can use phone, text, or email reminders to stay on track.
- Making timely payments is a habit that protects your credit, helps you understand key financial terms, and builds better money management skills.
4. Review Your Credit Score
- You can get the best interest rates on credit cards and loans if your credit score is good.
- You can use a free credit monitoring service to supervise your credit score.
- Be aware of what aspects can increase or lower your credit score. You can limit unnecessary spending through credit cards and achieve financial stability.
5. Learn Debt Management
- To manage debt effectively, focus on reducing your expenses and increasing your repayments.
- This is easier when you stick to a well-planned budget. Learn the basics, such as how interest rates affect loan repayments and how different repayment methods work.
- With this knowledge, you can develop an effective debt reduction plan and avoid financial setbacks.
6. Get Professional Advice
- Financial advisors, counsellors, and planners are experts in various areas of personal finance.
- They offer tailored advice based on your goals, financial situation, and risk tolerance.
- You can seek their help whether you are investing in the stock market, planning for retirement, or purchasing an office/home. They help you navigate complex decisions.
7. Networking with Peers
- Expanding your network can help you connect with expert and experienced individuals in the industry.
- Networking with peers can provide you with valuable perspectives on financial management.
- You gain practical insights by learning from others’ financial successes and challenges.
- Peer discussions can familiarise you with new tools, strategies, or products that can aid you with better financial management.
- Staying connected helps you stay updated with the latest financial trends.
Learn Key Fundamentals to Become Financially Literate
The earlier you begin learning the financial fundamentals, the better you can plan for your future. Financially educating an individual can create a series, i.e., spreading awareness among family, friends, clients, etc. Improving financial health, stress reduction, and enhanced security are key perks of valuing the importance of financial literacy.
