Financial Literacy

Unit 1: Introduction (7 Hours)

Meaning, importance and scope of financial literacy; Prerequisites of Financial Literacy – level of education, numerical and communication ability; Financial Institutions – Banks, Insurance companies, Post Offices; Mobile App-based services. Need of availing of financial services from banks, insurance companies and postal services.

LECTURE 1

FINANCIAL LITERACY: Meaning[1]

Financial literacy is understanding and effectively using various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money and is a lifelong learning journey. The earlier you start, the better off you will be because education is the key to success when it comes to money.

UNDERSTANDING FINANCIAL LITERACY

In recent decades financial products and services have become increasingly widespread throughout society. Whereas earlier generations of Americans may have purchased goods primarily in cash, various credit products, such as credit and debit cards and electronic transfers, are popular today.

Other products, such as mortgages, student loans, health insurance, and self-directed investment accounts, have also grown in importance. This has made it even more imperative for individuals to understand how to use them responsibly.

Although many skills might fall under financial literacy, famous examples include household budgeting, learning how to manage and pay off debts, and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of critical financial concepts, such as compound interest and the time value of money.

Given the importance of finance in modern society, lacking financial literacy can damage an individual’s long-term financial success.

Being financially illiterate can lead to several pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, and other negative consequences.

STRATEGIES TO IMPROVE YOUR FINANCIAL LITERACY SKILLS

Developing financial literacy to improve your personal finances involves learning and practising a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products.

Here are several practical strategies to consider.

Create a Budget—Track how much money you receive each month against how much you spend in an Excel sheet, on paper, or with a budgeting app. Your budget should include income (paychecks, investments, etc.), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings.

Pay Yourself First—To build savings, this reverse budgeting strategy involves choosing a savings goal (say, a down payment for a home), deciding how much you want to contribute toward it each month, and setting that amount aside before you distribute up the rest of your expenses.

Pay Bills Promptly—Stay on top of monthly bills, ensuring that payments arrive on time consistently. Consider taking advantage of automatic debits from a checking account or bill-pay apps and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report—Consumers can request a free credit report from various credit bureaus once a year.

Check Your Credit Score—A good credit score helps you obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score.

Manage Debt—Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt-reduction plan, such as first paying down the loan with the highest interest rate. Contact lenders to renegotiate repayment, consolidate loans, or find a debt-counselling program if your debt is excessive.

Invest in Your Future—If your employer offers a retirement savings account, sign up and contribute the maximum to receive the employer match. Consider opening an individual retirement account (IRA) and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help determine how much money you will need to retire comfortably and develop strategies to reach your goal.

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[1] Fernando, J. (2021, October 29). Financial Literacy Definition. Investopedia; http://www.investopedia.com. https://www.investopedia.com/terms/f/financial-literacy.asp