Tag: Surjit Singha

LECTURE 3

PREREQUISITES OF FINANCIAL LITERACY – LEVEL OF EDUCATION, NUMERICAL AND COMMUNICATION ABILITY.

Financial literacy will assist you in accumulating wealth, attaining goals, safeguarding oneself in the event of an emergency, securing the future of one’s family, and making retirement plans, allowing you to live a stress-free life. Financially educated is not just knowing the facts about money but also taking the appropriate procedures to achieve the desired financial goals. If you acquire the following essential knowledge and skills to make intelligent decisions with your money, you will improve your financial awareness over time.

1. Financial Knowledge.

Compared to a generation before, today’s financial world is highly complex. The simple understanding of how to keep it current in the savings account metal local bank or savings institution may have been enough for financial activities 40 years ago. Consumers should now be able to distinguish between a wide range of financial products and services and the provider of those products and services. Previously, the less indebted generation may not have required a complete awareness of credit features such as compound interest, the consequences of mismanaging credit accounts, etc. There is a need to raise consumer knowledge about the necessity of financial knowledge and how to obtain it. Financial knowledge is essential for everyone, not just investors. It is equally crucial, if not more so, for the average family attempting to balance their budget and save for their children’s education and their parent’s retirement. Through problem-solving, critical thinking, and an awareness of essential financial facts and concepts, financial knowledge and decision-making skills assist people in making educated financial decisions. The following are the crucial components of financial expertise.

1. Level of education: Although financial knowledge varies with education and income, highly educated individuals with high incomes can be just as ignorant about economic issues as less educated, lower-income consumers. Furthermore, individuals regard financial decision-making and education as complicated and anxious. Take the initiative to self-educate and grow with your financial knowledge by beginning with the basics of money management and maturing into a wise spender.
2. Understanding financial markets: It’s a direct relationship between financial education and financial market participation. Financial significantly improves stock market participation and increases involvement in saving schemes. Economic market activities directly impact individual wealth, business actions, and the efficiency of our economy. The bond market, the stock market and the foreign exchange market knowledge are essential.
3. Investment opportunities: Awareness of investment opportunities and financial instruments is integral to financial knowledge. Investing is essential for long-term financial security. Poor decisions can result in the loss of hard-earned funds. As a result, you will require financial expertise and a prudent plan. Working, either as an employee or as a business owner, is one way to make money. Investing in another option to make money. An investment is the purchase of an asset to produce wealth through regular income or profit from the sale of an item. Investment decisions are an essential part of financial planning.
4. Economic environment: The word economic environment refers to all external economic factors that influence consumer behaviour and business performance and are often beyond an individual or company’s control. The knowledge of the economic environment has a direct impact on your life. Interest rates affect your savings and the payment of loans you might take out for a car or a house, and monetary policy may impact your career prospects and future commodities prices. Understanding the economic environment will expose you to many political disputes surrounding the conduct of economic policy. It will aid you in gaining a better understanding of the economic phenomena you read about in the news.
5. Interest rates.
6. Inflation.
7. Tax rates.

• Financial Skills.

Financial skills are abilities required to perform critical financial decisions. Financial skills are needed to promote financial self-sufficiency, stability and well-being. Acquiring these skills requires a basic understanding of financial concepts such as savings, investing, and debt, which leads to an overall sense of economic well-being and self-trust. Lacking the knowledge of these skills leads to financial illiteracy. These skills include:

1. Budgeting: Making a budget is vital in developing financial literacy skills because it allows you to understand your income and expenses accurately. Once you’ve established the budget, you can keep track of your spending and evaluate your spending plan regularly. Thus, budgeting is an essential financial skill that aids in planning and managing money. Budgeting helps in the planning of short-term, medium-term, and long-term expenses. It enables people to save appropriately.
2. Financial planning: Financial planning is the long-term process of properly managing your finances to assist you in achieving your goals and dreams while working through the financial obstacles that inevitably come at every stage of life. It is important to remember that financial planning is a process, not a product. Financial planning skills refer to the acquisition of competencies that serve as a guide as you journey through life. It essentially aids you in maintaining control over your income, expenses, and investment so that you may manage your partnership and reach your goals.
3. Using financial tools: Financial tools are applications designed to calculate, estimate and interpret economic variables such as return and risk. Financial tools aid in evaluating investments, budgets, borrowing options and other potential related transactions to determine their performance and suitability; understanding your financial situation, whether personal or business-related, is critical to financial success. The proper financial analysis tool and techniques can assist you in understanding the risk and return of financial investment or selecting the best financial services.
4. Numerical skills: You don’t need to be a mad genius. The confidence and ability to add, subtract, multiply, divide and use decimals, fractions, and end percentages are essential. As a result, basic numeracy skills have their multiplication and division, as well as decimals complexities, fractions, and negative numbers, which are critical for making basic financial judgments. To accomplish various numerical activities, a financial literate should be able to use both mental calculations and the calculator.
5. Communication skills: Even though the financial healthcare series revolves around knowledge of managing money, using essential financial tools with the help of mathematics and financial variables. Nonetheless, so-called soft skills are required to be financially successful. Financial literate must be able to communicate and gain knowledge with strong speaking, writing and presentation skills.

• Financial Etiquette:

Money and manners are a difficult combination to achieve. You don’t want to come out as cheap, ungrateful, or disrespectful, but you also don’t want to get angry or lose a relationship. Thus, financial etiquette is a set of behaviour expected or required to become financial literate.

1. Sharing confidential financial data: advice such as it is nice to share and sharing is caring is frequently mentioned in conversations, especially when spending time with family and friends. While this may be true in some cases, it is not always the case regarding financial information. While sharing has its advantages, there are five things you should never share with anyone.
2. Credit card details.
3. CVV number: card verification value.
4. Passwords.
5. PIN: personal identification number.
6. OTP: one-time password.
7. Gifting: when we die, we leave behind everything we are on the planet. We do not take anything with us. Even wealthier people cannot take their money with them when they die. Individuals who have acquired considerable wealth will require throughout their lifetimes must leave some of their wealth to family, friends, and charitable causes.
8. Spending: some people experience financial difficulties due to not earning enough money. On the other hand, many others have a problem because they do not spend their money sensibly or more than they earn. At the same time, many people dedicate most of their time and attention to making more money. They should be aware that without understanding the art of spending, there may not be able to build a prosperous future.
9. Tax payment: many of us want to avoid circumstances where we have to pay taxes since it is a human tendency to avoid paying taxes. Even when tax rates are lower, our country, in contrast to other modern nations, lacks the desired tax culture. Income tax is one of the most important sources of revenue for the Indian government. If people begin to perceive Income Tax as a burden and avoid paying it, the growth of our nation will suffer, as would social breakdown. Filling your taxes demonstrates that you are a responsible citizen. Filing income tax forms on time allows you to be a good citizen, contribute to India’s prosperity, and provide Peace of Mind for you and your family.

LECTURE 2

IMPORTANCE OF FINANCIAL LITERACY[1]

Learning financial literacy has the following benefits:

1 – Personal Financial Planning and Management

Individuals who gain financial knowledge develop various sources of income. They prepare a monthly budget and borrow carefully. Financial knowledge ensures diligent financial management—enough savings for a rainy day.

2 – Identify Fake Schemes

Contemporarily, financial fraud is rising—chit funds, pyramid schemes, Ponzi schemes, carding, etc. A financially literate person will evade shady schemes. It is the perfect antidote to get-rich-quick schemes. 

3 – Spread Investment Awareness

Financial education does not occur in a vacuum. It is not an isolated incident. Educating one individual creates a chain reaction. Such an individual would make efforts to educate family, friends, students, colleagues, etc. A financially literate individual may conduct seminars, teach in colleges, write articles and books, mentor students, etc.

Everyone is interested in finance; everyone is a stakeholder. Therefore, financial literacy is a movement; “FIRE” is a good example.

4 – Succession Planning

It is often said that the poor plan for Saturday night whereas the rich plan for three generations. By being financially prudent, individuals impart valuable knowledge to their children. Moreover, they plan their succession and leave sufficient money for their successors.

5 – Refrains from Herd Mentality

The financially literate don’t follow random public opinion. They get to the bottom of every financial trend. They are more immune to incorrect market speculation. They make cautious investors, but in the long run, the profits add up.

6 – Financial Planning and Decision Making

Setting up an emergency fund and a retirement plan is very important—the earlier, the better.

Financial Literacy Example

Let us assume that both Jacob and Esau earn $6000 every month. Jacob is financially literate and, therefore, allocates his salary as follows:

Spending = $3700.

Investing in Mutual Funds = $1000.

Emergency Fund = $500.

Savings Account = $800.

At the end of the year, Jacob invests $12,000 in mutual funds and $9,600 into his savings account. On average, the total appreciation of the money in mutual funds was 13%, i.e., $1,560, and the savings account yielded an interest of $360.

On the other hand, Esau doesn’t have any financial knowledge and thus spends impulsively without any planning. He leaves the remainder in his salary account—it returns very low interest. Consequentially, Esau spent money on unnecessary items and ran out of cash.

SCOPE OF FINANCIAL LITERACY.

The intellectual understanding of financial concepts and skills such as budgeting, investing, borrowing, taxation, and personal financial planning is referred to as financial literacy. Lacking the knowledge of these skills leads to financial illiteracy. Financial illiteracy results in budget inaccuracy, higher expenses than income, debt accumulation, a poor credit score, financial fraud victim, and other undesirable repercussions. The purpose of financial literacy is to assist people in better understanding financial concepts so that they can better manage their money. It is a life skill that must be mastered in order to be financially successful.

Being financially literate provides a variety of benefits that can improve an individual’s standard of living by increasing financial security. It aids in the betterment of personal financial management. Personal finance is a process which involves the acquisition, practice, and application of a wide range of financial skills. The scope of financial literacy encompasses a wide range of skills.

Scope of Financial Literacy:[2]

Managing Income

Managing Expenses

Managing Debt

Create Saving

Investing

Tax Planning

Healthy Credit Score

1. Managing Income: A human being’s basic necessities are food, shelter, and clothes. How can we meet these essential requirements? We need to buy food, clothing, and a place to live (house). We need money to buy anything. From where are we going to acquire this money?

The term ‘income’ refers to the amount of money that comes into the household in the form of earnings. This money could come from a variety of sources. Salary from a job, part-time jobs, rent from a house or shop, bank interest, or the sale of shares and other investments are all examples of sources of income. It could also be a profit from your household produce or from the use of your abilities. To ensure some savings, the expenditure must be lower than the income. You must plan your spending in order to stay inside your budget. This is called as ‘managing income,’ and it means spending intelligently so that all of your demands are covered. You will need to create a ‘spending plan’ for this.

• Managing Expenses: Expenditure refers to the money we spend from our earnings to acquire various items to meet our requirements. Income brings money into a household, whereas expenditure takes money away, making it unavailable for other users. Managing expenses is a disciplined approach to spending income. It is based on an individual’s or family’s overall income. It enables an individual or family to live within their income while simultaneously saving for future needs and emergencies. The general rule for managing income and expenses is that income must exceed expenses. We are more likely to spend more than we have if we do not develop a budget plan. As a result, if our expenditure exceeds our income, we may be forced to borrow money to meet our demands. As a result, distinguishing between necessary and unnecessary expenses will keep a person from drowning in debt.
• Managing Debt: Debt is nothing but borrowed money. In other words, it is money that does not belong to you. For example, if a person borrows money from a bank, uses a credit card, or takes out a short-term loan. All of this is added to the debt. Debt is generally regarded as bad. As a result, knowing debt is critical. However, not everyone can afford to buy a house, a car, or pay a college fee in cash. Borrowing a loan is the only way out in such situations. The most crucial thing is to distinguish between good and bad debt. Furthermore, avoiding bad debt as much as feasible is always preferable. This covers the fundamentals of managing debt. Borrowing money for things essential for a living is considered good debt. For example, purchasing a home or paying for a college fee. On the other hand, bad debt is borrowing money for needless expenses. For example, using a credit card to purchase luxury clothing or electronic devices.
• Creating Saving: a portion of an individual or a family’s income should also be set aside for future use. This money is set aside is regarded as savings, and it can be utilized for any purpose in the future. Savings and shorts financial security, a secure present and a bright future he stopped long term wealth can be built through prudent financial planning. It is possible to save money by keeping track of one spending patterns a result of Saving; one can easily accomplish the following:
• Instil financial discipline: One can attain financial discipline in excel in life by saving money regularly.
• Complete financial goals: Financial goals are targets you hope to achieve over a set period using your financial resources. For example, buying a house, a kid’s education, and retirement savings.
• Create an emergency fund: An emergency fund serves as a safety net in the event of unforeseen circumstances. At least six months’ worth of income should be saved in the fund.
• Investing: Rather than keeping money in a bank account, it can be diverted to investment avenues. Investing is about creating and growing wealth so you can live a secure and happy life. Saving money is not difficult if done systematically. After executing effective budgeting, any surplus should be channelized toward investing. Investing will help individuals achieve their financial goals like buying a house, child education, marriage, and planning. It’s all about investing in a strategy that will help you earn substantial profits over time. The investment will assist in the generation of additional monthly income as well as considerable benefits. It is also possible to attain financial goals while allocating funds to retirement savings. Equities, debt instruments, mutual funds, real estate, and gold or some of the most popular investment options.
• Tax Planning: Taxes can significantly reduce your annual earnings. On the other hand, tax planning is a legitimate way of decreasing your tax payment in any particular financial year. It assists you in making the best use of the text as exemptions, deductions, and perks provided by the government to reduce your burden. Tax planning is the process of saving money by lowering your tax liability. The Income Tax Act of 1961 contains a number of provisions that allow you to claim deductions and save money on taxes. Aside from investing alternatives, there are several additional expenses for which you can claim a deduction. This includes tuition for up to two children, house loan repayment, health insurance premiums, medical payments for specified conditions, contributions, and so on. Tax planning is essential if you want to make the most of what the government has to offer. Tax planning aids in the smooth operation of the financial planning processes. Tax planning aids in the allocation of taxable income to various investment schemes. Tax saving is a long-term effort, and tax planning and investment are many closely linked.
• Healthy Credit Score: A credit score measures a person’s ability to repay a debt. It’s a numerical representation of their creditworthiness. It is typically expressed as a number based on the individual’s payback history and credit files across various loan and credit agencies. The credit bureaus determine a credit score based on a proprietary formula. When generating a credit score, they analyze various characteristics such as credit history and payback behaviour, among others. A credit score ranges from 300 to 900 points; if your credit score is between 750 to 900, it is regarded as good for availing of credit services such as loans and credit cards.

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[1] Vaidya, D. (n.d.). Wall Street Mojo. Financial Literacy. Retrieved July 23, 2022, from https://www.wallstreetmojo.com/financial-literacy/

[2] Umair, M., & V, B. (2021). Financial Literacy (pp. 7-10). Mumbai, India: Himalaya Publishing House.

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