Financial Literacy in India is rather low, and for various reasons. It is not taught as a subject in schools, colleges or other higher educational institutions, hence resulting in continued mismanagement of money by youngsters early in their career.
Nevertheless, it is important that youngsters learn the three basic concepts of money management: saving, budgeting, and investing, along with discipline that keeps the cycle running for generating wealth.
It is important for every person, irrespective of age, gender and social status to know the basics of money management on their own, without having to constantly rely on any advice from parents, spouses or any financial institution.
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Benefits of Financial Literacy in Young Age
Financial literacy at a young age empowers children with money skills that will prove invaluable when they come of age.
It prepares them to deal with concepts of inflation, fluctuations, market movements, investment strategy, including good and bad investment, and assets and liabilities.
Nevertheless, financial literacy remains a challenge despite initiatives like the Reserve Bank of India’s (RBI’s) National Strategy for Financial Education (NSFE) 2020-2025.
Says Mahek Tomer – founder & CEO of India’s Future Investors (IFI), an institute that aims to encourage financial literacy, “Even though the Indian government has launched such structured initiatives to increase awareness about financial literacy in India, the overall adoption and effectiveness have remained low.”
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According to Tomer, there are multiple factors that contribute to this, such as limited penetration in the rural and semi-urban areas and the lack of real-life financial decision-making scenarios.
She says, “People have a lack of trust in financial markets due to its volatile nature, and an over-reliance on traditional savings methods that gives limited returns.”
She highlighted that while digital financial services have expanded in recent times, people still remain reluctant to discuss financial matters openly leading to misinformation and mis-selling.
So, here are a few common financial misconceptions and the impact of lack of financial literacy on long-term wealth creation.
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Impact on Long-Term Financial Literacy and Wealth Creation
The growing divide between earning and managing money impacts a lot of people in the overall wealth creation, Tomer said.
She explained that the problem is not in earning, but the lack of discipline required for investment in the financial market which is resulting in poor returns.
She says, “Easier credit availability on buy-now-pay-later (BNPL) schemes that encourage people to spend more, leading to a widened financial security gap.”
She added that there is also a lack of initiative at the school level on teaching nuances of financial literacy that restricts children from learning money management skills early and leaves them unprepared for the real-world wealth creation strategies and fear market.
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“Also, poor financial planning can affect future generations in building long-term sustainable wealth. Hence, financial literacy programs that teach people across age groups in investing skills and money management are the need of the hour,” she adds.
Has UPI Boosted Financial Inclusion But Outpaced Financial Literacy Efforts?
Tomer adds: “Digital payment platforms like the Unified Payment Interface (UPI) have democratised access to banking services for people, boosting financial inclusion. However, many youngsters still lack knowledge of security risks associated with credit cards and understanding of various investment options, leading to a surge in cyber frauds and phishing scams.”
This also leads to a question whether we actually know about the platform that we are using in our daily lives for small and large online transactions? Do we know the security it offers or to what extent this security is implemented?
However, Tomer does not think that such initiatives have outpaced financial literacy efforts.
She adds, “Many youngsters as well as adults still lack understanding of concepts like compounding, asset diversification, and risk management. This requires an urgent need for regulators and industry stakeholders to come together and build an ecosystem where responsible financial behavior is taught and encouraged with the help of technology, media, and social initiatives, etc.”
Most Common Financial Misconceptions
Financial misconceptions often hold people back from investing in markets, and this is often due to fear of something they have learned from someone else’s experience.
Tomer explained with an example that the most common financial misconception that is widely prevalent among people is that financial markets are volatile and thus investing in them is akin to gambling. This belief prevents them from gaining long-term wealth creation with higher returns as they prefer to invest in fixed deposits (FDs) over other options, such as stocks.
Another misconception is that investment always needs to be in large amounts. “Many believe investing requires a lot of money; however, one can start a systematic investment plan (SIP) with a small amount, such as Rs. 500, enabling participation in the financial markets,” adds Tomer.
She listed another example of many seniors who never even enter the market due to the fear of not understanding the market.
“Similarly, senior citizens often go with bank investment options all their lives and avoid participating in the markets altogether. This often tends to lower their investment returns in the long run,” she says.
She adds: “Most people value gold and real estate investment options, which, lead to liquidity and diversification issues. The fear also spreads across loans and credit cards that hampers building credit history and impacts their participation in the financial markets.”
According to her, lack of a credit history may cause a significant problem in emergencies. It is always advisable to have a good credit history and show your your creditworthiness for smooth sanction of loans.
