Question

What is financial literacy? Do you think it's important? Why?

Answer 1

Financial Literacy is the ability to understand, comprehend and use the various concepts of Finance by an individual. There is plethora of financial instruments and products available now – and an individual has a wide variety to choose from. A few are listed below:

· investment in Bonds,

· Investment in Shares,

· Investment in Mutual funds,

· Home Loan Mortgages,

· credit cards,

· student loans,

· Life Insurance plans, health insurance plans,

· Unit Link Insurance plans

· Derivatives ,

· Interest swaps, Mortgage back securities

· Lease Options,

The list is never ending – with many products and options getting added with each passing day. Definitely these financial products has improved our livelihood by providing us various sources of finance and investment opportunities to make our dream of Financial freedom come true.

But- a clear understanding of them before we start using them is very important. And that understanding of the pros and cons is what financial literacy is all about.

Importance

As mentioned- it is very essential for anyone to know the basic concepts, the pros and cons etc, which will empowersan individualto make a more informed decisions and manage their money and wealth better.

For an individual - the knowledge of Monthly budgeting- goes a long way in realizing their financial dreams, by cutting their unnecessary spends and routing their investments in the correct Assets- based on their financial goals.

Financial literacy ensures- a proper management of debts, how to pay off them in time, how to channel your investments for any specific purpose or planning for retirement etc. To do this- understanding the concepts of time value of money, inflation, return on investment, yield, the power of compounding etc are all Very vital.

Knowing to plan for your taxes- is also an important aspect of financial literacy. To know the various tax saving options- and planning according would reduce the tax outflow and contribute to our wealth management.

It also helps us to safeguard from various financial frauds by scamsters by making informed decision and not falling in the trap of the perpetrators of such fraud.

Lacking of financial literacy-may lead to some wrong financial decisions( like accumulating unsustainable debt) - which has some adverse effects like- Foreclosing housing mortgage and losing your home, unmanageable credit card amounts, Loss on investments, bankruptcy,etc.