Champions of Financial Inclusion

Wednesday, December 15, 2010

Financial Literacy: 5 Basic Questions Answered

What is Financial Literacy

Financial Literacy is the buzz word today. Many organizations are making serious efforts to promote it. A big information asymmetry exists which prevents many individuals to make informed choices about their current and future financial engagements.

Financial literacy is an informal understanding of risks and rewards involved in handling financial assets and liabilities. It is not a formal or certified education. It is the basic knowledge required to manage personal finance.

Why is Financial Literacy Important

It is said that prevention is better than cure. Prevention of financial crisis is necessary than its cure to save the individual, and to save the nation. With credit being available hassle free in the market, the thin line between need and desire is vanishing. Therefore, it is important to have knowledge and related skills to calculate the consequences before investment.

When and Who started Financial Literacy

There is no formal record of when was financial literacy started, but it has been gaining momentum in recent years. Organization for Economic Co-operation and Development (OECD), which was founded to stimulate economic progress and world trade, started a program in 2003 which was believed to mark the start of financial education. In India, RBI has been a key player in creating awareness of programs related to financial literacy.

How to achieve financial literacy

As the definition says, financial literacy comes with simple understanding of how finances can affect the present and future. A simple guideline described below can be followed to achieve financial literacy:
1. Set financial goals for a time-period (days, months, years)
2. Creating a budget for the same
3. Itemize the expenditures in a detailed manner.
4. Focusing and accordingly planning for high-budget expenditures
5. Basics of banking and investment
6. Plan for retirement
7. Know about Insurance and its premium
8. Be aware about taxes that might have to be paid
9. Understand inflation and interest in terms of financial assets and liabilities.

-Chitra Nayak