Financial literacy

money-2724241_1920.jpgIf you have consciously opened this link, then most certainly you are a literate person, you can identify the letters, and individual words, followed by comprehension of the entire sentence. But literacy is not just about identification, its more about meaning – what you understand and how that understanding helps you in making some better choices. From recognition to making choices, term literacy has come a long way, and in today’s age of Information it’s ever more crucial. Particularly in case of our hard-earned money. 

Financial literacy simply means using knowledge and skills to utilize our financial resources so that they will grow on a sustainable basis. That is, not only we will get money to use for our immediate consumption but on longer term our money will grow so as to make our material dream come true – such as purchase a Car, new house or a world tour. Thus This aspect of literacy is important not only for the young adults but also for the senior citizens and obviously for the young adults who will become senior citizen later.

There are various instruments that can help us in this task. We should not keep our money stagnant because the inflation i.e. regular price rise of other goods reduces worth of the money we have. remember, during old days we had  5 paisa, 20 paisa and 25 paisa but today they are worthless, there is no good that can be exchanged with those values. Even a candy costs minimum Rs. 1. such is the case for even higher currency, we need more money to buy same good compared to 10 – 15 years ago. Thus, we need to make sure that whatever money we have will grow such that its value or capacity to buy stuff remais intact.

So what options do we have?

We can put the money in banks or we can put the money in saving schemes particularly that of post office or PPF. we can also invest the money in stock market and mutual funds and let it grow even faster. all of these choices are dependent on what we expect out of our investment mainly – safety or higher returns and for how much time we are willing to stay invested. The truth about financial market is Higher the risk you take the better returns you get, but that doesnt mean even mindless risks will yield returns. Thus one need to make mindful choices while make the investment decisions.

Another crucial factor to consider here is The inflation rate. Inflation rate reduces worth of our money as described above, so we need to look for the inflation beating assets. eg. Suppose we are getting average 5% interest on our bank savings (saving account at 3.5% + fixed deposits say 6.5%), and inflation is 4% then in effect our money grows by mere 1% and if inflation spikes to 6% then in effect we are losing 1%!

The growth of our money can be seen in terms of basic economic equation – cost benefit analysis. When you save some money, you dont get to spend it thus you pay a cost in terms of your patience, you avoid instant gratification for a bigger cause. Over a time your money grows and that growth becomes your reward or benefit. This is particularly true in case of Share market as they reward handsomely with compounding effect. To make such reward aspect worthwhile its crucial to invest your money in proper asset.

I have divided this into five groups depending on the nature of returns and risks. The grouping is done so that i can elaborate them properly and also, to know the opportunities to diversify your investment. In each of these assets there is some never discussed information, i hope you will find it helpful.

  1. The first group is of familiar fixed income, least risk group of Banks and postal saving schemes.
  2. The second group is that of risky investments i.e. the Market oriented assets – The mutual funds. (article coming soon)
  3. The fourth asset being the riskier Equity i.e. the share market itself. in Equity there is risk but for this risk, rewards are equally appealing.
  4. The final asset, often neglected that is of Insurance sector. (article coming soon)

click on above links to read further about that asset class.

I hope the information shared will help you in making better choices with respect to your financial health and also for your parents. I missed that chance in my personal life, and learned about it after demise of my parents. That event taught me a lot about life and about real nature of world, particularly the finance. I will share that experience later.

With all that said, I need to confess that I am not any expert in matters of finance, I am well invested in all of the above mentioned assets and based on that knowledge i have written these articles. So, even if i am not an expert, I have good working knowledge and I do believe in what Kahlil Gibran has said “the little knowledge that work is infinitely more valuable than the much knowledge that lies idle”.