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Need to have basic knowledge of finance

LET me start by asking as to how financially literate are you? This question is not addressed only to financial professionals but to all irrespective of their education background or profession.

This derives us to the fact that all of us [irrespective of one’s profession or background] it is important to have the basic knowledge of finance. Here is a simple test - suppose you had 500,000/- in a saving account that paid simple interest at the rate of 8 per cent per annum.

If you leave the money in the account, how much would you have accumulated after 5 years [i.e. principal + interest]: (a) more than 540,000/-, (b) exactly 540,000/- or (c) less than 540,000/-? The above test might look very simple and elementary to the reader of ‘Daily News’, but a survey found that only half of that country’s population [where a similar survey was conducted] aged over 50 years gave the correct answer.

This instance reflects the importance of having basic financial education in our society. On one side the above stated fact may appear shocking to most of us, but on the other hand this also throws a challenge to each one of us as to how we collectively as well as individually can contribute towards spreading a higher level of financial literacy in the society.

Often there is a misconception that finance per-say is a specialised field which can’t be understood by an ordinary person. I strongly refute such misconception, because when we talk about ‘financial literacy’, I for sure am not referring to some complex financial model to evaluate performance of a company.

Neither do I expect a non-finance professional to do ratio analysis of the audited financial results of a bank or any other company.

When on elementary financial literacy, what I am referring to is about the basic knowledge of simple financial transactions occurring in our life on day-in and day-out basis.

If the price of rice at one market place is 3,000/- per kg, while at the same time in another market it is being sold at 3,500/- per kg, don’t we know from where to buy? Quite obviously from the shop or market where the price is comparatively lower. By extending the similar logic, suppose Bank-A offers interest on your savings @ 5 per cent p.a while Bank-B is offering interest @ 7 per cent p.a.

In such a situation, is it not straightforward to decide as to which bank to choose for maintaining your savings account? The answer again is obvious and clear i.e. Bank-B – which offers a comparatively better rate of interest.

Why does financial literacy matter so much in our society? The explanation goes as follows: People with low levels of financial literacy suffer from that lack of knowledge at every stage of their lives. One study on this subject shows that people with a slightly higher degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t.

Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans.

Thus the cost of this financial ignorance is very high, leading many people to incur avoidable charges and fees from things like making late credit card payments or paying only the minimum amount due, overspending their credit limit, and using cash advances etc.

So what is the solution to the missing link? Financial education must start early. Like learning language and elementary mathematics, financial education must also become part of the core curriculum in our schools.

Likewise, parents should engage in regular constructive conversations about money matters to give their kids a solid foundation for financial wellbeing. Teaching our kids to be financially savvy is a gift – one that will keep on giving returns throughout the course of their lives.

Teachers need the right training to impart financial education in schools. But all said and done – elementary financial literacy is not a rocket science but merely acquiring very basic knowledge on financial matters. I am sure the above writeup will erase the missing link on financial literacy at least partially if not fully.

Furthermore, let us resolve to spread financial literacy in all corners of our society by using various modes of means.

According to the Oxford English dictionary, the verb ...

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Author: Jagjit Singh

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