Financial literacy means knowing the basic survival principles involved with earning, spending, saving and investing. Earlier, our parents use to save more and spend less, today, young adults wants to earn more to be able to spend more, without bothering to save or invest.
Prosperity can only come by properly balancing the four key personal finance components i.e. earning, spending, saving and investing. To achieve this financial literacy is very important and should be made mandatory.
Emphasizing on the importance of financial literacy, Ranjan Varma in one of his recent post raised very valid questions :
- How do we achieve better financial literacy in India?
- What is the best way to teach financial awareness to people who don’t think they require this education?
Before we try to answer them, it is important to understand the investment psyche of a common man and how past policies of Government of India promoted and helped in cultivating such investment behavior.
Government encouraged conservative investment attitude
Government tapped the retail savings through various Small Savings Schemes, Government bonds, Special Schemes etc to fund their developmental programs. To achieve a greater asset mobilization special incentives were given in form of tax exemptions, assured returns, guaranteed benefits and special bonuses. This made investment in such schemes extremely popular.
Post UTI fiasco, the cushion of assured returns and guaranteed benefits has gone. Tax benefits, principal and interest security are still there. Government has also started linking returns on many ‘controlled’ financial products to the market. Resulting in a lowered interest rates offered by such schemes.
In Union Budget 2005-06, the then Finance Minister, took an important decision to remove various sub-limits under Section 80C of income tax act and given the control to the common man to plan out his asset allocation on his own rather than a sate mandated asset allocation.
However, the investment habit of a large section of our society is still unchanged. Because, for decades they had to never look beyond the Government operated schemes for their investment needs. By investing in zero-risk products they have become a slave of protectionist investment behavior and did not kept pace with the changing market order.
Investing in Markets – fear of unknown
Common man today is fearful of investing in other asset classes. He follows the herd (his friends, family and peers) and will continue to do so until he burns his fingers. If his family member buys NSC he will also buy NSC, his friend invested in ULIP, he will also buy a ULIP, his co-worker made handsome profits investing in stocks he will also try his luck in stocks whatever be the market conditions. Not to mention the personal interest driven mis-selling by agents and brokers to these financially illiterate individuals.
Most often than not many of these people enter the investment arena at the last leg of investment cycle and ultimately end up making losses. They never accept their own mistake but try put the blame on someone or something else.
I was having a conversation with one of my friend, a software professional currently based in Miami, Florida, and was amazed to know that how even learned people like him are averse to even consider investing even in Mutual Funds (because mutual funds invest in stocks). Although, he had investments in land and property. My question to him was, in case of an emergency can he redeem is investment in property, if at all, without compromising on its market value? Who determines the market value of properties? Is investment in land and property 100% safe?
The reason given by many for not investing or avoiding certain asset classes is lack of knowledge about those asset classes. Further, the general negative perception that gets built-up by people around us, who failed in their investment, is passed on to the asset class instead of the faulty investment decisions made by those people.
The point is, the investment ideology which our parents and grand parents followed may not be suitable today. Need to evolve and acclimatize ourselves with changing time is becoming increasingly important.
How do we achieve better financial literacy in India?
First and foremost, the fear of unknown needs to be addressed. If people are aware about different products and know how to go about investing and benefiting from these products, they will try it. This will have double impact, one they will be able to take better decisions and invest properly, second they will lead their friends, family and peers to follow them and benefit by making better investment decisions, creating a positive feedback cycle.
Secondly, improving our education system to include money management courses at grass root level. This will help in improving the attitude of our kids towards money. It will help them in becoming better money managers when they grow-up.
What is the best way to teach financial awareness to people who don’t think they require this education?
We as, personal finance bloggers, are trying our level best to make a small difference to educate common man to be prudent with his personal money. However, the person seeking such information has to come to our respective blogs and read the tips that we provide. Our efforts will be futile if the person thinks they don’t require this education.
Some people think they know all it takes to manage their money and continue to commit mistakes after mistakes. We can not do any thing about them. It is better to leave them alone and let them learn things the hard way.
Many others are ignorant, as they consider financial literacy to be too finance oriented. Since they don’t know about finance they don’t bother. Such people needs to be told that it is not finance, but financial literacy is about managing their own money. Such persons have formed some misconceptions about money management in their minds
To address this we need to collaborate, join our forces and assume a greater role in reaching out to them and breaking their myths. The complacency factor of these people needs to be shattered. They need to be woken up by providing hard facts and consequences of ignoring personal financial prudence.
Remember the ICICI Prudential’s “retire from work, not life” and Ageon Religare’s “Know your correct retirement amount” campaigns. They were successful because they presented the hard facts to consumer. Something similar needs to be done in a border way. I don’t mean that we should also come out with a television commercial, but a one-on-one interaction with these people in physical world is required. Series of workshops, road shows, etc would help.
We would welcome more suggestions from fellow personal finance bloggers and also from common individuals to address the above mentioned problems. Feel free to post your opinion.