Importance of financial literacy for the growth of financial planning

Financial literacy is the ability to know, monitor and effectively use financial resources to enhance the well-being and economic security of oneself & one's family, Madhu Sinha highlights 

Financial literacy or financial education can broadly be defined as understanding of financial market products, especially rewards & risks, to make informed choices. Viewed from this standpoint, financial education primarily relates to personal finance to enable individuals to take effective action to improve overall well-being and avoid distress in financial matters. Financial literacy goes beyond the provision of financial information and advice. 

Financial education is the process by which investors improve their understanding of financial products, concepts & risks, and through information, instruction and objective advice, develop the skills and confidence to become more aware of financial risks & opportunities, to make informed choices to improve their financial position.

Thus, financial literacy is the ability to know, monitor and effectively use financial resources to enhance the well-being and economic security of oneself, one's family, and one’s business.

Need for financial literacy

Financial literacy has assumed greater importance in the recent years, as financial markets have become increasingly complex and the common man finds it very difficult to make informed decisions.

Financial literacy is considered an important adjunct for promoting financial inclusion and ultimately financial stability. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and the large section of the population, which still remains out of the formal financial set-up.

To understand financial planning, a person should be financially literate to understand the importance of preparing household budgets, cash flow management and asset allocation to meet financial goals. Everyone saves money for future needs but the approach is to save surplus money without preparing household budgets, without prioritising personal financial goals,  without properly allocating investments in different asset classes and without understanding real rate of return (after adjusting for inflation).    

Individuals make a wide array of financial decisions through their lifetime. Examples of such decisions include providing for children’s higher education, saving for retirement, managing credit wisely, budgeting, tax and estate planning, insurance, etc. Each of these decisions is prompted by the emergence of a need. To help consumers make informed decisions, financial education is very important.

The writer is a certified financial planner and has 20 years of experience in investment advisory, client handling and teaching.

Read more:

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Myths about financial planning

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