FUNCTIONS OF BANKS | IIBF JAIIB 2024 PPB FREE NOTES

FUNCTIONS OF BANKS | IIBF JAIIB 2024 PPB FREE NOTES

WHY FINANCIAL LITERACY IS SO IMPORTANT

This covid pandemic has endangered billions of people as well as put them out of jobs, thus, not only impacting physically and mentally but also financially. This situation has certainly made people realize the importance of having investment and savings for any emergency. Irrespective of the age, education, gender, or living area (rural or urban) need to manage their finances. 

As the economy is recovering, a rise in investments by investors has also been seen. But as it is said, ‘half knowledge is more dangerous than no knowledge’ the country’s lack of financial literacy needs to be taken as a Grave concern. 

Because most people have little understanding of finances or no understanding at all, it becomes the main reason why Indians struggle with saving and investing. 

And with the increase in credit card companies, Financial Institutions, and banks’ offers of credit opportunities, there is an increase in the number of credit card users. Without having proper knowledge of credit terms people can easily fall into the debt pit.

Financial planning is a long-term thing that increases the need to uplift the financial knowledge considering the future to manage the day-to-day finances.

DEFINITION OF FINANCIAL LITERACY

It is a management of financial, credit, and debt to make financial decisions or choices relating to our everyday lives. It also includes payment of a debt, creation of budgets and having an understanding of various financial instruments, and understanding how credit works. 

If you were to define financial literacy in simple terms, it would mean the ability to understand and apply financial skills. It is important for responsibility is increasing and people have to manage their debts that could be changed from student debt, trading accounts, and retirement accounts.

To be illiterate in a financial sense affects people living in advance as well as economically emerging or still developing economies. It is a worldwide problem that people do not understand the basics of finance.

Even though financial literacy varies with differences in education and levels of income, studies have shown that even the highly qualified consumers who have high income can be as ignorant about their finances as low-educated low-income consumers.

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TRENDS MAKING FINANCIAL LITERACY MORE IMPORTANT

As a financially illiterate person, one has to face many problems related to finance and therefore it becomes difficult for them to make various financial decisions. There are four reasons why financial literacy is important to make thoughtful decisions which are discussed below:

PEOPLE MIGHT BE FALLING BEHIND

When we talk about financial literacy, the level of financially literate people is not more than financially literate people. 

Even though there was an increase in the level of education, there still remains a gap between haves and have-nots and they might as well be widening. It has also been found that there is disparity among different ethnic groups as well as among the younger people.

CONSUMERS SHOULDER MORE FINANCIAL DECISIONS

We can take the example of increasing responsibility to make financial decisions for retirement planning.

In the past, people were dependent on pension plans which today are known as ‘defined benefit plans to fund their retirement. These funds are being managed by professionals which places a burden on the government and companies who sponsor them. There was no direct involvement of consumers with this decision making and their contribution was very less in their own pension funds and thus, were not aware of the state of their own funds and Investments. 

Because the source of retirement income for past generations was these pension Funds which might not be adequate for many people today. It has necessitated the people to find themselves a source of income for their retirement by making financial decisions today.

SAVINGS & INVESTMENT ARE COMPLEX OPTIONS

There are so many investment and saving products available in the market that it is difficult to choose one among the others. Investment and savings products have gotten more sophisticated than in the past which has provided different options with the different interest rates and maturities that require adequate education to choose from. 

These choices ultimately impact the consumer’s ability to buy a home, pay for education as well as save for retirement, putting pressure on the already varied choices. 

The increase in the lifespan of consumers has increased the need for more money for retirement than what was needed by the earlier generations. 

The number of Institutions who offer products and services can be overwhelming because there are too many participants and too many factors influencing the financial decisions. Institutions such as banks, credit card companies, mortgage companies, investment management firms, credit unions, and many other companies are all offering various products to different users which creates confusion for consumers.

4. THE FINANCIAL ENVIRONMENT IS CHANGING

Todays’ financial landscape is dynamic and due to the economies becoming a global marketplace, it has brought more participants & many more factors which influence this global economy.

As the environment is changing day by day and there are technological advances in the form of electronic trading, the financial markets have become more volatile. All these factors provide conflicting views and thereby increase the difficulty to create, implement and follow a financial plan.

FINANCIAL LITERACY MATTERS BECAUSE?

The daily management of finances, forecasting the long-term budgets requires basic financial literacy because it is important to plan and save enough money to provide for future retirement with the purpose to avoid falling into bankruptcy & defaults. 

It has been seen that low financial literacy leaves people unprepared to face a financial crisis. And not only that people having a high knowledge of personal finance are not much far behind falling into this crisis because more than half the people lack an emergency fund to meet even their 3-month expenses.

If we look at the history of the financial crisis, we can see the financial impact on the entire economy which arises due to lack of financial literacy itself. So, financial literacy is an issue having broad implications for economic health.

It is important not only because we provide a basis for making informed decisions but also because of the fact that the responsibility has increased in multiples. The availability of financial products and credit which is easily accessible today has placed so many choices in the hands of consumers. 

Improvement in financial literacy will impact people profoundly in daily life and their ability to secure their future. Because the availability of choices has placed more burden on the shoulders of a common person, he or she has to get himself or herself educated in financial product selling options. 

To be financially literate will not be easy but if one chooses this path then they can certainly lift up their burdens. 

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