Education is a critical issue in our country and in most of the world. However, the need for economic education, which is of particular concern, is almost never addressed. For such complex economic systems to work efficiently, it is necessary to have a thorough and widespread understanding of the economy and markets among the market participants.
A stable and developing economy has two definite aspects-financial inclusion and financial literacy. Financial inclusion means access to credit at adequate rates, employment opportunities, and all other financial services to all. Financial literacy is the possession of a set of skills and knowledge that enables individuals to make well-informed and effective decisions with their financial resources.
Such knowledge allows the consumer to avail all services better by enabling them to understand their options and benefits better. People who lack this often invest in physical assets with short term returns instead of making sound investments which lead to long term gains, helping inject funds in the economy, and subsequently increasing the earning and development potential of the economy. Being literate or ‘well-off’ is not the same as being financially literate.
For instance, two-thirds of Americans cannot pass a basic financial literacy test (55% of Americans do not have a $400 emergency expense). In India, 76% of adults lack the most basic knowledge required for savings and investments. I believe that in today’s day and age, we, the youth, may spend years gaining skills that will help us command higher salaries; yet we spend little or no time learning to save, invest, or grow our money.
The need for such education is growing, especially since consumers are shouldering more economic responsibility than ever. The earlier generations depended on pensions for their old age expenses, but now pensions are more a rarity than a norm. Professionals managed such pension funds; hence the burden to provide for the retired employee lay on the corporations or employers, but the decreased dependence of people on such systems has led to an increase in their responsibilities.
Another reason why financial literacy has become a necessity is that the market is becoming increasingly dynamic and volatile with a vast array of options to choose from. The complex options available to consumers only confuse them more. Often, consumers cannot discern one policy or investment from another and end up losing money or earning lesser than what they would have with adequate information. Consumers with low levels of financial literacy spend more and have more credit that they are unable to pay, and
subsequently, have debts because of the high rates of interests on the borrowed money.
Acknowledging the growing need for financial literacy, the government has designed several policies like the ‘National Mission on FI’ or the ‘Pradhan Mantri Jan Dhan Yojna’ to build the financial capabilities of the masses. The PM Jan Dhan Yojna allowed people to create bank accounts with zero balance, hence resulting in the creation of 350 million bank accounts that included more than 220 million accounts with zero balance. Not only did this policy lead to the creation of more accounts but also increased access to need-based credit, remittances facility and insurance covers leading to widespread financial inclusion. Another consequence of the lack of financial inclusion is that the unbanked go to informal institutions or sources for credit and loans where the interest rates are much higher. Any disputes regarding these loans cannot be settled legally and often result in heavy losses and exploitation of those lesser informed.
If you ever want to understand or estimate the impact of financial literacy, look up the financial crisis of 2008 that arose from a lack of understanding of mortgage of products. Americans with limited knowledge of money and its functioning got into extremely complicated mortgages which then blew up because of their inability to return the borrowed money. Their guarantees too proved to be unredeemable, which led to the collapse of the bank, The Lehman Brothers, and many others over the world, causing a global economic crisis.
According to the American Economic Review, a mere 0.02% increase in deviation on a financial literacy score would result in a predicted additional $13,800 for an individual on average. Financial literacy is a relatively new concept that is becoming very popular in both developing and developed countries. It has a profound effect on the consumer’s behaviour, attitude and thinking and it greatly affects the way people invest, save, or spend their money.
