Oneof the first lessons we learn in Economics is that ‘Man has unlimited wants andscarce resources’. For centuries the field of Economics has tried to solve thispuzzle. The debate on how the puzzle needs to be solved has continued but thepuzzle hasn’t changed. Economists try to solve this problem on a macro level.They propose allocation of resources of the nation for its most efficient use.
At the same time an individual is solving this puzzle for his/her household. Anindividual who runs a household faces two primary challenges related to his/herfinances. Firstly, as mentioned above the household as whole has certain needsand wants which have to be fulfilled. For example monthly recurringexpenditures, children’s education, marriage expenses etc. The second challengehe/she will be facing is how to meet sudden expenditures that happen in anemergency situation. Now, how does he meet these challenges? To meet thesechallenges he/she has manage his/her finances efficiently.
The household has todo some kind of ‘Financial Planning’. Here comes the need of financialliteracy. Before talking about financial literacy and benefits of financialplanning we have to take a look at the various definitions of FinancialLiteracy. “Possessing theskills and knowledge on financial matters to confidently take effective action that best fulfils an individual’s personal, family andglobal community goals.” (The National FinancialEducators Council)Nowthe question arises whether literacy is sufficient to meet these challenges? Financialliteracy is necessary but not a sufficient condition to safeguard against theabove mentioned challenges. The puzzle is solved only when the knowledge offinancial literacy can be of some help to the individual. In a country likeIndia where Financial Inclusion is the talk of hour but the amount of researchon the issue of Financial Literacy is very limited.
Financialliteracy has become more important than ever in today’s ever changing world ofeconomy. Being aware of money management, income, saving, and spending canequip our young people with knowledge to fight fraud and take charge of theirfinances. We are living in an age of unprecedented debt and people are destinedto face challenging times financially.
It is imperative that educators begin toequip people with the knowledge and skills to succeed as consumers in today’sglobal economy. Teachers, administrators, parents, business owners, andcommunity members need to know the importance and value of Personal Financeliteracy. Lusardiaddresses this problem in her paper ‘Financial Literacy: An Essential forInformed Consumer Choice, 2008’, where she asks the question ‘Does FinancialLiteracy matter?’ She writes “Retirement planning is a powerful predictor ofwealth accumulation; those who plan have more than double the wealth of thosewho have not done any retirement planning.
Financial Literacy matters forplanning: Those who are more financially knowledgeable are much more likely tohave planned for retirement. Financial literacy continues to be an important determinantof planning and it is found that those who were financially literate are morelikely to plan for retirement in their young age, showing that literacy affectsplanning and has important implication welfare.There is widespread financialilliteracy among the population, particularly among social demographic groupslike that of people with Low education, women etc.
Lusardi, Mitchell and Curto(2009) studied the level of financial literacy among the youth and found that lessthan one-third of young adults possess basic knowledge of interest rates,inflation and risk diversification. Young people are passing out from schoolwithout the basic skills to manage their personal financial affairs, which wouldput them at a high risk for not being able to plan responsibly for theirfinancial future.