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07 Dec2021
  • By Authored by CA Manish Gupta)
  • Category Miscellaneous
  • Views 968
"It's not about how much money you earn; it's all about how much money you keep, how that earned money works for you, as well as how many generations you keep it for."
 
The biggest mistake that many of us make is to work hard for our entire life for money and not expect money to work for us in return.
 
As the behemoth of all the investors, Mr. Warren Buffet says “If you have only one source of income, you will work until you die.” This statement makes more sense during covid period wherein those who have only one source of income (mainly salary) struggles to meet their livelihood, on the other hand, those who have multiple sources (consisting active as well as passive income) spent their lockdown in ease in comparison. Hence it is the need of the hour that each citizen of India should understand the importance of Financial Literacy and Financial Freedom right from their schools. Although its never too late to know these things, but earlier the better, so that one can reap the benefits of 8th wonder of the world i.e. Compounding.
 
Hence in this blog, we will try to understand these things. We will start from meaning of Financial Literacy, Financial Freedom, the need of it, consequences if you don’t know about it etc. and then procced to the Types of Asset classes, Importance of Diversification etc. So let’s start now.

WHAT IS FINANCIAL LITERACY?

To be financially literate means having the capacity not to let money – or the shortage of it – get in the way of your ease as you work hard and build your dreams complete with a long and fulfilling retirement.
 
Financial literacy refers to a combination of critical financial skills and concepts.
 
Financially literate people are generally less vulnerable to financial deceptions.
 
A strong foundation of financial literacy can help us support various life objectives, such as savings for education or retirement, using debt responsibly, and running your business.

WHAT IS FINANCIAL FREEDOM?

Financial freedom generally means that one has enough savings, investments, and money in hand to live the life one wants to live for himself and his family too, without relying on anyone. The best way to achieve financial freedom is by making the timely investment. As it has been rightly said, "THE EARLIER YOU START YOUR RETIREMENT PLANNING, GREATER IS THE POTENTIAL RATE OF RETURN ON YOUR INVESTMENT."

WHY THERE IS A NEED FOR FINANCIAL AWARENESS?

For each person, financial awareness is as vital as any other basics as it will help you manage all your hard-earned money effectively for your safe plus secure future. It helps to become self-sufficient and self-governing. The same shortage will lack a solid foundation for your actions and choices concerning savings and investments. A crucial indicator of people’s expertise to make financial decisions is their level of financial literacy. Financial literacy is not only the awareness and understanding of financial notions and risks but also the skills, motivation, and courage to apply such knowledge and understanding to make efficient decisions across a range of financial contexts, to improve the financial well-being of selves and society, furthermore to enable participation in economic life. Effective and efficient financial planning has become part and parcel to lead a peaceful life in today's constantly changing environment.

EFFECTS OF FINANCIAL ILLITERACY

Financial illiteracy not only affects a single age group or a particular group of society, but it affects all groups in terms of both age and socio-economic status.

The lack of which could make a person to make wrong financial decisions, which could further result in large amounts of borrowings. Being financial uneducated has been a notable contributor to a lower standard of living.

The higher the fiscal illiteracy rate, the lower will be the retirement planning rate. To live peacefully at old age, one needs to start future planning from a very young age. 

People who don't manage their money are the most affected ones during their harsh times. They are left with only one option to opt for borrowings, and that too at very high rates.

Poor financial decisions have a long-term impact on lifestyles; a small wrong financial decision has so many adverse consequences that could make a person to negotiate with his wants. 

INVEST YOUR MONEY ON LONG TERM BASIS

An investment made for the long term is the best way to maximise the growth potential of your savings. Long term investments provide more tax benefits on capital gains than short term investments. Furthermore, it also reduces the risk factor of market volatility. The best reason to invest for a long duration is the benefit of compounding.

50/30/20 RULE

The basic 50/30/20 RULE is very manageable in real-life practice. As the rule suggests to diversify our income into three subsequent parts, 50% of our earnings should contribute toour needs and necessary expenses, 30% should satisfy our wants, and the remaining 20 % of our earnings should be kept for savings and investment purposes. Most of us spend most of our earnings and save a little bit. So, the 50/30/20 RULE helps us to limit overspending and contribute to healthy financial habits.

SHOULD WE DIVERSIFY OUR SAVINGS?

It is one of the most common questions that most of us think should we finance all our savings in one investment tool or diversify? So, diversification is the most simplistic way to boost your returns and reduce the asset price movement risk. It is one of the crucial components of reaching long term financial objectives while lowering risk.

EXAMPLES OF SOME INVESTMENT OPTIONS AVAILABLE:

Public Provident Fund(PPF) 

- Nowadays, PPF is considered as one of the most popular saving schemes. PPF replenishes deductions up to 150000 under 80C of the Income Tax Act,1961. Furthermore, interest accrued on the PPF scheme too is exempt from tax. It is most suitable for those investors who are looking for stable as well as high returns.

Sukanya Samridhi Yojana  

-Investment made in (SSY) can be utilized for girls' child wedding and education. The above scheme provides deduction under section 80 C of the Income Tax Act. The rate of interest is also relatively high in comparison to other small saving schemes.

Fixed Deposit 

- It is the best-suited investment plan for those who are not willing to bear risk. Unlike other investment tools, FDs are not market-driven. Like PPFs, they too attract tax benefits under 80C of the Income Tax Act,1961. In case of critical cash need, we can take loans against FD rather than breaking it and making ourselves pronto penalties.When you invest in FD for a longer tenure, the basic principal value compounds over time and helps you earn a better interest rate.

Bonds 

-Bonds are considered to be less unsafe than stocks. Bonds provide you with regular passive incomes, and if bonds are held till maturity, bondholders get back the entire principal money along with premium or discount as the case may be.

Real Estate 

- As it is a long-term investment, it provides you with benefits of capital appreciation and regular rental income. One added benefit is that it grants you various tax benefits as you can claim various expenses. It provides you with passive income as well as provides you long term securities.

Stock Market 

- Stocks are considered as one of the most liquid assets. The main reason most people are attracted to the stock market is the increasing inflation rate as bank FD or saving accounts failed to beat the inflation rate. Though the stock market provides a reasonable rate of return simultaneously, it is also precarious. You could lose your entire investment if you are involved in intraday trading as the market is highly unpredictable. In stock market, investors generally experience much higher rate of return if they hold their stocks for longer duration. 

Mutual Funds 

- The main benefit of mutual funds is that it allows us to pool our money with other investors, and professional portfolio managers take the investment decision. So, it is suitable for those who don't have knowledge of the stock market but want to invest their money. 

Gold 

- Investing in gold is a widespread way to invest the money as it is easy to buy and sell. Furthermore, it safeguards you against inflation uncertainties. We can invest in gold by purchasing it in physical forms like coins, jewellery, bullions. Though there is a risk of theft and impurities in physical form, it is preferable to invest in gold through Gold ETFs, as they attract no wealth tax, no security transaction tax, no VAT, and no sales tax.

LET’S CONCLUDE-

Financial literacy is a vital part of eliminating financial blunders for a robust, safe and secure future. So, don't consider savings as punishment; invest your money wisely and at the right time. Being financially literate will help you make better financial decisions and cause you less financial stress and anxiety. So, your stress-free future depends on the financial decision you make today; for that each of us needs to understand the essence of being financially literate.

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