Importance Of Financial Literacy Among Growing Youngsters

Young adults are "financially precarious" because they had poor financial literacy and lacked money management skills and income stability


The enhanced risk caused by the rapid globalization of financial markets requires people to be adequately skilled to be able to make cognizant financial decisions. However, research conducted across the world indicates that financial illiteracy is prevalent even in well-developed financial markets like Germany, the Netherlands, Sweden, Japan, Italy, New Zealand, and the United States. 

Studies conducted in various countries across the world have shown that a significant percentage of young adults were found to be "financially precarious" because they had poor financial literacy and lacked money management skills and income stability.

The role played by governments and employers in managing investments on behalf of individuals has shrunk significantly in the recent past as a result of changes in the social support structures across the world. This has increased individuals’ responsibility in managing their own finances and securing their financial future. Given the fact that assortment and the intricacy of financial products are constantly growing, it is crucial for people to have a deeper understanding of financial products and services so that they can identify suitable investment avenues for themselves.

Reports on financial literacy from various countries across the world indicate that poor financial literacy has had a far-reaching and damaging impact on investment decisions made by individuals.

Such behaviour is also evident among youth, across nations. For instance, Reed and Cochrane who have been reporting on student indebtedness in the US for the last several years, in their latest report observe that about two-thirds of students who graduated from college were heavily indebted due to education loans and credit card borrowings.

In India too, there is an increasing trend of borrowing amongst the young population. According to the Reserve Bank of India (RBI) data on sectoral deployment of bank credit, personal loans, which include home, vehicle and education loans, accounted for a record 96 percent of incremental non-food credit in the last financial year. Most of the people availing personal loans are professionals in the age group of 25 - 45 years. 

Is there a cause of concern? Are the youngsters of our country falling into a debt trap? In countries like the US, many households are living on credit. Many over there take payday loans just to make ends meet and some take credit cards to pay off existing card bills. So, will we see a day like this in India? 

Conventionally, Indians have largely been quite conservative. Off late there has been an increase in the credit appetite of Indians. As of now, not many  Indian households have fallen into a debt trap. However, living beyond their means has already become a reality for a small percentage of borrowers, and the trend is on the rise. 

In a survey by Financial Services giant Visa, Indians emerged as one of the least financially literate among 28 countries. Analysis of the low rank seems to indicate factors like poor understanding of money management principles and lack of financial education. 

Financial Literacy can be defined as the ability to apply one’s knowledge and competences to effectively manage one's financial assets efficiently to achieve lifelong financial security.

India is the second-most populous country at 1.2 billion after China. It is home to 17.6 percent of the world’s population and it is said that 76 percent among those 1.2 billion are financially illiterate. Additionally, India’s average age is 25 years and by the year 2020, our country’s average age would be 29 years against China at 37 and Japan at 48, which would mean that India will be a country full of young and enthusiastic people who will be willing to take our country forward. 

An erroneous thought is that financial planning and financial knowledge is only important to adults. We have the erroneous belief that it’s too early for children to learn about money management and that they will probably learn about in school or college. However, in the absence of a well-defined financial education framework, young adults in India, start earning without being equipped with the knowledge and skills to manage the money they earn.   

In Indian homes, it is the general norm to keep the children out of money matters so that they are not burdened by the tough life that awaits them after college or so that they focus on their academics, and this is where the parents go wrong. When these children grow up they are faced with difficulties regarding the decisions they need to take regarding their income and the most that they can do is keep their money in fixed deposits and savings account which doesn’t give them a lot of returns and even if they do invest, they are greeted by losses because the decisions weren’t informed, they were taken in haste.

The youth would be financially literate only when they are taught from an age as young as 9 or 10. When they are given their respective pocket money they must also be taught about the advantages of saving their money for future use. By the age of 15 or 16, they must have an idea about the stock markets and different saving schemes which they can use when they come of age. Educational institutes should conduct classes on financial literacy even for students of humanities and science streams to ensure that they know the basics of markets and the basic investment procedure so that when they start earning they don’t only become smart workers but also smart investors.

Ultimately, when these financially literate people hit the age of 40 with a burden on their shoulders regarding retirement and family, they will be able to handle it with grace because they know that their hard-earned money is not sitting idle but is generating additional income for them. Smart investment decisions make smart citizens and smart citizens in return make an intelligent country which is financially stable in times of crisis. 

As they say, “You can be young without money; but you cannot be old without it”! 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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financial literacy financial market investment skills


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