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The Covid-19 pandemic has not only put millions of lives in jeopardy around the world, but it has also thrown countless individuals into financial ruin. The significance of being financially prepared is one of the many important lessons that the coronavirus has taught us. But first, let’s look at some stats to determine where we stand in terms of financial literacy.

According to a survey conducted by Standard & Poor’s, 76% of Indian individuals do not understand basic financial principles. Globally, only one out of every three adults understand basic financial principles. Even though financial literacy is higher among the wealthy, educated, and those who use financial services, billions of people are clearly unprepared to deal with the rapid changes in the financial world.

Financial literacy refers to the ability to comprehend and use a variety of financial concepts and abilities, such as personal financial management, budgeting, and investing. It is especially crucial in an era where increasingly complicated financial products are readily available to a broad variety of people. With governments in many countries attempting to increase access to financial services, the number of people with bank accounts and credit products is also increasing.

Financial illiteracy comes at a high price. Consumers who don’t understand interest compounding pay more in transaction costs, accumulate larger debts, and pay higher interest rates on loans. They also end up borrowing more and saving less money

The need to save, especially at a young age

Before answering this, let’s consider this first.

Say you put INR 5000 in a bank account earning 8% interest every month at the age of 25. How much money will you have at age 40?

Well, after 15 years, your investment of ₹ 9.05 lakhs will grow to ₹ 17.58 lakhs @ 8% p.a.

Now, if you had started at the age of 20, instead of 25, your investment of 12.05 lakhs would have grown to 29.89 lakhs after 20 years at an annual rate of 8%.

You can see why saving early at a young age makes more sense, right? The power of compounding only “works” if you give it enough time.

Here are a few reasons why you should save:

• Goals – We usually need to save for meeting short term or long-term goals. Short-term goals can include home renovations, planning a function, and so on; medium-term goals might involve buying a car or going on a vacation; and long-term goals might include buying a house or, if you’re a little older, sending your child overseas.

• Emergency – You will need money set aside for emergencies. Emergency cushioning can be needed for various things such as, a new roof for your home, unaffordable medical bills, or an unexpected loss of income.

• Retirement – If you plan to retire eventually, you’ll most likely need to supplement your income with savings and/or investments to replace the income you’ll no longer receive from your employment.

We save because we don’t know what the future holds. Saving money can help you in achieving financial stability and provide a safety net in the event of an emergency.

Tips on money management:

• Create a budget: Calculate how much you’ll spend on each item and keep to your budget. A budget will assist you in planning your expenses and ensuring that you do not exceed your financial limits.

• Create an emergency fund: If you earn Rs.30,000 per month and Rs.15,000 of that goes toward your regular living expenditures, your emergency fund should be between Rs.60,000 and Rs.1,000,000.

• Set financial objectives: It’s critical that you create financial objectives for yourself. What are your plans for your money? What do you intend to do with it? Knowing these items is important; else, all your financial management efforts will be useless.

• Avoid Getting into debt: Don’t take out a loan until it’s required. Debt is easy to accumulate and even more difficult to eliminate. Taking out a loan requires a regular cash flow and an ongoing expense (excessive interest that you’ll wind up paying).

• Equip yourself with financial education: Don’t risk your money on something you don’t fully comprehend. The first and most critical step for every rookie investor is to arm themselves with as much financial knowledge as possible before they begin investing. The first step toward increasing your money is to learn and continue to learn.

• Start Investing your money and diversify your investments: The next stage is to put your money to work once you’ve got the necessary knowledge to begin investing. As we already mentioned, the longer you invest, the more money you’ll make, and the earlier you start investing, the more compounding power you’ll have. Also, rather than putting all your money into one stock or another financial instrument, diversify your portfolio.

Power of Financial literacy

“Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.” – Robert Kiyosaki, founder of the Rich Dad Company

The tips on money management listed above can be successfully applied if you’re financially literate. The advantages of financial literacy are numerous. People with good financial knowledge do a better job of retirement planning and saving. Those who understand how money works begin earning and investing at a young age, thus, avoiding lifetime financial difficulties.

(The author is Founder, LearnApp.com; views expressed are personal)