Financial Planning cannot work without financial literacy. Financial literacy is not merely the knowledge of financial services and products; it is about your financial attitude and behavior so that you could have ability to make self-informed financial decisions regarding planning, saving, investing, protecting, borrowing and much more. Financial literacy is not rocket science and it does not even require you to understand complex financial concepts or make financial calculations. It just requires some alertness on your part and taking the initiative. These are simple strategies which you need to learn for any financial planning process. You would have to just understand the simple and basic financial concepts such as the power of compounding, the decision to start saving and invest early, spend less on transaction fees, getting rid of bigger debts etc. For instance, most cases people are leaving their savings account itself or converting it into fixed deposit and putting it back into the banks account. The issue is not of merely saving, the issue is of what your bank fixed deposit is doing for you. They do not understand that financial ignorance in terms of inflation element and post-tax yield. Here we are talking about creative financial strategies, how simple habits, taking advantage of existing rules and regulations, using the facilities offered by manufactures of financial products and services and the financial ecosystem, you can do it yourself some significant savings and create investible surplus. Meanwhile the potential benefits of financial literacy are manifold. People with strong financial skills do a better job planning and saving for retirement. Financial savvy investors are more likely to diversify risk by spreading funds across several ventures.

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Global Current Financial Survey

There is general literacy and then there is financial literacy. According to the Census Survey of 2011, India’s adult literacy rate stands at around 74%. But, according to a global survey conducted by rating agency Standard & Poor’s (S&P), financial literacy is less than one-fourth of Indian adults. Globally, only one-in-three adults are financial literate. This in itself is a cause for concern because without financial literacy it is difficult to attain financial freedom at an individual and community level and that is one of the pre-requisites if we have to take the country to the next phase of growth.  If we delve deeper into the data on financial literacy, we find that world over; women, the poor and the lower educated respondents are more likely to suffer from gaps in financial knowledge. HNIs who use formal financial services like bank account and credit cards generally have higher knowledge, regardless of their income. Even poor and middle-class people  who have a bank account are more likely to be financially literate than poor and middle-class people who do not have a bank account, rich people who use credit also generally have better financial skills than rich people who do not. This suggests the relationship between financial knowledge and financial services may work in two directions. While higher financial literacy might lead to broader financial inclusion, operating an account or using credit may also deepen consumer’s financial skills.

Users of Financial Products lack Financial Skills

Financial literacy skills are important for people who have been paying a big sum as life insurance premium for their traditional and Unit Linked Insurance products (ULIP) and even they are not adequately insured and earning low-yield on that flawed products. They may be having mutual fund portfolio of 5 funds, 15 funds and up to 25 funds. Value of some of those funds would be appreciating significantly but they are not bothering and reviewing non-performing funds. Another big issue is that youngsters tend to invest in real estate, gold and even in over-exposure into fixed deposits as an asset class in a portfolio. They generally don’t recognize that where they are investing and how much should they invest. They are earning a lot but are not serious while taking financial decisions. Some of them are facing adverse consequences on wrong financial investments. The case may be of investing in a Ponzi schemes or regular monthly savings in gold through kitty schemes or trading in equities. Investors make dozens of mistakes while buying financial products partly because they are careless and partly because we humans find it hard to deal rationally with money. Losses in financial products, especially products that are market-linked, are common. But a lot of buyers don’t readily admit their own mistakes; often, they put the blame on financial intermediaries and companies that sell them. Though sellers resort to tactics to entice people to buy the wrong product, without crossing the undefined line that constitutes mis-selling but what about mis-buying? Have you ever bought a product, believing that it was the right one, only to find out later that it was a dud and you lost money? Have you been a victim of your own mistakes? Interestingly, you cannot rely on the seller and end up making a mistake even if you are a ‘highly-educated’ customer. Financial knowledge is especially important in times where increasingly complex financial products are easily available to a wide range of the population.

Investors ignore Financial Advice

The countries with the highest financial literacy rates are Australia, Canada, the United States, Denmark, Finland, Germany, Israel, and the United Kingdom etc. where about 65% or more of investors are financially literate, they rely extensively on financial advisers to guide their investment and savings decisions. Despite widespread financial awareness among investors, use of advisory services is grossly underutilized in the financial market. Even self-directed savvy investors tend to make mistakes due to lack of financial skills or behavioral biases. Clients often don’t follow good recommendations for reasons that have almost nothing to do with the adviser’s persuasiveness or their intelligence, even if their advisers have worked hours to get the best financial plan chalked out for their clients. They do not easily believe that their personalized plan may work is just the first step. The key lies in implementation. Finally, the toughest part is taking action. Many individuals fail to follow through on their plan. At the same time, there is no universal answer to why people don’t follow through on advice, as we’re all human: we get distracted, we forget, we procrastinate, etc.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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