What is financial literacy?

By Ashwini Kumar

Financial literacy poses a significant challenge across the globe, encompassing knowledge, skills, and attitudes toward financial matters. It serves as a foundation for informed decision-making and enhances the overall well-being of individuals. In today’s intricate market landscape, the demand for financial knowledge is unprecedented.

Countries, especially those with a substantial youth population like India, can elevate financial literacy levels through governmental initiatives. Numerous financial education programs, totaling 4,444, have been implemented by both governments and private institutions. Financial literacy extends beyond providing information; it involves the adept utilisation of financial resources for the improvement of personal, familial, and business well-being.

According to the OECD, financial literacy is “the combination of awareness, knowledge, skills, attitudes, and behaviours necessary to make informed financial decisions and ultimately achieve personal financial well-being.” Acquiring financial knowledge early in one’s career is crucial for accumulating wealth and making sound financial decisions.

However, economic illiteracy persists due to personal or professional limitations. This leads to insufficient understanding of financial operations and suboptimal decision-making. Financial literacy significantly impacts financial inclusion, ultimately contributing to economic stability. India, with its lower literacy rates and a considerable portion of the population excluded from formal finance, faces an amplified need for financial literacy.

Global surveys, numbering 4,444, have consistently demonstrated low levels of financial literacy. A specific study explores the financial literacy of Generation Y employees, focusing on their preparedness for financial decisions, information sources, knowledge, and challenges they encounter in financial matters.

Complex financial products, limited awareness, and knowledge gaps contribute to the evident lack of financial literacy. Levels of financial literacy vary among individuals, with gender differences playing a pivotal role. Women’s financial decisions are often influenced by personal life experiences and the intertwining of emotions, money, and family in their lives.

The absence of consistent access to information hampers informed decision-making, leading to lower confidence and knowledge about financial topics. Life changes, such as new jobs, divorces, or the death of a partner, act as stressors impacting financial literacy.

Reforms in financial markets restrict governments and employers from aiding workers in planning for their financial futures. Consequently, younger employees bear increased responsibility for managing their financial needs amidst job insecurity, income uncertainty, and easy access to consumer finance.

Limited research on financial literacy underscores the urgency for comprehensive studies, especially in countries like India, with a youthful population and diverse socio-economic backgrounds. India, boasting one of the world’s largest youth populations, with 65 percent under the age of 35, must prioritise addressing this critical issue.