One primary challenges related to his/her finances.

One
of the first lessons we learn in Economics is that ‘Man has unlimited wants and
scarce resources’. For centuries the field of Economics has tried to solve this
puzzle. The debate on how the puzzle needs to be solved has continued but the
puzzle hasn’t changed. Economists try to solve this problem on a macro level.
They propose allocation of resources of the nation for its most efficient use.
At the same time an individual is solving this puzzle for his/her household. An
individual who runs a household faces two primary challenges related to his/her
finances. Firstly, as mentioned above the household as whole has certain needs
and wants which have to be fulfilled. For example monthly recurring
expenditures, children’s education, marriage expenses etc. The second challenge
he/she will be facing is how to meet sudden expenditures that happen in an
emergency situation. Now, how does he meet these challenges? To meet these
challenges he/she has manage his/her finances efficiently. The household has to
do some kind of ‘Financial Planning’. Here comes the need of financial
literacy. Before talking about financial literacy and benefits of financial
planning we have to take a look at the various definitions of Financial
Literacy.

 “Possessing the
skills and knowledge on financial matters to confidently take effective action that best fulfils an individual’s personal, family and
global community goals.” (The National Financial
Educators Council)

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Now
the question arises whether literacy is sufficient to meet these challenges? Financial
literacy is necessary but not a sufficient condition to safeguard against the
above mentioned challenges. The puzzle is solved only when the knowledge of
financial literacy can be of some help to the individual. In a country like
India where Financial Inclusion is the talk of hour but the amount of research
on the issue of Financial Literacy is very limited.

Financial
literacy has become more important than ever in today’s ever changing world of
economy. Being aware of money management, income, saving, and spending can
equip our young people with knowledge to fight fraud and take charge of their
finances. We are living in an age of unprecedented debt and people are destined
to face challenging times financially. It is imperative that educators begin to
equip people with the knowledge and skills to succeed as consumers in today’s
global economy. Teachers, administrators, parents, business owners, and
community members need to know the importance and value of Personal Finance
literacy.

Lusardi
addresses this problem in her paper ‘Financial Literacy: An Essential for
Informed Consumer Choice, 2008’, where she asks the question ‘Does Financial
Literacy matter?’ She writes “Retirement planning is a powerful predictor of
wealth accumulation; those who plan have more than double the wealth of those
who have not done any retirement planning. Financial Literacy matters for
planning: Those who are more financially knowledgeable are much more likely to
have planned for retirement. Financial literacy continues to be an important determinant
of planning and it is found that those who were financially literate are more
likely to plan for retirement in their young age, showing that literacy affects
planning and has important implication welfare.

There is widespread financial
illiteracy among the population, particularly among social demographic groups
like that of people with Low education, women etc. Lusardi, Mitchell and Curto
(2009) studied the level of financial literacy among the youth and found that less
than one-third of young adults possess basic knowledge of interest rates,
inflation and risk diversification. Young people are passing out from school
without the basic skills to manage their personal financial affairs, which would
put them at a high risk for not being able to plan responsibly for their
financial future.