Financial Planning and Stability is the new buzz nowadays. Be it television or newspaper, or even your social media feed on Facebook, it is entirely reasonable to see those investment advertisements advising you on the importance of long-term investments. Every Financial expert seems busy pitching high returns and great profits through their next best money making idea.
A look over Quora feed could swiftly tell us how many Indians are curious about their future and what their hopes are. While many are out there having questions, a lot more have free guidance and suggestions. One may say that many people have now started investing towards their future and are certainly going to enjoy financial stability.
But does having a sound investments makes you a financially knowledgeable person? A global survey conducted by Standard & Poor’s Financial Services LLC (S&P) in 2017 did provide the answer to it. It also showed an underlining problem in India that many were not aware of.
The survey revealed that Financial literacy had been the primary priority for most of the countries like the US, Europe, Australia, but indeed, it has not been the same in India.
Financial literacy has consistently been poor in India compared to the rest of the world. India is home to 17.5% of the world’s population, but nearly 76% of our adult population does not understand (or lack the motivation to understand) even the basic financial concepts like compounding, inflation, risk diversification. It is not only detrimental to India’s ambition of becoming an economic superpower in the coming years, but it also puts a significant burden on the nation in the form of higher cost of financial security and lesser prosperity. Most people resort to investing with incomplete or misleading knowledge resulting in short-term instruments.
Here are a bunch of numbers from other reports
- A whopping 73% of working-class Indians have indicated that along with daily expenses, they expect to financially support family members including parents and teenage children after retirement. (Aegon 2015 Retirement Readiness Survey).
- A large number of Indians believe that they would need 58% of their current income post retirement for a comfortable lifestyle but with the current course of financial planning, they expect to save only71% of that retirement income goal. (Aegon 2015 Retirement Readiness Survey)
- MNI India Consumer Report measured a record low in consumer personal finance sentiment to 96.2 in February 2016. This is a measurement at the same time last year. Survey respondents quoted higher household expenses as a primary cause, which left little, or nothing to save.
- Moreover, over 70% of the respondents in the MNI India Consumer Report quoted loss of employment as the biggest motivator of saving in February 2016. So, the gap in savings is expected and feared.
- Close to 74% Indian adults do NOT understand critical financial concepts with just 51% that understood compound interest! (S&P’s Ratings Services Global Financial Literacy Survey).
These numbers could be hard to digest. Especially for people who make monthly contributions to their future and believe that is enough to achieve financial stability.
Truth be told, most of the youth nowadays invest not because they know what they want, but because they just do not want to miss out to others. Most do not focus on becoming a financially responsible person. Investments are made without gaining the fundamental knowledge and blindly trusting the brokers advise. Financial Planning has now turned into making a high retirement number. Look at the common questions that people have been asking on Quora recently.
People are more focused on the final number they can hit, without actually going into the fundamental learning of investing. They do not want to learn financial concepts like compound interest, inflation or debt. Stock options are bought and dumped within a second without really knowing or looking into companies business model.
Not to mention the experts who have well-trimmed offers to sell mutual funds even to students.
Many people post half-cooked questions online and get back the same half-cooked pieces of advice.
Thanks to higher earning, most of us feel more financially secure than we did in 2008. However, in reality, financial literacy is much more a need than a luxury. Various government bodies have started multiple initiatives with grand visions to encourage financial education within common masses, but these initiatives have not been able to bear substantial fruits on the ground.
Now that we know where we stand, we need to understand what financial literacy is and why we need financial literacy in Inda.
What is financial literacy?
Financial literacy, according to its literal definition, is the ability to use skills and knowledge to take effective and informed money management decision from the available financial resources. For a country like India, it plays a more prominent role, as it is considered an adjunct for the promotion of financial inclusion and ultimately achieve financial stability. People with appropriate financial literacy training often make better business decisions and manage money in a much better way than people who do not undergo such training.
Financial literacy emphasizes on expanding the knowledge on financial matters and products so that one can
- Understand how to use and manage their finance and investments efficiently.
- Identify the benefits and facilities offered by banks and do not get into dodgy moneylenders or fraudulent products.
- Minimize financial risk and increase stability.
- Derive the long-term interests of savings and help other forming the same healthy habits.
In simple words, we need to be creative and use simple math concepts like compounding in our actual lives and real world to make responsible financial decisions.
Why we need financial literacy in India?
Most people only focus on high scores in school and college examinations. So they do not fill themselves with enough practicality to related those textbook lectures into actual lives. Without this, they take short-term actions or acts of instant gratification at the cost of future stability.
Lower Financial Literacy results in a couple of following consequences:
Myths & Dangerous Money Habits.
People have a general myth that “literate” or “rich” people are always financially literate and to get the same success, you have to follow in their footsteps. Having insufficient knowledge, people choose priorities that they don’t need. Take inadequate measures, create unfocused goals and hope for miraculously unexpected returns in the long run.
People, then soon start investing in financial products or schemes without forming any healthy money habits or regular monthly budgets. They find hard time committing towards their goals and break once after losing motivation or facing a setback.
They choose to purchase luxuries over achieving financial goals. Those who use debt or loan to extend their purchasing capability loose far more. While those things might bring joy instantly, they lose out their attractiveness once the next shiny things appress.
This kinds of instant gratification act only accumulate debt interests. Not to mention the stress and liabilities that come along with that debt. Not able to pay these liabilities to bring more problems and money issues.
If you have a habit of buying a 50K smartphone every year or two, the purchase does not necessarily provide values that are equivalent to its price. It can also cause budget constraints for many years, while the feeling of instant gratification indeed goes away after a few months.
An emergency fund is meant to be a buffer for unexpected costs or bumps in the highway of life. However, people who do not clearly understand its value prioritize investments above emergency fund. Most investment schemes come with a locking period, and this creates problems when any expenses appear out of thin air.
In 2016, dealsunny.com posted an article about spending behaviors among Indians. It stated that 3 out of 5 Indians actually have less than Rs 5000 in their savings account. Only 19% population tend to keep more than 50,000 which would be a comfortable sum needed to live for more than 2 months if not six.
Why is that bothering when emergencies come in your lives more like a blue moon thing? Because having sufficient funds provide you peace of mind. It acts as insurance if you have to bring significant changes in your life. People who hate their jobs hate financial instability even more. With not having sufficient funds they stick to their paychecks even more.
Blind Trust on Financial Advisors or brokers
Most Brokers have to tie their Livelihood or earnings with product commissions they sell. So promoting a product that offers a higher commission is a natural choice for them. Financial markets and products have become increasingly complex and competitive, each providing unique sets of advantages over others. People who do not realize the need for financially educating themselves lack sufficient awareness to make sound financial priorities. They then are forced to trust their brokers and advisors blindly.
The result, they buy products or make investments which helps their brokers more than themselves. They make investments with untold risks. Only when things start to go wrong, people understand that they stand in deep waters and no-one is there to save them.
Another example would be people buying Insurances. Even though insurance should be to setup guarantees towards failing investments, it is considered as part of tax deduction offered by the government. People often focus on premium prices that satisfy their tax deductions liabilities without concentrating on overall insurance cover. They don’t recognize how much term insurance their families will actually need after they are gone.
Since people do not understand the actual need of buying insurance in the first place, they hop onto next lucrative insurance with less premium cost after 2-3 years leaving behind the bounty they paid previous years. India faces low policy persistent issues.
Life insurance is a long-term product, and so is the business. The persistency ratio shows what proportion of policyholders stick with their product and keep funding it, and for how long.
For FY2016, the life insurance industry, on average, had persistence of 61% in the 13th month, which means: 1 year after the sale, only 61 out of every 100 policies got renewed.
By the 5th year of policy sale, 16 out of the 24 life insurance companies couldn’t retain even a 1/3 of the policies. Five years after being bought, two-thirds of the life insurance policies are no more.
Globally, the persistence of regular policies is close to 90% in the 13th month and above 65% after five years. This stats shows that the Indian customers are losing substantial money pockets on account of bad financial planning.
So how much should your insurance cover? There are a variety of ways to arrive upon the answer, but a starting point could be not less than ten times your current income. The final corpses would vary according to other family members’ income, assets, house, etc., but rarely would anything less than ten years’ income be sufficient.
Stock Market Fluctuations
Most of the small investors view stock buying as a means of capital gains only. They do not correlate buying equity shares as taking a stake in a business or the company. The idea of analysis and valuation gets replaced with tips and recommendations. Since all of them can buy and sell shares in a matter of seconds using online demat accounts, easy money always attracts over hard work.
Financial institutions and advisor scream these hot stock tips (apparently without any underlining guarantees), and people jump from one stock to other not to lose any opportunities. Only a very few countable investors go into the pain of valuation of the companies past financials, it existing business practices and what plans it holds for its future.
Everyone knows that only 5% of the individuals make money in the stock market. That’s because only a few try identifying correct analysis and then buy stocks at their fundamental valuation.
Since nobody wants to go through the pain of learning and evaluation, stock prices mostly fluctuate due to greed, gambling and brand marketing instead of organic growth.
The most important contribution of financial services businesses should not be to make returns and fund financial goals in their investor’s lives, but sadly interest of the majority is only toward seeking immediate results. Brokers keep on promote trading, as it increases business volumes and their fees. Ordinary people focus on their portfolio value. Companies that issue equity shares do not benefit directly from activities in the stock market, so their primary aim to get a high valuation IPO and then build public brand after listing.
Credit Card’s Minimum Due Amount
92% of Indian pay more than their minimum amount due on their credit card bill. This might seem a good thing but is still concerning.
People who do pay more than MAD but not in full, lose much money on credit card debt. Within the elegant lines of free credit card and discounts, people often fail to read the essential rule of interest payments, i.e., 40% APR.
They believe that they can continue using the credit cards just by paying the minimum amount due (usually 5% of the total bill). That may be technically true, but it so comes with a very high credit interest charged by institutions.
Interest Charged on the unpaid amount is between 2-5% per month, i.e., 20+%. Some credit cards even attract more than 40% APR. This amount is weighed too more than avg 15% asked for a personal loan or goal loan. But just because people fail to understand how credit cards actually work, they fall into the debt traps.
It is the credit card company that benefits from the customer paying only the minimum due amount.
As a Customers, you also lose 21 days grace period, thus paying interest for each purchase from the very first day. Most people do not take this into account thus often tend to carry over debt. Due to lack of complete picture they do not realize credit card debt is the far worst debt to take.
Credit card Registrations in India have increased from 17.65 million in March 2012 to 33.87 million in Oct 2017.
India has around 92% of credit card holders that often pay more than their minimum due on their revolving debts each month as compared to 89% in the US, 88% in Canada and Hong Kong, 52% in Colombia and 44% in South Africa. Numbers seem good but do not help all the people.
India is way behind developed nations in financial literacy efforts. It also ranks lowest in among major emerging economies. We can ensure high economic development only through higher financial literacy. The bottom line, therefore, is that “me-too” approach or “government is responsible” attitude will not work for Indians. All stakeholders including everyday people and government organizations need to take individual responsibility and must work in conjunction for financial literacy through a combination of innovative strategies and responsible actions.