The CoVID-19 pandemic has taken two years from our lives. It has affected us not only physically and mentally but also financially. Numerous life lessons (and financial lessons) had rained down on us in those years. It has changed our attitude towards money and savings. Today, as the economy recovers, the relevance of financial literacy has been reverberating in every corner of the world.  

 

By the way, what is financial literacy?

 

Financial literacy is understanding basic economic concepts and using various financial skills, such as personal finance management, budgeting, and investing. In other words, financial literacy is an ongoing journey of financial learning that solidifies your relationship with money. In addition, being financially literate helps you with financial, retirement, and tax planning.

 

The Ways to Attain Financial Security

 

The ultimate goal of financial literacy is to turn yourself into a financially independent individual and create a financially secure future for yourself. There are five significant ways to do that.

 

1. Put Your Money to Work

 

“If you don’t find a way to make your money work while you sleep, you will work until you die.”

 

 – Warren Buffet

 

With every passing year, the purchasing power of money comes down with a rising standard of living. So, a single income source is not enough to survive. We are accustomed to living from paycheck to paycheck even while our needs and lifestyle change endlessly. As a result, we fail to use our money optimally, and our financial liabilities exceed our limits.

 

Financial literacy will make you understand the power of compounding and how your money will work for you to make you more money. It enables us to invest money rather than save it as idle money in our bank account. Investing eliminates our financial liabilities and, at the same time, aids our retirement planning, setting up an emergency fund, and attaining our short-term and long-term financial goals.

 

Investing regularly is the key to putting your money to work. First, keep track of your monthly spending by calculating your fixed and variable expenses. Then set aside some money for investing regularly.

 

The modern financial world offers various investment instruments like mutual funds, bonds, cryptocurrency, private equity, and many more. Investing in a wide array of financial products diversifies your portfolio and minimizes your risk. However, you should also remember that in the world of investing, with higher risk comes higher returns. So, play the game as per your risk appetite.

 

If you can set aside some amount monthly, you can choose a Systematic Investment Plan (SIP) for investing. A typical SIP works like this: suppose your monthly revenue is ₹50,000, and you decide to invest 20% of it. That is ₹10,000 through SIP. The exact amount will get deducted automatically from your bank on the same day of every month. Your monthly installments will get invested regularly under the supervision of a certified financial professional. SIPs come with a small management fee, better liquidity, and higher returns.

 

2. Understanding Yourself

 

Some people, by nature, are risk takers, while most prefer to stay inside their comfort zones. These personality traits can be seen in investors as well. Some investors take higher risks for higher returns, while others prefer lower returns with lower risk and capital protection.

 

When you take your first step into investing, you should be aware of your personality, whether low-risk or high-risk. Factors like age and the amount you can risk influence your personality and risk profile. For example, someone close to retirement usually looks for a steady income through low-risk debt instruments. Whereas a youngster at the early stage of his career prefers to take more risk and attain higher returns by trading stock derivatives

 

3. Never Put All Eggs in One Basket

 

Diversity is the key to an optimal portfolio. If one can accurately invest in the right mix of asset classes and investment products that suit their risk appetite and market conditions, they can minimize risk and maximize returns. A financial advisor or a portfolio manager can help an investor to do this.

 

For example, the relationship between equity and gold is inversely proportional. A price fall in the equity markets drives up the gold prices and vice versa. This relationship helps an investor to hedge their investments.

 

4. Develop Financial Awareness

 

The fast-paced technological advancements have transformed the face of financial crime today. Besides banking fraud, digital swindling activities like spam, identity and data theft, fraudulent crypto assets, and online investments have become very common. Digital swindlers come up with many money-making ideas that promise to double your investment in a few days.

 

Financial awareness is a skill that everyone should develop today. However, one must never forget that equity, commodity, or crypto markets are volatile and don’t offer steady returns on your investment.

 

5. Look Out for Tax Benefits

 

The Indian government offers tax benefits for every tax-paying citizen. The most common example is the tax benefits under section 80C, in which one can claim a deduction of ₹1.5 lakhs on certain types of investments. Like 80C, numerous tax-saving methods exist, and one must avail of all possible tax benefits to divert these funds to profitable investment ventures.

 

Final Notes

 

Learning is a non-stop activity. Keep these five ways as ageless seeds of wisdom throughout your lifelong financial literacy journey. In conclusion, it would be insightful to quote Travis Cook, the Education Specialist at the Utah State Board of Education: “My hope is that with increased financial capability, more of us will be able to transition from surviving to thriving. This results in sufficient resources to support our ever-changing, highly subjective pursuit of happiness.”

 

Krishika Makhija

 

Alpha Research Team