Why Financial Literacy should be taught academically
I come from a typical Indian middle-class setup, where the only options of saving up for future were insurance, gold or real estate . The fact that my parents thought insurance was a means to save money is absurd, but I cannot blame them. When you’re living from pay check to pay check , saving up money was on the bottom of your priorities. Even more so , understanding the various means to save money would be the last thing they wanted to do .I contemplated that if they had better exposure to these financial topics , they would have understood things better.While all this sounds reasonable , the unreasonable reality is that when I received my first paycheck, I didn’t know anything more about saving than my parents. When i asked around my friends , I found a similar pattern emerge. Anybody who has some basic knowledge about money and finance, can refrain from reading further , since my views expressed here are pretty basic.
Our Education system is a mess
Forgive me for talking from a very narrow perspective again. But with the schooling system I grew up with , there is no single mention of this humongous monster called ‘Money’ in its truest sense. Of course , we did have a subject called economics where we were cramming supply vs demand without understanding the role money plays in the debate.There’s no mention of financial speculation (Share markets and its siblings). There’s no mention of the word entrepreneur . Of all the talk in our history books about India’s struggle to independence , there’s no mention of the term ‘Financial Independence’ . In essence , we were brain washed from kindergarten to aim for the biggest paycheck , but never to aim for establishing a successful business. If everyone understands money , it would not be so easy to lure hordes of sheep to do some corporate’s bidding.Understanding insurance might be good place to start.
One size fits all solution
The huge success of LIC in India , can be attributed to the brilliant scheme of convincing the common public with the following ideas.
You can save taxes through insurance
You’re investing money through insurance (Money back policies)
You will also get a lump-sum in case of a loss or damage.
Though all these statements are true , some truths are deliberately kept back from reaching the common public.
There are better ways to save taxes
Returns offered by Money back policies are not so great.
Lump sum offered by Money back policies are far lower compared to term insurance policies.
And Yes Most of the policies your parents have are money back policies!
People should see the literal definition of insurance. A practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.In simple words , Insurance is not an investment. A simple comparison would explain this better.
In a money back policy , you get your money back at the end of term. Say If you have paid 12k in yearly premium installments, you get 15lakh life cover or you will receive 15 lakhs at the end of term if you’re alive. But in term insurance with the same 12k per year, you will get close to 1 crore cover .If you are alive at the end of the term , you get zero money back.That’s like kind of the point though. So when you’re buying insurance , it’s just insurance .A safety net for your loved ones in case of some misfortune.It’s either money or your life at the end of the term ,which makes complete sense. This might be a well known universal truth for some people ,but since i didn't find it as common knowledge among my contemporaries, i wanted to say it out loud .
Sitting on your money is worst thing to do ever
One more way of saving money in Indian households is saving hard cash. Hard cash will be stashed in home , lockers or savings bank accounts. While the individual feels he’s saving money for the future or an emergency, what he doesn't understand is the he’s losing money every second without actually spending it because of inflation. The prices are skyrocketing everyday , especially during this pandemic. So it would be wise for us to either spend it now , or invest in some solution which provides minimum guarantee to beat the inflation. In trivial terms , 1 litre of petrol cost 100 bucks today. 1 litre of petrol might cost 108 bucks next year. So you should either refuel today using the 100 rupees , or if you should choose to save/invest it for future, then you should invest in a solution which would give you 108 Rupees as minimum returns.Mutual funds would be a decent place to start.
Entrepreneurs view money differently than the rest of us
Topics discussed above are just a slow lane to financial stability, typically suited for the middle class. But an aspiring entrepreneur or a person who is born with the silver spoon views money completely differently than us. We always wonder how Vijay Mallya went scot-free with all the debts against his firm and why do we have to struggle so much just to pay off your educational loans and other similar debts. The key difference lies in the existence of a make-believe thing called legal entity which can be created out of thin air . Vijay Mallya never got any loans for himself . Only the legal entity called Kingfisher acquired loans . So when the loans couldn’t be repaid , the imaginary entity will declare bankruptcy , and Banks use terms like write-offs, waivers to save themselves. Understanding this is immense , since it expands our understanding of what are secured and unsecured loans. Understanding secured and unsecured loans in turn gives us a better sense of how this mystery term called CIBIL score is calculated.
Final thoughts
Widening our worldview on finance is quintessential to understand the deep rooted problems in our society. This article is not just to enable people to be more sensible about their personal wealth , but it also gives a better understanding why the poor can never cross the poverty line despite the enormous hard work they are delivering every day. Imagine if an educated middle class fellow doesn’t have this basic understanding of money , how can we explain all this to a daily wager who struggles to keep his family afloat just through pure hard work. That is a question I currently have no answer for.
