Introduction to Finance and Financial Literacy

Learning Outcomes

• Students will be able to describe the meaning and importance of finance, and explain the role of financial literacy in decision-making.
• Students will be able to identify and differentiate between the components of financial literacy, including financial knowledge, financial attitude, financial skills, and financial behavior.
• Students will be able to demonstrate an understanding of the relationship between financial literacy and financial education through practical examples and scenarios.
• Students will be able to assess the factors that affect the success of financial socialization and evaluate the effectiveness of various socializing agencies in promoting financial literacy.

Introduction to Finance

• Money and finance are often used interchangeably but are different
• Money is a finite resource used as a medium of exchange for goods and services. Currency is a form of money.
• Money includes coins, checks, bank notes, fixed deposit receipts, and digital wallets.

Public Finance

• Public finance studies the principles of acquiring and using financial resources by the central, state, and semi-governmental bodies.
• It includes managing public funds, collecting taxes, allocating government spending.

Private finance

• Covers financial planning for individuals, businesses, and non-profit organizations.
• Personal finance concerns the planning and management of personal or family finances, including budgeting, banking, insurance, loans, investments, and retirement planning.
• Social finance involves planning within social enterprises like charities, schools, and religious organizations.
• Business finance involves planning and executing the financial operations of businesses, including generating revenue, making investments, and managing operations.

Financial Literacy Basics

• Financial inclusion is crucial for economic growth and poverty alleviation.
• Lack of access to formal financial services forces individuals and businesses to rely on informal and often costly sources.
• Case studies of Sita's tailoring shop and Ramesh's grocery store illustrate the challenges of limited access to formal financial services.

Needs, Wants, and Vices

• Needs are essential for survival and well-being (e.g., food, shelter, healthcare).
• Wants provide comfort or pleasure (e.g., entertainment, gadgets).
• Vices are habits that may negatively affect financial health (e.g., gambling, excessive spending).

Spending - Planning a Movie Night Out

• Differentiate between needs and wants
• Compare prices to find the best deals
• Budget money effectively
• Track expenses to avoid overspending

Income, Expenses, and Savings

• Neha and Vikram, a young couple in Chennai, track their income and expenses to manage their finances.
• This includes tracking expenses, creating a budget, identifying areas where they can save, and prioritizing their savings and investment plans.

Risk Management

• Understanding financial risks and mitigation is key.
• This involves knowledge of diversification, insurance, and emergency savings.
• Seema diversifies her investments, showing how not putting all her eggs in one basket reduces risk.

Budgeting

• Budget is a financial plan outlining expected income and expenses over a specific period
• Budgeting helps effectively allocate resources and avoid overspending,
• Priya, for example, sets a savings goal, tracks expenses and makes necessary adjustments.

Financial Knowledge

• Conceptual knowledge includes understanding interest rates, inflation, risk and diversification, and time value of money.
• Procedural knowledge includes calculating interest, inflation, and making investment decisions.
• Applied knowledge is using above knowledge in real-life situation. Examples are planning for retirement and managing investments

Financial Skills

• Ability to earn money
• Ability to spend and save appropriately
• Ability to explore investment options
• Ability to calculate borrowing costs
• Ability to forecast the consequences of borrowing

Financial Attitude

• Tendency to look beyond short-term perspectives
• Tendency to consider the impact of decisions on others
• Lack of self-control

Financial Socialization

• Financial socialization is a process of learning about financial matters through interaction in the social sphere
• It is influenced by various agents, including parents, peers, media, education, employment, and culture.
• Financial socialization includes financial knowledge, attitude, behaviour and wellbeing.

Financial Education

• Provides financial consumers/investors with understanding of the financial products, concepts, risks and confidence to take informed financial decisions.
• Includes: reducing time spent on managing financial matters, managing money through budgeting, maintain emergency funds, achievement of financial goals, motivation to create financial plans, reducing debt, increased savings, and successfully managing financial dealings like negotiations.

Financial Literacy and Financial Inclusion

• Financial literacy is essential for financial inclusion
• Financial inclusion is ensuring that vulnerable groups have access to financial products and services, and financial literacy is crucial for financial inclusion.
• Financial literacy helps individuals and firms meet their financial needs and enables them to pursue growth opportunities and maintain sustainable economic growth.

Financial Literacy and Economic Development

• Financial literacy helps people manage income and expenses efficiently
• This leads to greater financial stability, more savings, and contributes to the overall socio-economic growth of a country.
• Financial literacy encourages people to use formal credit instead of informal lenders.

Financial Implications for Personal Issues

• Financial Literacy is especially vital in personal situations when individuals face different financial concerns
• These concerns are frequently categorized as needs, wants, and vices to create a comprehensive understanding of one's financial well being.