Financial Literacy Concepts PDF

# MODULE 1 ## FINANCIAL LITERACY CONCEPTS ### Learning Outcomes Upon completing this chapter, students will be able to: - Describe the meaning and importance of finance, and explain the role of financial literacy in decision-making (Understand). - Identify and differentiate between the components o...

# MODULE 1 ## FINANCIAL LITERACY CONCEPTS ### Learning Outcomes Upon completing this chapter, students will be able to: - Describe the meaning and importance of finance, and explain the role of financial literacy in decision-making (Understand). - Identify and differentiate between the components of financial literacy, including financial knowledge, financial attitude, financial skills, and financial behaviour (Analyse). - Demonstrate an understanding of the relationship between financial literacy and financial education through practical examples and scenarios (Apply). - Assess the factors that affect the success of financial socialization and evaluate the effectiveness of various socializing agencies in promoting financial literacy (Evaluate). ## UNIT I: INTRODUCTION TO FINANCE ### Introduction to Finance - **Money Vs. Finance:** The terms 'money' and 'finance' are often used interchangeably. However, they are different in their meaning. People normally say, "money doesn't grow on trees" as it is a finite resource. Money is primarily used as a resource or medium of exchange for trading goods and services. It is also to be noted that money and currency are different as currency is just one of the widely accepted forms of money. Money is a much broader term than currency as the former includes coins, cheques, bank notes, fixed deposit receipt, and even digital wallets. - **Finance is referred to as the art and science of managing money.** It involves acquiring, planning, and effectively utilizing money to achieve financial goals. Hence, it covers decisions with regard to budgeting, saving, investing, borrowing, and making sound financial decisions. - **Money is a tool and finance may be stated as the knowledge and skillset to use it properly.** - **Functional Definition of Finance:** The Penguin Dictionary of Economics defines finance as "the provision of money when and where it is required". It is the functional definition of finance. This definition is very much valid in a money-oriented economy. From the point of view of a business organization, the above definition has two components viz., the procurement of money through the financial resources (liability side of the balance sheet) and the provision of money to obtain the economic resources (asset side of the balance sheet) for operations. Unless the money is procured, it cannot be provided for operations. - **Finance as an Academic Discipline:** As an academic discipline, finance is a branch of learning that studies how the individuals, business organizations, non-profit organizations and governments manage their money. For example, academic programmes like B. Com Honours (Finance & Accounting), MBA (Finance), M.Com (Finance), B.Com (Finance), MS (Finance) etc., deal with finance subjects. - **Finance is the Life Blood of Business. Why?** Finance is one of the major functional units of a business organization. It is the essence of all economic activities of an organization. The other functional units such as production, marketing, human resource etc., cannot be operated without continuous flow of funds. Therefore, finance can be described as the life blood of business. In that sense, the finance department in an organization may be likened to the heart in a human body which pumps blood to all parts of the body. ### Types of Finance - **Public Finance:** Public finance deals with the study of principles underlying the acquisition and utilization of financial resources by central government, state government and semi-governmental bodies. To put it briefly, it is the management of public exchequer. It deals with the management of government finances, including revenue collection in the form of taxes, expenditure in the forms of social programs, infrastructure, etc., and budget planning. Public finance also includes the financial planning of government-owned institutions. - **Private Finance:** Private finance covers the financial planning of individuals, business organizations and non-profit organizations. - **Personal Finance:** It is concerned with the planning and management of personal or family's financial activities. It covers family budgeting, banking, insurance, home loans, investments, retirement planning etc. - **Social Finance:** It refers to the financial planning in social enterprises including charitable organizations, educational and religious institutions. Though they are not profit motivated, they also have finance function. - **Business Finance:** According to Guthmann and Dougall, "business finance can be broadly defined as the activity concerned with the planning, raising, controlling and administering the funds used in the business". All the activities mentioned in the definition are applicable to all types of business organisations such as sole traders, partnership firms, limited liability partnership firms, joint stock companies, etc. - **Behavioral Finance:** Studies the emotions and behavior of investors, has been rapidly emerging. ## UNIT II: FINANCIAL LITERACY: BASICS ### Financial Inclusion and Financial Literacy - **Financial Inclusion**: Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. This is the reason why the Reserve Bank of India has formulated a unique national strategy for financial inclusion in 2018 to broaden and deepen financial inclusion. The National Strategy for Financial Inclusion (2019-2024) primarily focused on providing access to formal financial services in an affordable manner. - **Access to formal financial services**: If there is no adequate access to formal financial services, individuals and firms will be forced to: - rely on their own limited resources or - costly informal sources of finance to meet their financial needs and pursue growth opportunities. - **Case study of Sita and Ramesh:** In a rural village in Kerala, two small businesses, a tailoring shop run by Sita and a grocery store owned by Ramesh. Both businesses need capital to expand. However, they have limited access to formal financial services, pushing them towards informal sources of finance. ### Comparison of Informal and Formal Credit | Business | Savings (₹) | Friends/Family Loans (₹) | Total Amount Available (₹) | Total Amount Required (₹) | Deficit (₹) to be Financed | |:---:|:---:|:---:|:---:|:---:|:---:| | Sita's Tailoring Shop | 20,000 | 30,000 | 50,000 | 1,00,000 | 50,000 | | Ramesh's Grocery Store | 30,000 | 50,000 | 80,000 | 1,50,000 | 70,000 | ### Costly Informal Finance Vs Economical Formal Finance | Business | Informal Loan (₹) | Monthly Interest (₹) -3% per month | Annual Interest (₹) -36% per annum| Monthly Interest If the Loan is Taken from a Bank (*) 0.75% per month| Annual Interest (₹)  -9% per annum| Annual Benefits Due to Formal Finance | |:---:|:---:|:---:|:---:|:---:|:---:|:---:| | Sita's Tailoring Shop | 50,000 | 1500 | 18,000 | 375 | 4,500 | 13,500 | | Ramesh's Grocery Store | 70,000 | 2100 | 25,200 | 525 | 6,300 | 18,900 | -* *In both cases, the loan amount is the deficit amount.* - **The Learning Outcome:** The cases of Sita and Ramesh illustrate the significant financial burden of relying on costly informal finance. However, with access to formal loans, they can secure the necessary capital at much lower interest rates. This not only reduces their financial burden but also allows them to invest more in their businesses, promoting sustainable growth and financial stability. The above case illustrates the need for access to formal credits for people or financial inclusion. - **Financial Inclusion:** According to C Rangarajan, Former Governor of the Reserve Bank of India, financial inclusion is "the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost." The RBI has identified financial literacy and financial knowledge as key strategic pillars of financial inclusion. This implies that financial inclusion is not possible without financial literacy and financial knowledge or it can be stated that financial literacy is the key to the financial inclusion. ### Financial Literacy - Meaning and Definition - **Financial literacy**: In simple words, financial literacy can be defined as the understanding of how to spend, save, and invest money effectively, utilizing available financial products and resources optimally. The Organization for Economic Co-operation & Development (OECD) defines Financial Literacy as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being" It follows from the definition that; - It empowers individuals to make sound financial decisions and - Helps to achieve financial well-being. - **Financial Literacy in Action - Learning Concepts Through Case Studies:** - **Needs Vs. Wants Vs. Vices - Nikhil's Weekly Allowance:** Nikhil, who receives₹1000 as his weekly allowance. He plans his spending as follows: | Items | Amount (₹) | Category | |:---:|:---:|:---:| | Food (Groceries) | 300 | Need | | Transportation | 200 | Need | | Mobile Recharge | 100 | Need | | Movie Ticket | 150 | Want | | Fast Food (Burger and Fries) | 100 | Want | | Junk Food (Snacks and Sugary Drinks) | 150 | Vice | | **Total** | **1,000** | | - **Financial Literacy Concept 1 - Needs Vs. Wants Vs. Vices:** - Needs are essentials that are necessary for survival and well-being. - Wants are non-essential items or services that provide pleasure or comfort but can be postponed. - Vices are habits or indulgences that may negatively impact financial health. | Category | Needs Vs. Wants Vs. Vices: Indicators | |:---:|:---:| | Needs (necessary) | - **Food and Water:** Essential for survival. E.g., buying groceries. - **Shelter:** Necessary for safety and well-being. E.g., paying rent or a mortgage. - **Clothing:** Basic apparel necessary for daily life. E.g., buying school uniforms or work clothes. - **Healthcare:** Medical expenses for maintaining health. E.g., purchasing medicines or paying for a doctor's visit. - **Education:** Necessary for personal and professional development. E.g., school fees or buying textbooks. | | Wants (not very essential) | - **Dining Out:** Eating at restaurants or ordering takeout instead of cooking at home. - **Entertainment:** Going to movies, concerts, or amusement parks. - **Gadgets:** Upgrading to the latest smartphone or buying a gaming console. - **Fashion:** Buying trendy clothes, accessories, or luxury items. - **Travel:** Vacation trips, weekend getaways, or adventure sports. | | Vices (excessive & harmful) | - **Smoking:** Spending money on cigarettes or tobacco products. - **Alcohol:** Regularly buying alcoholic beverages. - **Gambling:** Spending money on lottery tickets, betting, or casino games. - **Unhealthy Eating Habits:** Frequently buying junk food or sugary drinks. - **Impulse Shopping:** Buying non-essential items impulsively without planning. | - **Spending - Planning a Movie Night Out:** It's Saturday afternoon, and Rohan and Meera are excited about their plan for a movie night out with friends. They decide to catch the latest blockbuster at the nearby multiplex and grab dinner at a favourite restaurant afterward. Rohan opens his phone to check the movie timings and ticket prices in BookMyShow. - **Financial Literacy Concept 2 - Spending:** Before spending, people should be able to; - Differentiate between needs and wants - Compare prices to find the best deals - Budget their money effectively and - Track their expenses to avoid overspending. - **Income, Expenses and Savings - Family Financial Tracking of Neha and Vikram:** Neha and Vikram are a young couple living in Chennai. Neha works as a marketing executive, earning ₹50,000 per month, and Vikram is a software developer, earning ₹70,000 per month. They also earn ₹4,000 per month from their investments in fixed deposits. Neha and Vikram understand the importance of managing their income and expenses to cover their needs and save for the future. They decide to implement a financial tracking system to help them manage their finances better. - **Income and Expenses Breakdown of Neha and Vikram:** | Monthly Incomes | Amount (₹) | Monthly Expenses | Amount (₹) | |:---:|:---:|:---:|:---:| | Neha's Salary | 50,000 | Necessities | | | Vikram's Salary | 70,000 | Food | 15,000 | | Income from Investments | 4,000 | Housing (Rent) | 25,000 | | | | Utilities (Electricity, Water, etc.) | 5,000 | | | | Transportation | 8,000 | | | | Communication (Phone, Internet) | 3,000 | | | | Clothing | 5,000 | | **Total Income** | **1,24,000** | **Total Necessities** | **61,000** | | | | Discretionary Spending | | | | | Dining Out | 10,000 | | | | Entertainment | 7,000 | | | | Vacations | 10,000 | | | | Gifts and Miscellaneous | 6,000 | | | | **Total Discretionary ** | **33,000** | | | | **Total Expenses** | **94,000** | | | | Savings and Investments | | | | | Emergency Fund | 10,000 | | | | Savings | 20,000 | | | | **Total Savings** | **30,000** | | | | **Total Expenses** | **1,24,000** | - **Financial Literacy Concept 3 - Income, Expenses and Savings:** - **Income**: Income is the money earned from various sources like salary, wages, earnings from farming or business, and interest income from investments. It represents the total funds available to cover expenses and savings. - **Expenses**: Expenses, also known as expenditure, are the money spent on various items. This includes spending money on essential (necessities) as well as non-essential (discretionary) items. - **Savings**: Savings is the amount of money that remains from the income after all expenses are made. It is the portion of income set aside for future needs, emergencies, and specific financial goals. - **Savings = Income - Expenses** - **Expenses = Income - Savings** Here, the person can spend only the amount left after allocating for savings. - **Budgeting - Sruthi's Solo Travel Budget:** Sruthi, a young professional with a passion for travel. She earns a monthly salary of ₹50,000 and dreams of exploring the beautiful landscapes of Himachal Pradesh for a week. However, she also needs to manage her everyday expenses and plan for the future Recognizing the need for financial planning, she creates a budget to ensure her travel dreams don't come at the cost of financial strain. - **Financial Literacy Concept 4 - Budgeting:** Budgeting: Budgeting is the art of balancing income and expenses to ensure that expenses are always less than income. The surplus generated, if any, can be invested for future needs. A personal or household budget is an itemized list of expected income and expenses that helps a person to plan for how his/her money will be spent or saved. The budgets can be; - **Surplus Budget:** In the case of surplus budgets, income exceeds expenses so that there is savings. - **Deficit Budget:** In the case of deficit budgets, expenses exceed incomes so that there may be borrowings or loans. - **Balanced Budget:** In the case of balanced budget, incomes equal expenses. - **Investment: Dream Wedding Plan of Riya & Rahul:** Riya and Rahul, a young couple in Bangalore, both working professionals with a combined monthly income of 1,20,000. They dream of a grand wedding in two years. But with rising wedding costs in India, they understand the need for smart financial planning. They consult a financial advisor to understand their options. - **Financial Literacy Concept 5 - Investment:** - **Investment:** An investment is a commitment of funds made in the expectation of gaining additional income or growth (appreciation) in values. Thus, it is rightly said that an investment is a sacrifice of current money for future benefits. The sacrifice occurs currently and is certain whereas benefits or returns will take place in the future and it will be mostly uncertain. - **Borrowing: Anjali's Bakery Expansion:** Anjali is a passionate baker who runs a small bakery from her home in Kottayam. Her delicious cakes and pastries are a local favourite, but Anjali finds it challenging to meet the growing demand due to limited oven space and equipment. Anjali sees an opportunity to expand her business by renting a larger space and purchasing additional ovens. However, she lacks the upfront capital of Rs. 5,00,000 needed for the expansion. - **Financial Literacy Concept 6 - Borrowing:** - **Borrowing:** Borrowing is the act of receiving money or goods from someone with the understanding that it will be returned, usually with interest. It involves creating a debt obligation. - **Loan:** A loan is a specific type of borrowing that typically involves a formal agreement between a borrower and a lender. This agreement outlines the terms of the loan, including: - **Loan Amount:** The total sum of money borrowed. - **Interest Rate:** The cost of borrowing the money, expressed as a percentage of the loan amount. - **Repayment Tenure:** The period over which the loan must be repaid. - **Repayment Schedule:** How often and how much the borrower must repay (e.g., monthly instalments). - **Collateral:** An asset pledged by the borrower as security for the loan. If the borrower defaults (fails to repay), the lender can seize the collateral. - **Sources of Borrowing:** There are two main categories of sources for borrowing: - **Internal Sources:** Borrowing from friends, family, or relatives. These loans may be informal and have flexible terms. However, borrowing from loved ones can strain relationships if not handled carefully. - **External Sources:** Borrowing from financial institutions, banks, micro-finance institutions, etc. These loans typically come with stricter terms and regulations. ## UNIT III: COMPONENTS OF FINANCIAL LITERACY ### Components of Financial Literacy (Core Financial Competencies) - **Financial literacy**: Financial literacy enables the people to take informed personal financial decisions. A financially literate person must be proficient in core competencies like financial knowledge, financial skills, positive financial attitude and rational financial behaviour. - **Financial Knowledge:** Understanding about the key financial concepts and procedures as well as the ability to use this understanding to solve financial problems in the real life. This helps the individuals to evaluate costs and benefits various financial decisions. - **Conceptual Financial Knowledge:** Understanding financial concepts such as interest rates, budget, inflation, risk, etc. - **Procedural Financial Knowledge:** It is about knowing how to perform financial tasks, like calculating interest or managing a budget. - **Applied Financial Knowledge:** The ability to apply financial concepts and procedures in real-life situations, such as making investment decisions or planning for retirement. | Financial Concept | Conceptual Financial Knowledge | Procedural Financial Knowledge | Applied Financial Knowledge | |:---:|:---:|:---:|:---:| | Interest Rates | Understanding what interest rates are and how they affect loans and investments. | Knowing how to calculate simple and compound interest. | Applying knowledge of interest rates to choose between different loan or investment options. | | Inflation | Understanding how inflation affects the purchasing power of money. | Knowing how to calculate the impact of inflation on prices over time. | Applying knowledge of inflation to plan for future expenses and investments. | | Risk | Understanding different types of financial risk and their implications. | Knowing how to assess and measure risk in various investments. | Applying risk assessment techniques to diversify investments and minimize losses. | | Diversification | Understanding the concept of spreading investments to reduce risk. | Knowing how to create a diversified investment portfolio. | Applying diversification strategies to manage and reduce investment risk. | | Time Value of Money (TVM) | Understanding the principle that money today is worth more than the same amount in the future. | Knowing how to calculate present and future value of money. | Applying TVM calculations to make informed financial decisions about investments and loans. | | Types of Insurance Policies | Understanding different types of insurance policies and their coverage. | Knowing how to select and purchase insurance policies. | Applying insurance knowledge to select suitable policies for personal and family protection. | | Various Types of Bank Accounts | Understanding different types of bank accounts and their features. | Knowing how to open and manage different types of bank accounts. | Applying the right type of bank account for specific financial needs. | - **Self-Assessment Questions (Financial Knowledge):** Categorize the following knowledge into conceptual, procedural and applied financial knowledge. - Neha learns that the interest rate on her loan affects the total amount she will repay. **Conceptual** - Ravi calculates simple interest on a savings account: ₹ 10,000 at 5% per annum = ₹ 500. **Procedural** - Priya compares interest rates on different personal loans to choose the most affordable option. **Applied** - Raj understands that inflation erodes purchasing power. **Conceptual** - Ananya calculates the impact of 3% annual inflation on her monthly grocery bill over five years. **Procedural** - Sunita adjusts her retirement savings plan to account for expected inflation rates. **Applied** - Priya learns about market risk and credit risk. **Conceptual** - Amit assesses the risk of different mutual funds by analyzing their past performance. **Procedural** - Rahul diversifies his investment portfolio to minimize the impact of any single investment's poor performance. **Applied** - Amit understands the benefits of spreading investments across different assets. **Conceptual** - Meera creates a diversified portfolio by investing in stocks, bonds, and mutual funds. **Procedural** - Kiran adjusts his investment strategy to include international assets, reducing overall portfolio risk. **Applied** - Geeta understands the differences between term life insurance and whole life insurance.**Conceptual** - Shyam learns how to compare insurance policies and choose the best coverage. **Procedural** - Divya selects a health insurance policy that covers her family's medical needs. **Applied** - Sruthi understands that ₹ 1,000 today is worth more than ₹ 1,000 in the future due to earning potential. **Conceptual** - Suresh calculates the future value of ₹ 5,000 invested at 8% annual interest for five years. **Procedural** - Kavita decides to invest a lump sum inheritance in a fixed deposit to maximize its future value. **Applied** - Sita understands the differences between savings, current, and fixed deposit accounts. **Conceptual** - Rohan learns how to open a savings account and set up online banking. **Procedural** - Anil decides to open a fixed deposit account to earn higher interest on his surplus funds. **Applied** ### Financial Skills (Proficiencies) - **Financial Skills:** Financial skills refer to the ability to apply the acquired financial knowledge in the analysis or evaluation of various financial alternatives. It also covers the competency to manage the uncertainties associated with certain financial decisions. - **Ability to earn money.** - **Ability to spend and save as per the personal financial budget.** - **Ability to explore more options to invest surplus money.** - **Ability to compute the cost of borrowing.** - **Ability to tap funds at lowest cost.** - **Ability to forecast the consequences of borrowing.** ### Financial Attitude - **Financial Attitude:** It refers to the motivation and readiness to use the financial knowledge and financial skills while taking financial decisions. Therefore, it is a personal response or tendency that lead to a financial action or financial behaviour. - **Tendency to Look Beyond Short-Term Perspective (Long-Term Planning):** Sreelakshmi a young professional, prioritizes saving a portion of her salary every month for her retirement, even though her retirement seems far off. This demonstrates her long-term financial planning perspective, ensuring financial security in her golden years. - **Contrast:** Manoj prioritizes spending his entire salary on current needs and wants, neglecting to save for the future. This short-term perspective might lead to financial difficulties later in life. - **Tendency to Consider the Impact of Decision on Others' Wellbeing (Financial Responsibility):** Suby invests a portion of her savings in her daughter's education plan. This demonstrates her financial responsibility, prioritizing her child's future well-being. - **Contrast:** Raj spends a significant amount of his income on gambling, neglecting his family's essential needs. This irresponsible financial attitude can negatively impact his family's financial security. - **Lack of Self-Control (Impulse Spending):** While window shopping, Maya falls prey to impulse buying and ends up purchasing a dress she doesn't necessarily need and can't afford. This highlights a lack of self-control, potentially derailing her financial goals. - **Contrast:** Mathews maintains a shopping list and sticks to his budget, avoiding unnecessary purchases. This demonstrates self-control regarding spending habits, ### Financial Behaviour - **Financial Behaviour:** It is the actual behaviour in financial decision-making situations such as financial planning, spending, savings, investment, borrowings to meet daily requirement, etc. It is the outcome of financial knowledge, financial skills and financial attitude. Good financial knowledge, financial skills and financial attitude lead to good financial behaviour. - **Indicators of Good Financial Behaviour:** | Budgeting | Savings | |:---:|:---:| | Has identified a realistic financial goal | Avoids unnecessary spending | | Has made a written budget | Spends less than income | | Follows a spending plan | Has a realistic savings plan | | Has a plan for future expenditures | Owns a savings account | | | Puts aside savings as soon as money comes in | | | Has an emergency fund | | | Saves regularly | ## UNIT IV: FINANCIAL LITERACY AND FINANCIAL EDUCATION - **Financial literacy**: Financial literacy is one of the most basic and critical skills that an individual should possess to achieve financial growth and success. The financial wellbeing of an individual is the result of his/her financial literacy whereas financial literacy is the outcome of proper financial education. - **Financial Education and Financial Wellbeing:** The process by which financial consumers/investors improve their understanding of financial products, concepts and risks, and develop skills and confidence to make informed financial decisions to expand their financial wellbeing. - **outcomes of financial education:** - Reduced amount of time spent for managing financial matters - Use of budget to manage money - Maintenance of emergency savings account - Financial stability - Achievement of financial goals - Motivation to plan ahead and set a financial goal - Independent financial decision - Reduced debt - Increased savings - Successful financial or business negotiation - Reduction in financial stress - Greater satisfaction with financial situation - **Financial illiteracy**: Financial illiteracy implies the lack of financial knowledge or lack of proper financial skills. It leads to poor financial decisions. The major pitfalls or consequences of financial illiteracy are given below. - Absence of household budgets and financial goals - Overspending and poor investment decisions - Losses due to financial frauds and scams - Bad credit or availing credit at high interest rate - Excessive debt - Physical and mental issues associated with being in debt - Bankruptcy - **Financial well-being**: A state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life. The person has; - control over day-to-day or month-to-month expenses and incomes - capacity to absorb a financial shock - capacity to attain his/her financial goals, and - the financial freedom to make the choices that allow you to enjoy life - **Components of Financial Education:** Financial education is essential for helping individuals make informed financial decisions and achieve financial well-being. - **Basic financial education:** Covers fundamental financial concepts and practices that everyone should know. | Concept | Description | Example | |:---:|:---:|:---:| | Savings | Setting aside money for future needs and emergencies. | Emergency fund, savings account | | Managing Loans | Borrowing within one's repayment capacity. | Avoiding high-interest personal loans | | Interest and Compounding | Earning interest on savings and the power of compounding. | Compound interest on a fixed deposit | | Time Value of Money | Money's value, changing over time. | Investing early to benefit from compound interest | | Inflation | Decrease in purchasing power over time. | Price of goods increasing due to inflation | | Insurance | Protecting against financial risks. | Life insurance, health insurance | | Retirement Planning | Preparing financially for retirement. | Pension plans, provident funds | | Financial Institutions | Understanding key financial players. | Role of RBI, SEBI, IRDA, and PFRDA | | Risk and Return | Balancing potential gains against potential losses | Investing in stocks versus fixed deposits | - **Sector Focused Financial Education:** Covers detailed information specific to different financial sectors. | Sector | Concept | Description | |:---:|:---:|:---:| | Banking | Bank Accounts | Types of accounts and their features | | | Negotiable Instruments Act | Responsibilities and legal aspects | | | ATMs and Net Banking | Safe usage practices | | | Types of Loans | Fixed versus floating interest rates | | Securities Market | Stock Exchange Mechanism | Basics of trading, clearing, and settlement | | | Intermediaries | Roles of brokers, merchant bankers, registrars, etc. | | | Margin Trading and Derivatives | Risks associated with these activities | | Insurance | Types of Policies | Life insurance, health insurance, and general insurance | | | Premium Payments | Importance of regular premium payments | | Retirement Planning | Pension Plans | Role of pension fund managers and annuity service providers | | | Trading and Risks | Understanding commodities trading and associated risks | | Commodities Market | | | - **Product Oriented Financial Education:** Ensures that the consumer understands the product's features, risks, and benefits. The education should be neutral, providing a comparison of various options within the product range. | Product Type | Concept | Description | |:---:|:---:|:---:| | Banking | Types of Accounts | Savings, current, and fixed deposit accounts | | | Loans | Home loans, personal loans, and fixed vs. floating interest rates | | Insurance | Policy Types | Life insurance, health insurance, and general insurance | | | Coverage and Premiums | Benefits and costs associated with insurance policies | | Investments | Mutual Funds | Different types of mutual funds and their risk-return profiles | | | Stocks | Understanding stock market investments | | | Bonds | Features and benefits of investing in bonds | ## UNIT V: FINANCIAL SOCIALIZATION - **Financial Socialization:** A process of learning in an individual's life that directly or indirectly influences his/her actions, beliefs, and behaviour, etc. Through this process, an individual is inducted into the social world or he/she internalizes the norms and ideologies of the society. - **Financial socialization may be defined as the process of acquiring and developing values, attitudes, standards, norms, knowledge and behaviour that contribute to the individual well-being.** It helps the individuals to develop financial skills like budgeting, banking, saving, investing, etc. - **Outcomes of financial socialization include:** - Financial Knowledge - Financial Attitude - Financial Behaviour - Financial Wellbeing - **Financial Socialization in Daily Life - Practical Examples:** - **Jessy** is a 35-year-old woman living in a rural village in Kerala. Her family's income mainly comes from small-scale farming and occasional labour work. Despite their hard work, they struggled to manage their finances and often found themselves in debt. - **Outcomes of Financial Socialization Process:** - **Financial Knowledge:** Jessy learned how to create and maintain a budget, understanding the importance of tracking expenses and setting savings goals. - **Financial Attitude:** She developed a positive attitude towards saving and became more disciplined in her spending. - **Financial Behaviour:** She regularly practiced budgeting and saving, reducing unnecessary expenses and gradually building an emergency fund. - **Financial Wellbeing:** Over time, Jessy's family experienced improved financial stability, reducing their debt and feeling more secure about their financial future. - **Rajesh** is a 28-year-old factory worker in an urban area. He earns a steady income but lacks financial knowledge and often spends impulsively, resulting in minimal savings and frequent financial stress. - **Outcomes of Financial Socialization Process:** - **Financial Knowledge:** Rajesh gained knowledge about various financial products, such as savings accounts, fixed deposits, and mutual funds. - **Financial Attitude:** His attitude towards money changed, recognizing the importance of saving and making informed financial decisions. - **Financial Behaviour:** Rajesh started saving a portion of his salary each month, invested in a recurring deposit, and began planning for future expenses. - **Financial Wellbeing:** With improved financial habits, Rajesh experienced less financial stress and started building a financial cushion for emergencies. - **Liya** is a 20-year-old college student from a middle-class family. Her parents are financially savvy and have always involved her in discussions about family finances. - **Outcomes of Financial Socialization Process:** - **Financial Knowledge:** Liye learned about budgeting, saving, and the importance of building a credit history. - **Financial Attitude:** She developed a responsible attitude towards money, valuing financial security and planning. - **Financial Behaviour:** Liya managed her allowance well, saved part of her pocket money, and started investing in a small mutual fund under her parents' guidance. - **Financial Wellbeing:** By the time she graduated, she had a healthy savings account, a good credit score, and a strong foundation in financial management. - **Financial Socialization Agencies**: Financial literacy, the ability to make informed financial decisions, isn't learned overnight. It's a continuous process shaped by various "socialization agents" people encounter throughout their life. - **Parent-Child Financial Socialization:** Parents are often the first and most influential financial socialization agents. They instil basic financial concepts and attitudes through direct teaching and role modelling. Parents, through everyday interactions, instil financial values and habits in their children. They might involve their children in; - Budgeting exercises - Discussing household expenses related to groceries (like budgeting for weekly vegetable purchases at a local vegetable shop) or utility bills. - Observing parental saving habits, such as utilizing schemes like the Kisan Vikas Patra (KVP), can leave a lasting impression on the child. This may encourage children to save a portion of their pocket money in a piggy bank or a minor savings account. - **Teacher-Learner Financial Socialization:** Schools play a crucial role in shaping financial literacy. However, teachers can integrate financial concepts into existing subjects like mathematics (calculating interest rates) or social studies (exploring the concept of inflation). Initiatives like the National Centre for Financial Education (NCFE), separate financial literacy curriculum for students can equip students with basic financial knowledge. - **National Centre for Financial Education (NCFE):** It is a Section 8 (Not for Profit) Company promoted by Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA). - **Peer-Peer Financial Socialization:** Friends significantly influence financial behaviour, especially during adolescence. Peers influence financial decisions and behaviours, especially among youth. Peer discussions and shared experiences can lead to better financial understanding and practices. Social interactions often play a pivotal role in shaping financial attitudes and behaviours. - **Media Financial Socialization:** The media, including television, newspapers, social media, and online platforms, plays a significant role in disseminating financial information and shaping public perceptions about financial matters. Media campaigns and financial literacy programs can reach a wide audience and influence financial behaviours. - **Employer-Employee Financial Socialization:** Financial socialization extends beyond childhood. The workplace plays a role in shaping financial well-being. Employers offering financial wellness programs, workshops on budgeting or investment planning or pension schemes or SIPs, can empower employees to make sound financial decisions. In India, some employers might offer salary accounts with features like automatic savings options, encouraging saving habits. - **Producer-Consumer Financial Socialization:** Marketing strategies employed by the financial services industry can target young people's aspirations for financial freedom. Understanding the difference between needs and wants, and avoiding falling prey to predatory lending practices advertised online, becomes crucial for responsible financial behaviour. - **Family Financial Socialization Theory (FFST):** Financial socialization occurs through different channels like school, colleges, family etc. Among these channels, financial socialization through family has the strongest impact on financial literacy. The process of acquiring financial knowledge and developing necessary financial attitudes, skills and behaviour through parental influence or other members in the family is known as family financial socialization. - **Implicit