Importance of Money

In our school days definition of basic necessities of life was food, clothes, and shelter. But in today’s era, just the basic necessity to have food twice a day, to live under a concrete shelter, or to have clothes to wear is not sufficient. It is a must to have some means of communication, access to the latest information, and some space for emotional well-being. The definition of basic necessity has shifted now. Can we imagine ourselves without a phone or access to the internet for a day? Feels like impossible it will hamper our day-to-day activities, probably our work, and many other things. As we move towards one-click technology where things can be done just in a few clicks with an instrument that accompanies us 24 by 7, without going anywhere or struggling much, our definition of basic necessity has changed. Rather than a necessity in the changing world few changes have become mandatory, because they make our life easy, save time, and reduce our waiting time. One of the important aspects behind our basic necessities or our required mandatory necessities is money. The simple definition of money is the means of paying for something or buying something. We all might have heard that “money cannot solve all our problems” which is true. Money cannot buy us mental peace or inner happiness, but having said that we also agree to the point that money can solve a lot of problems. Money works in a very simple way, if you want any product or service just pay for it the intended amount and then you can have that product or service. Though it has a very simple terminology and its working is not complicated at all any person who knows basic mathematics can decide if he has the intended amount and whether he can purchase the required item or service. But still, we often hear people saying ‘I am not good with money’ or ‘Money management is complicated,’ ‘Financial planning is not my cup of tea,’ and ‘Financial terms are difficult to understand.’ As we grow up major problems in our life or the root cause for any difficult situation or the reason of worry will be related to money. A rich man worries about how to handle his wealth, while a poor worries about how to earn the wealth. At every stage of life since we are born till, we die we need to think about money still this is not one of the major subjects in school curriculums. Since our childhood, we have considered money as a very serious matter and a complicated one. We are taught that it is important to earn money for our livelihood and to live a comfortable life, but nobody has taught us how to manage it, how to invest it wisely, and how to put money to work when we are sleeping.

Problem with Financial Literacy

Apart from the people who have studied the finance-related courses, for the rest of the world which we call it as non-finance background managing personal finance is a problem. We often pay for financial consultancy or engage an advisor to ensure we can manage the finances, nothing wrong with that until you do that to get some extra advice or delegate it as you have other important things to work on. The problem comes when you delegate or take help because you do not have any knowledge on the same and it is just not possible to learn it. Often it is questioned to a non-finance guy, that do you understands all the terms in the salary slip, how are your earnings calculated, how is the tax calculated, and how should invest. In most of the cases, they are not aware. We are often told by our elders, to save the money, use wisely, do not spend on unnecessary stuff. But we are not taught on what are the different ways to invest, the importance of investment, how to earn more returns on your investment, and how to deal with inflation rates.

Let us understand a scenario where just saving the money and putting in a locker is not going to help in future. Let us assume today someone gives you 100 rupees to buy some XYZ product and instead of buying you put those 100 rupees in a locker. After 10 years what do you think happens to the money in the locker will the value get 10 times will it be 1000? The answer is no, its value is not going to be 1000. Its value would be decreasing. The value of 100 rupees in 2023 might be equivalent to 20 rupees of 2033. In fact, if we take the inflation rate as 6% per year, the cost of product XYZ will be 180 or more than that in 2033.

Though money is very important but we are scared to think about it. Personal finance is a skill and is not a natural gift. It must come with a lot of patience, effort, and experience. The reason it is not taught in school is may be that we still do not emphasize on the concept that money can be put to work to earn more money. Our educational system is not upgraded with the fact that one of the important skills in a person’s life is money management. And at last, maybe this requires a lot of practical work and experience, just theories are not going to help.

Money Management should be a habit

Right from our school if we are taught practically the concept of how money works it will help during the actual stage of life where you earn it and you need to handle it. Let us take a scenario If we give 100 rupees to a kid of fourth or fifth grade and ask a choice, what will you select if you can purchase 1o gram copper with that amount or purchase 1 gram gold? In this scenario to take the correct decision kid should be aware that copper and gold hold a different value, and in this case instead of quantity the value matters. But if he is not aware of the difference, he might choose the one which is offered with greater quantity. These kinds of practical lessons could be taught in school with some activities. Another possible activity could be if you are given some x amount of money, how should you spend it. In order to answer it we should first explain the concept of budget why it is required, what is the difference in needs and wants, what are the things that are needs, and should be prioritized first, what can be compromised, what amount should be spent, what amount should we keep for an emergency. If we train our mind since the childhood, it becomes very easy and clear when we have to actually handle those situations. It is always a stressful moment when we need to discuss the budget at home or prioritize things.

Everyone in our society deals with money right from a person selling vegetables on road, people running a business or working in corporates or a housewife, or maybe a house help. In a nutshell, everything drills down to fiancé at the end. The literacy rate in India is 77%, but the financial literacy rate is close to 27%. In a growing economy like India, only 3% of Indian households are actively investing in the stock market. Because stock market is considered risky or it is gambling. The reason behind this low numbers is the issue of financial literacy. In fact, stock market investment is not gambling a lot of analysis is needed in the company’s fundamentals, you need to track the quarter results and keep an eye on when to enter and when to exit. In school, we are taught about cost price, selling price, simple interest, and compound interest, and we very well do the calculations or solve the problem statements to find out the profit or loss and its percentage. But we do not know how that applies in actual life. Terms like savings, investment, debt, asset, and liabilities are very important to understand. With the steady growth of the Indian Economy numerous startups have entered the market, one of the major reasons of unsuccessful startups is not because of poor product or marketing but a lack of financial education on how money works.

People are trapped in the cycle of loans and debts. We all might have mugged the compound interest formula in school, but we do not know how powerful that concept is. “Money makes money” this statement is justified by the concept of compound interest. Let us say you have 1000 Rs you put in a bank that gives you 5% annual interest, after 2 years what will be the amount? Practically after one year, you get 50 Rs on 1000 Rs, but after 2 years will again 50 Rs be added? That means on 1000 Rs and 5% annual interest after 2 years you will get 100 Rs, answer is no. There comes the power of compound interest, in the second year you get 5% on 1050 and not 1000, which is 52.50 Rs, and hence in total you get 102.5 Rs, and the new balance becomes 1102.50 Rs. If this concept is applied to the money that you have in savings accounts, where it will increase the bank balance, the same concept gets applied to credit card charge interest or when you borrow money. If you do not pay the credit card bill each month, the next month's interest is calculated on a higher amount. There are so many lessons to be learnt from the concept of compound interest, start investing as early as possible, do not take loans with high interest rates, and do not compound your interest in delaying credit card payments.

Half of our life just goes into paying back the loans. Right from childhood if we are taught about this financial concept from the grassroots level, we would be able to make better decisions. I have met very few people who aspire to be financially free and are working towards it with a plan.

Conclusion

Money cannot be simply stored; it must be invested. Just keeping the money in a locker or bank account cannot beat the inflation rate. Today everything is becoming costlier if we just compare its prices to the previous year. Our parents or grandparents might not have imagined that the prices of tomatoes or onions could reach a stage where it would be like a luxury if you can afford it. So just earning the money is not important but at the same time, we need to plan the investment with a goal. Today there a lot of options available which could be very basic like having a fixed deposit, or to some advance like buying a stake in some companies, or buying a property, or having digital gold. Based on our earnings, our current needs, our future requirements, and our risk-taking appetite we should plan our financial goals and focus on achieving them. We need to also consider how can we plan for different income streams, passive income, retirement, and healthcare emergencies. Do not trap yourself in offers that just ask you with an investment of 10K Rs and will return 1 Cr. There is no shortcut to earn money. Instead, focus on clearing the basics and start laying a strong foundation. Gone are the days when you had savings coming from ancestors. Today we are struggling for our better living it is very difficult to save for our grandchildren. But you can advise them on financial planning and importance of it.

Today we have access to unlimited information, and there are a lot of sources through which we can start our journey to become financially literate and at a later stage independent. This journey is not the same for all of us, we must figure out what best works for us and make it a habit which later will be converted to a skill. We can seek for advice or learn from others experiences, but we need to have our own perspective and thinking which should evolve with time. Let's start with a step-by-step process to understand finance, make it a habit by practicing on a small scale, improve your learning, set a goal, and focus on achieving the goal. Let us all change the notation that we are referring to as ‘Non-Finance’ to Finance.

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