One day, I was sitting in my college canteen when I heard a few of my juniors talking about mutual funds, equities, and the stock market. I was unaware of these terms. I decided to search for it on the internet when I learned about the concepts of investing. I was around 28 years old then, and I realized I was late to start my financial planning.

To make you understand better, let me give you an example that will explain you the power of compounding and the need to start investing early. Suppose you start a SIP (Systematic Investment Plan) of Rs 2000/month, starting at the age of 30 years. Assuming an annual return rate of 14% and retirement at the age of 60 years, you will have a total of approximately Rs 1 crore 11 lakhs at 60 years of age. If the same is started at 25 and 20 years of age, the accumulated amount will be approximately 2 crore 24 lakhs and 4 crore 52 lakhs, respectively.

With the above example, you can easily understand how planning your finances and investing early can secure our financial future at the time of retirement.

Though money management is considered a concept in adulthood, forming a foundation of financial literacy at an early age can improve financial as well as overall well-being of the individual later in life.

Let us understand what financial literacy means...

Financial literacy is an important skill that enables individuals to manage their finances effectively, make informed decisions, and achieve long-term financial stability. It helps individuals to become self-sufficient and independent financially. Considering today’s complex economic structure, it is essential for young individuals to develop financial literacy from an early age.

Understanding Basic Financial Concepts

Financial literacy helps young individuals to have a solid understanding of financial concepts, such as budgeting, saving, taxation, investing, and managing debt. Knowledge of these concepts will help them to manage their finances confidently, avoiding costly mistakes. Individuals who receive financial education are more likely to save, invest, and manage debt effectively.

Benefits of Early Financial Literacy

1. Early Financial Independence: Knowledge of how to manage finances early can help young individuals to achieve financial independence early and reduce dependency on others.
2. Proper Financial Decision-Making: Knowledge of finance can help young individuals to make proper, informed decisions regarding taxes, investments, and loans. It also boosts their confidence in decision-making without having to rely on others.
3. Risk Management: Financial literacy can help individuals to tackle financial risks and protect them from various scams.
4. Making Individuals Debt free: Because of rising costs of education, many students take loans for their education. Knowledge of finances can help students to become debt free early.
5. Wealth Creation: Early financial literacy can help individuals for long-term wealth creation through smart investing and saving.
6. Improved Mental Health: We all know that money matters can take a significant toll on mental health. Knowledge of finances reduces stress and anxiety and improves mental health.

How to Develop Financial Literacy at a Young Age

1. Integrating the concept of financial literacy in the school curriculum: Before discussing this, let me give you an example. My niece and nephew are 11 and 9 years old, respectively. Their school organized a fair/picnic in which everybody was supposed to bring some eatables from their home and sell them at the picnic. The kids can buy the eatables of their choice from the other kids. After the picnic, they both earned around 100 Rs. each and ate food of around 25 Rs. They were very happy that they saved 75 Rs. I asked them what they would do with the money, and they said, “We will tell Father to keep the money in our bank account so that we can save it for our future”. With a fun activity, the school was able to teach about the importance of money to children at such a young age. School is a place where children inculcate maximum knowledge. Integrating the concept of finances into the school curriculum can help teenagers develop financial literacy from a very young age.
2. Parental guidance: Parents usually refrain from discussing financial matters with their children, considering them to be too young for such matters; however, it is said that children learn from their parents. Discussing financial matters with their children and teaching them about finances can help children develop an understanding of financial literacy. Parents can try to involve children in small money matters like managing small household expenses, or they can pay them small pocket money and encourage them to save from the pocket money. Also, parents can motivate children to start earning early in life. These activities will make them understand the importance of money, regulate their spending habits, and make them responsible regarding their finances.
3. Online Resources: Multiple resources are available online, like websites, apps, blogs, and videos, to educate people about finances. Young individuals can utilize such platforms to gain knowledge about finances. Some of these are also available for free or at very nominal rates.
4. Workshops and Seminars: Multiple workshops and seminars are available to educate young individuals about personal finance. Encouraging children to attend them can enhance their knowledge about finances.
5. Personal experience: Parents can help young individuals to understand finances through small tasks like saving from pocket money or doing part-time jobs.

Drawbacks of Financial Illiteracy

Lack of financial literacy can make a person accumulate more debts or loans due to poor financial management, which can cause bankruptcy, poor mental health, and an overall poor quality of living.

Conclusion

Financial literacy is an important skill for young individuals to manage complex financial responsibilities. By developing financial literacy from an early age, individuals can achieve early financial independence, make proper financial decisions, create wealth, minimize financial risks, and improve their mental health. Schools, parents, and policymakers can make a significant contribution in teaching the concept of financial literacy to students by prioritizing financial education and helping young individuals to secure their financial future.

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