1

Financial Literacy

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• • •~ng this chapter, you should be able to understand:
► the basic knowledge of financial literacy;
► key concepts in personal finance;
► benefits of financial literacy.

1.1 Introduction
In the modern society, financial literacy has a significant role. Every person should be taught financial
literacy as a life skill to handle their personal finances. The complexity of financial goods, the prevalence
of fraud and Ponzi schemes, the need for money to attain a better quality of life after retirement, etc. are
just I few of the problems people deal with. These problems have created a demand for better personal
financial management, including proper control of income and expenditure. People who receive
financial education become more financially literate and adopt a responsible attitude toward managing
their income, expenses, assets, and liabilities, which will ultimately improve their financial well-being.
For every household, financial planning is a necessity. Savings alone are not enough for financial
planning. It is a financial commitment with a goal. Budgeting should be done properly since it is a
strategy to conserve and spend money from future income. With the help of this literature, readers
can gain a basic understanding of personal finance, including information on financial planning, key
financial literacy concepts, different investment opportunities, wealth creation components, insurance
and pension products, retirement planning, warnings against Ponzi schemes, tax-saving strategies,
investor protection measures, dos and don'ts of investing, etc. The student will have a better grasp ofand
 ----··-

1
Financial Literacy

Learning. Ouicome5. .1··-- - - - - - - - - - - - - - - -

,-•Ahe;st~d~i~~ this chapter, you should be able to understand :

► the basic knowledge of financial literacy;
► key concepts in personal finance;
► benefits of financial literacy.

1.1 Introduction
In the modern society, financial literacy has a significant role. Every person should be taught financial
literacy as a life skill to handle their personal finances. The complexity of financial goods. the prevalence
of fraud and Ponzi schemes, the need for money to attain a better quality of life after retirement, etc. are
just a few of the problems people deal with. These problems have created a demand for better personal
financial management, including proper control of income and expenditure. People who receive
financial education become more financially literate and adopt a responsible attitude toward managing
their income, expenses, assets, and liabilities, which will ultimately improve their financial well-being.
For every household, financial planning is a necessity. Savings alone are not enough for financial
planning. It is a financial commitment with a goal. ~udgeting ~hould be done properly since it is a
strategy to conserve and spend money from future income. With the help of this literature, readers
can gain a basic understanding of personal finance, including information on financial planning, key
financial literacy concepts, different investment opportunities, wealth creation components, insurance
and pension products, retirement planning, warnings against Ponzi schemes, tax-saving strategies,
investor protection measures, dos and don•ts of investing, etc. The student will have a better grasp of and
 1.4 II Financiol Lit"a cy

ial w,11-being by u nderst ,J

ability"' manag, their p,rson al finances in onler to improve their financ
financial literacy.

Definition of Anancial Literacy

s and skills such as budgetinc
Financial literacy is the cognitive understanding of financial component
absence of such ~kills i
investing, borrowing, taxation, and personal financial management: The
become self-sufficient, ,
referred to _as being financially illiterate. Financial literacy makes individuals
es should be able to ans,
that financial stability can be accomplished. Those who understand financ i
whether it is accessible,
questions concerning transactions, such as whether an item is required,
that benefits you throughou
whether it is an asset or a liability. Managing your money is a personal skill
your life - and not one that everybody learns.

1.2 Benefits of Anondal literacy .

through an increase •
Being financially literate an improve the standard of living for individuals
ially literate:
financial stability. Listed bdow are the assortment of benefits of being financ
• Ability to makt better nnancial decisions.
• Etfectivt management of money and debt.
• Greater equipped to reach financiai goals.
• Reduction of expenses through better regulation.
• Less financial stress and anxiety. . .
s, and using
• Increase in ethical decision-making when selecting insurance. loans, investment
credit card.
• .EtfectM aation ofa structured budget
of life that can ensu
Making steps to becoming .financially literate is an important component
financial solidity, reduce anxiety, and stimulate the achievemenl of financial goals.

J.3 Key Concepts in Personal Rnance

be aware of when managin]
Th~ following are a few crucial personal finance ideas that a person should
theu 6nancts:

(i} What are sewings?

The difference between income and expenditures is savings.
, etc.
• lncom~ Cash received from a variety of sources, including salaries, wages
al purchases. Most peoplf
• ~~t u~: The amount of money spent on both essential and option
a bank's savings accoun
use t~ savings to ach~eve their short-term objectives. Money kept in
earns a little amount of mterest and is simple to access whenever needed.
People can save money in savings accounts at banks, post offices, etc.
 Fln11nclal Literacy II I .S

(ii) What are Investments?

Th act of investing involves putting money from savings into financial or non-financial products
.eh the hope of generating larger returns over time. Investments can be made in a variety of items.
~tclt ding financial ones like fixed-rate bank deposits, stock market purchases, mutual fund investme
10 u nts.
d non-financ1·a1 ones l'k
I e the acqumt1
• • •on of real estate, precious metals. such
as gold and silver.
etc., an ts can be made ,or r short-. med'1um-. or long-term goals.
Jnvestmen . One should constantly keep in mind
when investing that returns on investm ents may change over time and that is very natural.
Difference between Savings and Investments is mentioned in the table below:
~

Savings In Bank Accounts hmsbnent la Fmdl>epolltsaad

Other fm--1 Plocllldl
-I,eaning A portion of one's income which is not used Putting your money in various investment
for expenses products to make money grow.
Savings are made to maintain liquidity to Investments are made to make the money
Purpose
meet short term or urgent requirements grow by creating assets that can generate
. income in the future/increase value of assets.
Low or negligible Depends upon the asset in which investment
Risk
is done.
~

Liquidity Highly liquid Comparatively less liquid

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(iii) What is the importo_nce of saving and investing?
When you invest money, 1t gro~s for ~ou. Any rise in the investment's value over time, or investm
ent
. come or returns that you receive, brmgs you one step closer to achieving your financial objective
s.
~arly in life, one should begin to invest and save. The earlier you get started, the higher your chances
are of achieving your objectives, like as owning a home, paying for your child's education, saving
for
retirement, etc.

(iv) What ore assets and liabilities?

Your assets are things you own and have economic value, whereas your liabilities are things you owe
to
or have borrowed from others. It is your asset, for instance, if you save and then invest in a fixed deposit.
On the other hand, if you borrow money or take out a loan from a bank or another person, you are liable
for the loan.

(v) What is Debt?

Money borrowed to meet shortfall of money when expenses are more than the funds available in hand
is called debt.
 1.6 II Finandal Utm,cy

(vi) What is the Time Val~e of Money?

As time goes on, you'll learn that if you could afford to buy a whole lunch for a certain amount of money
10 years ago, you could probably afford to buy only a fraction of the meal for the same amount of money
today. This indicates that a 500 Rupee note would be worth more now than it would in five years. Even
if the note is the same. if you have the money now, you can accomplish much more with it because over
time. you can make it grow by earning interest on it By investing the 7500 you receive now and earning
interest or capital growth over time. you can enhance the amount of money you will have in the future.
The time value of money proves that time truly is money at its most fundamental level, i.e., the value of
your money today is different from what it will be tomorrow and vice versa.

(viil What is Inflation and i1s Effect on Investments?

Price increases for products and services are referred to as inflation. The ability (?fa unit of money, such
one rupee. to buy goods and ~rvices over time decreases as the price of goods and services rises. In
other words, ~e purchasing power of money. or the degree to which it can be used to purchase anything,
declines. When making financial plans. it~ critical to consider how inflation may affect your investments.
Since inflation lowers the value ofan investor's investment, investors are extremely afraid of it.

(Yi) How does Inflation Affed my Investment Decision?

Five years ago, a Vada Pav costing Rupees 2 would today cost Rupees 1. This price increase is due to
inflation, which has an effect on the prices of the ingredients and ultimately the final product, rather than
a higher yicJd or higher quality of Vada Pav.

(iiJ What n the steps that you ain take to avoid the adverse effects of iaflation? •
Try to caJculaltJOII' •...i ratt ofmum." or the return you may anticipate aftlr accounting for inflationary
etfecu. You can mvest the money you have now at a rate that is equal to or higher than the rate of inflation
to lesstn the chance that it will lose value.

(x] What is Power of Compounding?_

Simplt inte~st simply allows you to earn interest on the principal, or the amount you initially invested·
_compound mtemt, however, allows you to earn interest on both the principal and previously earned'
mttrest .
Ltt ~s understand the magic of compounding with the help of an example.

far Prindpal Rite ofreturn °--m •amed

AC"1u.. Maturity value
1 1,000 9% 90 1,090
2 1,090 9% 98 1,188
(1,000 +interest earned 90)
3 (1,000 +interest earned 90 + 98) 9% 295 1295
1r------~-

Fi1111ncuil Utna cy II 1.7

Yea Prind pal ~ofr etan a ltetaraeaned Matur ityffla e

2,172 9% 195
10 2,367·
5,142 9% 463
20 5,604
28,816 9% 2.593
40 31,409

,.At the end ofeach year, the principal amount is adjusted to reflect the addition of the return received
return earned on growing principal also risn h . . al
during that year to the principal. The investment off 1,000 becomes , year~,ou
aft•..reac years. pnnci p
above, an initial . . . ,
31409 40 earn a
does. In the example forth. In contrast, with simple
return on the return that was already earned when 1t 1s reinvested, and so
. and with annual interest of
interest, the principal amount stays at $1,000 for the whole 40-year period
90, the amount only increases to f 74,600.
al for the second year.
Note: Principal + Return from the first year collectively becomes the princip
al for the third year
Principal + Return from the second year collectively becomes the princip
and so on

(xi) The Rule of 72

double your money by simply
According to mathematicians, yo~ can calculate how_Iong it will take to
s gift you S200, and you intend
dividing 72 by the interest rate. Lets say that for your birthday, your parent
you deposit it in an account that
to invest it. How long will it take for the money to increase to 400/- if
generates 6 percent {6%) interest annually?
72 I 6% interest= 12 years
So, in 12 years, your money will have doubled to ?400/-

(xu) Rupee Cost Averaging

r intervals regardless of market
By using rupee cost averaging, you can invest a set sum of money at regula
units at high unit prices. By
volatility. For instance, you purchase more un(ts at low unit prices and fewer
task of attempting to determine
sticking to a timetable, you can avoid the difficult or perhaps impossible
units, the rupee cost averaging
the precise optimal time to spend. By averaging out the costs of your
.
efect decreases the influence of short-term market swings on your investments
For example, look at the table below:
• Month Amountp aid Cost per unit Number of units bought (Amount paid/ Cost)
Jan 2000 50.00 40
Feb 2000 41.67 48
Mar 2000 47.62 42
Apr 2000 58.82 34
May 2000 71.42 28
Jun 2000 66.67 30
1.8 \I Financfal Urercacy

1 Number of units boqht (Amount paid/ Coll)

Month Amountpalcl Cost per aalt
50
\u\ 2000 40.00
42
Aug 2000 47.62
44
Sep 2000 4S.45
32
Oct 2000 [Link]
[Link] 36
Nov 2000
S0.00 40
Dec 2000
466 units
Total 24.000
From the abo\"9 it can be Stffl that with a total investment of {24:000/- ove~ a period of twel\1e
. ____.____. "a units of Mutual fund. The average pnce per unit comes to 751.501•
[Link] anvcstorRU:Jv~-
(i.e., 724.000/466 = [Link]/-).

(xiii) WhJto keepfflOMJ in banks?

1ht following are drawbacks of storing cash at home:
• Loss of growth OPPORTUNITIES - Loss of interest income.
• Unsafe Monty can be Stolen or Lost Due to Natural Calamities. .
• No/Low Credit Eligibility; Deposits in Banks Create Eligibility for Borrowing.
Al a mult. it is advantageous to hold cash in banks rather than at home.

(xiv) Banking
Sinct commercial banks deal with public funds and trust, they are regulated financial institutions.
The Reserve Bank of India oversees commercial banks in India. At regular times, banks must undergo
mandated audits and inspections. The Reserve Bank of India also conducts an annual audit of banks.
Im·estments with a reduced risk profile include bank savings. Depending on the demands of the
clients, banks offer a variety of deposits. The liquidity and safety of bank deposits are valued more than
the returns they offer. Additionally, fixed deposit loans from banks are available up to 75 to 90 percent
of the deposit'& value.
All deposits are covered by the government under the Central Government Deposit Insurance
Scheme, up to a maximum of?S lakhs per client in that specific bank. Depositors are therefore promised
that even in the event of a bank failure, the Government will intervene and recover up to 75 lakhs of their
funds in that bank. One may occasionally go to the Reserve Bank of India website for detailed details on
the scheme.

(xv) Know Your Client (KYC) Norms for the Account Opening Process
Customers must go through the KYC process in order to open any form of bank account. "KYC" is an
acronym for "Know Your Customer." The goal of KYC is to help banks better know and understand their
custom_trs and assist them in managing their risks responsibly. The KYC documents that bank typically
accept mdude a photo, a document for evidence of identification (such as a copy of a PAN card or an
~adhaar card), and a document for address verification (such as a copy of an electricity bill, a driver's
license, a passport, an Aadhaar card, etc.).
 Financial Utn-«y II 1.9

(xvi) Types of Bank Accounts

Types of Bank Deposit and their Key Features
l. Savings Bank (SB) Account
• Low interest, however, highly liquid.
• facilitates payment mechanism through Automated Teller Machines ([Link]).
• No Tax deducted at Source (TDS) on interest on SB account balance, but taxable in the hands
of depositor
• Account can be opened in single name or joint names. In the case of joint account, the
operation of the account can be done by any one account holder or jointly.
• Minors of any age can also open a savings bank account through their natural or legally
appointed guardian. Minors above age of 10 years can also avail additional banking facilities
like internet banking, ATM/ debit card, cheque book facility, etc.
l. Basic Savings Bank Deposit Account (BSBDA)
• Introduced to promote financial inclusion.
• zero balance savings account without any requirement of an initial deposit can be opened for
individuals and also minors (through their guardian}.
• Relaxed conditions for number of deposits/ withdrawals in a month.
• ATM Card, passbooks are issued free of charge.
• BSD BA account holders are not eligible for opening any other savings bank deposit account in
that bank.
3, Fixed Deposit (FD) Account
• Involves placing funds with the bank for a fixed term at a certain interest rate.
• Interest accrued or earned on FD is subject to Tax Deducted at Source (TDS} beyond a
stipulated amount. .
• Senior citizens may get extra benefits on the interest rate.
• Tenure and rate of interest on FDs varies from bank to bank.
4. Recurring Deposit (RD) Account
• A fixed amount is deposited at monthly intervals for a predetermined term.
• Earns higher interest than savings bank account.
, TDS applicable on interest accrued or earned beyond a stipulated amount.
• Senior citizens may get extra benefits on the interest rate.
, Tenure and rate of interest on RDs varies from bank to bank.
S. Special Bank Term Deposit Scheme
• Tax savings scheme available with banks.
, Relief under Section SOC of the Income Tax Act, 1961.
• Term deposit with 5 years lock in period.
• No premature withdrawal/loan allowed.
~0 \\ Fincandal Literacy

~\\ O\g\ta\ Bank\ng

rn the modern era transactions include payments, fund transfers and buying goods, all take place on
digital platforms such as mobile phones. Customers can perform transactions from any place.
The various digital modes of transferring funds are as follows:
\ Mo4e of Transfer an4 Key [Link] -
\ [Link] lNational Electronic Fund Transfer)
• Transfer o{ funds from one Bank. account to another.
• No restriction on the minimum/maximum amount for transfer.
• Transfer is done using beneficiary's account number and IFSC Code (Indian Financial System code, a
unique code assigned to each bank branch)
• Chary,cs for trans{er may differ from bank to bank
• Tnn~cr of funds can be initiated any time during the day and it takes few hours to get creadited in the
beneficiary account
\ltGS llleal Tune Gross Settlement)
• lnnsfer 0 { funds from one Rank account to a different account of another bank on a real time basis.

' • \JKd to mm high value transactions.

• Transfer is done using benc6ciary•s account number and IFSC Code (Indian Financial System Code, a
unique code assigned to each bank branch)
.
• Clmgcs for transfer may differ from bank to bank. •
• Transfer of funds can be initiattd during the specified period on working day and is completed instantly
on a real time basis.
IMPS (Immecliate Payment Semct)
I

• Transfer of funds from One Bank account to another facilitating instant fund transfer.
I
• For fund transfer through internet banking. beneficiary's account number and IFSC Code (Indian
Financial Services Code, a unique code assigned to each bank branch) are needed.
• For fun~ transfer through mobile banking. beneficiary's MMID (Mobile Money Identifier is a 7 digit
number issued by bank to the customer) is needed
Unified Paymmt inttrface (UPI)

• Instant transfer of funds through any smart phone using VPA (Virtual Payment Address).
• 24 x 7 fund transfer facility on a real time basis.
• One needs to download UPI. enabled bank app and login using bank details.
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New categories of banks and business cormpondents:
RBtI ~lads intbro)duced certain new categories of banks and business correspondents whose key features a
de a1 e as e ow: re
 Flruinclol Litnocy II I. 11

ntle Key Features

Payment Bank • Provides savings account/current account facilities.
• Can accept demand deposit but not recurring/fixed deposit.
• Can issue ATM/Debit cards but not credit cards.
• Cannot give loans/advances.
• Offer payment and remittance service through various channels
Small Finance Bank • Provide features like taking small deposits and disturbing small amount loans.
• Instrument to save funds primarily to unserved and underserved sections of
population.
• Extend loans of small amount to small business units. micro and small
enterprises, small and marginal farmers and entities in the unorganized sectors.
Business • Representative of a bank who goes to customers (usually in remote locations/
Correspondent villages) to help them with their banking needs/transactions.
• Can provide services like opening of bank accounts. deposits. transfer of funds.
collection ofloan deposits, disbursal ofsmall value credit, collection ofpayment/
fees, etc.
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(xviii) What is a Credit Card and a Debit Card?
With a credit card. the cardholder can make payments without having cash on hand right away by using
credit card transactions. This benefit of using credit for a limited time. A debit card. on the other hand,
is a card issued to a bank account holder for both making payments at points of sale and withdrawing
money from an ATM. Debit card are accepted for transaction settlement at all retail locations. Both
credit and debit cards can be used for online purchases as well as cash withdrawals from ATMs.
Comparison between a credit card and a debit card are listed as below:

Particulan Credit Card DelNtCard

Source of funds Lending bank provide the credit facility. Linked to one's own savings/current
account maintained with the same bank
Interest If outstanding amount is not paid on Not applicable.
time, interest is levied.
Credit History Relevant for issuing a credit card. Not relevant for issuance of the debit
card.
Relationship with the No compulsion to have account with Having an account with the issuing
issuer issuing bank. bank is a pre-requisite.

Things to keep in mind while transacting through ATM card:

• Immediately after receiving the card from the bank, change the PIN.
• Avoid making any notes of your PIN number. Recall it. Keep your PIN number a secret from
others.
, It is preferable to use an ATM on bank property or on property where a security guard is on duty
around-the-clock. Use it for yourself.
I. 12 II Filuutcull Utnr,cy
l
• When utilizing the ,;rtua) kerboards for online transactions, the bank is not responsible if the
ATM card has bttn gi,Tn to someone other than the account holder for a transaction .
• Sign up with rour bank to receh·e SMS notifications of transactions. Banks, however, have the
right to charge clients for sending them email or SMS warnings about their accounts.
• Change your PINs as often as practical.
• Notify the bank right away if the card is missing.
• Don't let anyone use or access your card.

(xix) Customer Liability for Unauthorized Banking Transactions

According to the RBI, if an unlawful transaction occurs because of fraud, contributory carelessness, or
1 failing on the part of the bank. the consumer is not responsible. In a similar vein, even in ·cases where
neither the customer nor the bank is at fault but instead another component of the system is at fault, the
customer is emnpt from_li~bility as_long as they notify the ~~nk of any unauthorize~ or illegal activity
"ithin three da)'S of recel\'lng a notice from the bank. Additionally, the bank must immediately credit
wcustomer'uccount "ith the sum involved in the transaction. However, in situations when such fraud
occurs dut to the negligence of the client, the customer will be responsible for paying all losses up until
me date that the unlawful transaction is reported. The RBI has made it dear to banks that they must
inStaJ1t)y notify consumers via SMS and email when a transaction occurs in their account. In order for a
customer to rtport any such fraud right away, they have been told to make sure that such messages can
also convty the client's r~ly.
(IX) Resant Bank of India (RBI)
The RneM Bank of India Act authorized the establishment of the Reserve Bank of India (RBI), the
nation's central bank, on April 1, 1935. The Reserve Bank of India is responsible for overseeing the
nation's monetary and credit systems and implements monetary policy to establish financial stability in
India. The primary objective of the RBI is to perform comprehensive supervision of the Indian financial
sector, which consists of commercial banks, financial institutions, and non-banking financing firms. It
develops, enacts, and oversees India's monetary policy. Maintaining price stability and ensuring that
credit is flowing to productive economic sectors are the central bank's management goals. The RBI
governs and regulates the entire banking system in addition to serving as the government of India's
banker. All commercial banks' lender of last resort is the RBI. •

Review Questions
J. What do you mean by Financial Literacy with reference to investment in India?
2. Write the difference between Saving in Banks and Investment in Securities?
3. Know Your Customer (KYC) does is it important for the bank to know their own customer? Explain.
4. Write the difference between Digital Banking and Mobile Banking with illustration.

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