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What is the Importance of Financial Literacy in Investing?

April 21, 2023

Table of Contents

    Table of Contents

      Explore the importance of financial literacy and a few concepts to remember before embarking on your investment journey!

      Money is the primary means to acquire prime survival resources like food, water, utility expenses, and other needs. So, having enough funds in hand is imperative.

      But it is impossible to have an indefinite amount of money unless you start saving and making investments smartly with financial literacy in investing.

      But it is impossible to have an indefinite amount of money unless you start saving and making investments smartly.

      It is the only way to become financially independent and have enough money in hand to cover the expenses for your needs and desires.

      But is it easy to invest in the right scheme and see the money grow? 

      No, investment is not everyone's forte. To become a successful investor, you should be financially literate.

      But shockingly, as per a study by SEBI, only 27% of the Indian population is financially literate.

      The following article will shed more much-needed light on financial literacy and things one should be aware of before starting to invest.

      What does financial literacy entail?

      Financial literacy is the synergy of finance, investment, credit systems, and debt management.

      Being well-versed in these four primary elements can help you make an informed decision when it comes to safeguarding your assets. 

      Being financially literate means understanding the tips and tricks about investments, earnings, and debts based on real-life scenarios.

      Furthermore, a huge gap prevails between knowledge and the implementation of those ideas into practical financial decisions.

      Owing to this, one fails to achieve stability and meet financial goals.

      You solely cannot rely on textbooks and Social Media knowledge while dealing with money.

      For instance, while investing, you should be able to make your financial plan based on real-time statistics, like interest rate, volatility, returns, and more, to prevent unfortunate losses. 

      Patience, research, and observation are the key factors to becoming literate in finance.

      They come in handy while making new investments, reaching financial goals, or managing the existing ones for maximum yield.

      Why is it essential to become literate in finances?

      1. With the help of accurate financial knowledge, you will gain a more in-depth understanding of how to segregate your earnings, manage expenses, make investments, and handle debts.

      1. Without proper knowledge about the finance market, it is hard to make yourself immune to inflation, fraudulent deals, and market volatility. So, becoming financially literate also means shielding yourself from economic calamities.

      1. It helps bridge the gap between textbook knowledge and hands-on understanding, thus allowing you to make suitable financial decisions.

      1. In addition, proper financial education further helps achieve stability and easily meet goals. You don't have to compromise anything, whether it is your financial goal or investment plan.

      5 Investment concepts you must know

      1. Navigating short-term and long-term investments

      You should first understand the concepts of long-term and short-term investments. As the name suggests, short-term investments are typically made for a year or less.

      These investments are ideal for fulfilling your immediate desires, like a holiday or purchasing a car. Without any prior knowledge, you won't understand which one is ideal for your financial goals.

      On the other hand, long-term investments are made to fulfil your future goals like retirement planning, kids' education, etc. Popular tools for long-term investments are stocks, digital gold, cryptocurrency, and REIT, among others.

      Returns of this type of investment do not accumulate overnight. It takes years of compound interest to accumulate a handsome wealth reserve.

      2. Diversifying your investments

      Traditionally, gold is considered one of the most secure assets for investments. However, investing in physical gold comes with an array of challenges, like limited investment caps, high risk of misplacing, low-to-none interest rates, wealth taxes, wastages, and astronomic making charges.

      You might have heard your elders saying don't put all your eggs in one basket. The risk of breaking all the eggs gets high otherwise. This philosophy applies even today in financial investments.

      Putting all your money in a single asset class puts you at undue risk of losing all your money if that asset crashes. This is why diversifying your investments is essential.

      Nowadays, you will find a plethora of different investment options like:

      • Digital gold
      • Equity and shares
      • Bonds
      • REITs
      • Futures and options
      • Mutual funds
      • Cryptocurrency

      These asset classes offer highly competitive returns with various risks associated with them. But they can ensure the maximum ROI.

      However, you should understand the market stability, volatility, price movements, and prospects before deciding on the assets for your investment.

      Some of the best tips for choosing the right asset for a future investment journey are:

      • As a beginner, you should go for a stable asset because volatility will expose you to more risks and losses.

      • Investing in digital gold is a remarkable decision as it will help you save a lot for buying your favourite accessory later on and keep the money safe from market volatility.

      • Check the price movements and determine the highs and lows for a proper analysis. This will help you to generate a forecast for future price movement.

      3. Debt management

      When you are financially educated, you will understand the value of low-interest loans and how the overuse of credit cards and payday loans can create a debt trap owing to increasing interest rates.

      Financial literacy prevents you from getting into debt. It will help you comprehend that paying off your debts regularly and refraining from using credit cards can minimise your debt and help you maintain a decent credit score.

      If you are presently in debt, it will assist you with numerous techniques to get out of debt through debt consolidation, as well as how to keep your debt-to-income ratio below 50% to avoid any repercussions on your credit score.

      4. Higher returns mean higher risks

      One of the most important financial lessons to make investment decisions easily and get maximum returns is about returns and risks. Investors are exposed to risks and threats with many security policies and protocols.

      With the finance market being so volatile and vulnerable, you are exposed to constant market risks and dips as an investor. 

      Many amateur investors invest in the wrong funds or withdraw their investments prematurely and endure severe losses.

      Therefore, assessing the risk factors and safeguarding your hard-earned from the consequences is crucial.

      5. Fraudulent deals and scam

      Digital transactions have taken over our world. From ordering food or clothes online to investing in a mutual fund, e-transactions have replaced the paper trail, exposing us to the world of online scams and frauds.

      Whether it is the management of your personal finances or investing in a crypto asset for a long-term period, you should be aware of the scam and fraudulent deals happening in the market.

      Having financial literacy will assist you in protecting your sensitive financial information by taking the required precautions, such as avoiding clicking on strange links in text messages or emails and not disclosing any financial data like passwords, OTP over the phone, etc.

      Final thoughts

      Managing finances and investment is a hard nut to crack. Being financially free implies being able to live your life without having to worry about the next paycheck.

      If you already have a financial roadmap in place but think it needs some alterations, feel free to edit it. After all, our financial priorities change with our growing age.

      Besides, at Jar blogs, we are here to give you the daily dose of investment advice you need to manage your money better and see it grow over time.