There is a misconception that saving is equivalent to financial literacy. Indians are world-class savers but terrible money managers. Teaching children about financial planning and wealth management in schools can play a critical role in reducing poverty levels drastically and quickly.
In his best-selling book, Beating the Street, ace investor and author Peter Lynch wrote about a class of 12-year-olds in the United States being asked to create virtual stock portfolios by their teacher. Within a couple of years, this portfolio delivered a gain of 70 percent, easily trouncing the 26 percent returns delivered by the benchmark S&P Index during the same period.
Can you imagine this happening in India? As we grow older and settle into our professions, we find ourselves woefully incapable of efficiently managing our finances. There is a misconception that saving is equivalent to financial literacy. Indians are world-class savers but terrible money managers. Consider the following facts:
- According to a survey published by SEBI in 2017, more than 95 percent of Indian households preferred to keep their money in bank deposits. Fixed deposits were followed by life insurance policies, precious metals, post office savings and mutual funds as preferred investment destinations. Only 9.7 percent of the surveyed households invested in mutual funds and 8.1 percent in stocks.
- An article published in Bloomberg noted that less than 1.5 percent of India’s population invests in Indian equities. By comparison, 10 percent of Chinese citizens and 18 percent of Americans have invested their savings in their local equity markets.
- The Household Finance Committee set up by the Reserve Bank of India (RBI) published a report in 2017. According to it, 56 percent of Indian households have unsecured debts, which signifies high reliance on non-institutional sources of lending such as private money lenders who charge a high rate of interest. Another disturbing finding was that 77 percent of respondents weren’t saving for retirement, as most had decided to depend on their children for financial support.
- As per the Economic Survey published in 2018, general insurance penetration in India was 0.77 percent and life insurance penetration was 2.72 percent. The global average is 2.81 percent and 3.47 percent respectively.
These surveys point to an alarming lack of financial literacy in India. But why is this a concern? Here are eight great benefits that will arise from nurturing a financially literate population:
The magic of compounding
Have you seen a bamboo tree grow? For the first four years, there is no activity. You may nurture it with fertile soil, bright sunlight and regular watering; yet, the plant doesn’t grow an inch. In the fifth year, it grows by 80 feet in six months!
One cannot find a better analogy for investing in equities. Imagine a child who is taught about mutual funds and operates a demat account with one of his parents as a guardian. The child begins to invest Rs 200 per month in mutual funds at the age of 15. According to this calculator, if a child of 15 invests Rs 200 per month and steps up investment by 10 percent every year, a CAGR of 15% over 20 years would offer a return of around Rs 4.6 lakhs! This means that by the age of 35, this tiny monthly investment would have grown into a significant corpus. Once the child begins to earn, she would in fact step her investments up by a larger amount.
Rs 200 per month is not too much to ask for from a 15-year-old Indian child. According to a study conducted by Pogo, the pocket money earned by Indian kids is more than the GDP of 52 countries. As of 2017, Indian kids were getting an average pocket money of Rs 555 per month. Interestingly, 50 percent of the kids saved some part of their pocket money. By asking them to redirect their savings into mutual funds, they could change their lives for the better.
The need to understand inflation
Most of us plan our future by completely discounting the impact of inflation. If you are 30 and planning to save Rs 3 crores as your retirement corpus to be used when you turn 60, then you are on your way to have a difficult retirement, as the real value of Rs 3 crores after 30 years would be substantially lower. This is the kind of effect inflation has. By learning about how to predict your needs for the future by taking inflation into account, you would be better prepared to lead a comfortable life post-retirement.
A life skill is developed
Just like swimming or cooking or changing tires (which, incidentally, most schools don’t teach), financial literacy is a life skill. By earning without understanding how to manage money, one would be prone to make terrible financial decisions. This could lead to having minimal savings or – worse – debt traps.
Dreams can be fulfilled
How many times have you told yourself that if you had a few lakh rupees at the age of 25 or 30, you could have left your job and started your dream venture? The best part about learning and beginning to invest as an adolescent is the time you give your wealth to compound. This not only helps one to earn a decent corpus by the time one is in the mid-twenties, but also – more importantly – offers the confidence that one can create a corpus by starting to invest at any stage in life.
Helps understand business cycles
Retail investors across the world have been notorious for discontinuing their systematic investment plans or completely selling off their holdings when markets plunge. This is because they haven’t been exposed to business cycles. Investing early makes one witness the ups and downs of the stock markets and improves the mental fortitude of a young adult.
Increases upward mobility
Financial literacy shouldn’t only be for the upper, upper-middle or middle classes. Sections of the society which have been historically oppressed and underprivileged can turn their economic and social status around within a generation, if their young ones are introduced to financial literacy. This can play a critical role in reducing poverty levels drastically and quickly. Therefore, schools which cater to these sections should implement financial literacy on a war footing.
Avoiding old mistakes
Children and young adults are most likely to receive their first lessons on financial planning from their parents. However, parents are likely to be biased towards traditional forms of investment such as gold, real estate, bank deposits and so on. Pursuing financial literacy in school will not only help children make appropriate financial
Emergencies will not trigger poverty
More often than not, a health emergency involving a terrible accident or critical illness could push families on the edge of poverty back into its vicious clutches. Students exposed to financial literacy in schools could guide their parents in purchasing a smart health insurance plan or do it themselves when they grow up.
To reap all these benefits of financial literacy, the National Centre for Financial Education (NCFE) introduced the National Financial Literacy Aptitude Test (NFLAT) in 2013-14. NCFE even conducts workshops on financial literacy for school teachers. As of 2017, over 4,000 schools have participated and almost 500,000 students have taken the NFLAT.
The Securities and Exchange Board of India (SEBI), along with the National Institute of Securities Market, has been trying to work with the CBSE Board to develop course material on financial education for school children. It is time for the other Boards to follow suit.
Policies which enable a sustainable financial literacy program across Indian schools will result in an informed and resilient citizen base. This, in turn, would choose to vote for governments that favour sustainable and progressive economic policy frameworks. India’s education system must pay heed.
For more from this author, visit his website, Gulakh.