How Lack Of Financial Education Impacts Your Wellbeing - Outside View by PersonalFN

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How Lack Of Financial Education Impacts Your Wellbeing
Aug 26, 2019

"The single biggest difference between financial success and financial failure is how well you manage your money. It's simple: to master money, you must manage money." - T. Harv Eker (author, entrepreneur, and motivational speaker)

Being in a finance profession, I fully understand the importance of the proper utilisation of my money - regularly saving and investing it in wealth-creating assets for my present and future wellbeing. But many people lack the knowledge required to make the right financial decisions.

To prove this point, I had to look no further than my own family and neighbours. Most of them, irrespective of their age, formal education, and what they do for a living, have rarely ventured beyond bank deposits and provident funds for wealth accumulation.

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Their reasons pointed to the fear of capital erosion. Plus, it was the lack of knowledge about basic financial concepts like risk diversification, inflation, and compound interest that made them stick to traditional investment avenues.

Though this trend is slowly changing, there is still lot to catch up.

While the people today are more aware about the various investment products available, behavioural biases, and preconceived notions about certain products may prevent them from exploring those options.

Often due to lack of financial literacy, people end up parking their money in low yield investment or take on high interest loans to fulfil their needs. Sometimes, they even fall for investment traps, all of which puts their wellbeing in jeopardy.

So, a lack of financial education impacts your wealth-building capacity and you end up with a lower corpus for your goals or incur losses.

[Read: Are You Paying Attention To Your Financial Fitness?]

To financially secure yourself you need to learn to manage your money smartly. This way you can meet your short-term needs, achieve future goals, and be prepared for emergencies. In other words, you need to be financially literate.

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For this, you need to first get into the habit of saving and budgeting to avoid unnecessary spending. This will instil financial discipline in you and ensure that you are left with a higher amount for investment.

Before you proceed to invest, you need to set S.M.A.R.T goals to give direction to your savings and classify your targets as short, medium, and long-term.

Then evaluate your risk profile to choose a suitable investment option based on your goals and investment horizon.

Bank deposits and provident fund are relatively safer and aid in capital protection and therefore these should form a part of your investment portfolio. But if you wish to multiply your wealth, diversify risk and counter inflation, you will have to undertake a higher risk and invest in mutual funds. This is especially true if you are younger and have long-term goals.

[Read: Here's What Could Make Or Break Your Financial Goals]

With its potential to generate higher returns and the option to choose from various categories and investment styles, mutual funds can be your best bet for various goals. However, make sure to select the right scheme based on your needs after assessing on quantitative and qualitative parameters.

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To save yourself from unnecessary risk, make sure you fully understand the features, terms and conditions of the investment product before investing. If you are unsure about the product, you may consult a financial adviser. Having said that, don't be ignorant or do not blindly trust an adviser and conduct your own basic research.

It is important that you ask legitimate questions to your adviser to clear all your doubts. At the same time, be open to questions that your adviser may ask you relating to your income, debt, and insurance, among others so that they can design an appropriate investment plan.

Apart from wealth creation, another vital aspect of financial wellbeing is to adequately insure the life and health of yourself and your family. Furthermore, to be prepared for emergencies such as job loss, unexpected expenses, etc. you need to create a reserve in liquid investment avenues worth at least 6-12 months of expenses.

Patience is the key to successful investing. So stick to your investment plan till your goal/s is achieved and avoid making any hasty decisions. Review your portfolio periodically to track its performance.

[Read: Why Patience Is The Key To Successful Investing]

Remember that when it comes to an investment plan, there is no 'one size fits all'; it differs from person to person based on their age, financial circumstances, goals, time horizon to each goal, and risk-taking ability. Therefore, do not imitate the investment style or strategy that your friend/relative may be following.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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