Importance of Financial Literacy for Jobs
In today’s commercialised world, basic financial awareness and the ability to use financial products is imperative if one is to keep up with current times. Moreover, sound financial awareness is key to socio-economic well-being and improving confidence of the economy as a whole. The first time Aarushi, a co-author, worked on the topic of financial literacy was four years ago. Her analysis of the survey population revealed a resistance towards the banking sector and focus was placed to explore the under-lined reasons for this. A major gap was observed between the support staff’s perception of banking facilities, and the perception of the economically well-off.
The Organisation for Economic Co-operation and Development (OECD) defines financial literacy as a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being. This includes owning a bank account and the frequent use of cheques, deposit slips and ATMs, all of which are common in the upper economic classes.
Further, our Prime Minister’s financial inclusion plan is an example of the existing efforts that are being made to improve the current situation of financial illiteracy, with schemes such as the ‘Pradhan Mantri Jan Dhan Yojana’ (PMJDY). While people opened bank accounts under the scheme, there is a lack of awareness regarding the need for regular operation, so as to avail the scheme’s benefits. Despite these measures, a significant portion of our society remains financially excluded, which does not bode well for a rapidly growing economy such as ours. An inability to make use of formal financial products, which are documented and legally backed, signifies a non-optimal use of available resources. Moreover, improving confidence in the nation’s financial institutions is not possible if certain sections of the society make frequent use of loan-sharks and unreliable money lenders as a source of credit.
How does financial literacy help? Does financial illiteracy translate into costly economic behaviour? Lusardi and Mitchell find evidence that financially literate people are more likely to plan, save, invest in stocks, and accumulate more wealth (Lusardi and Mitchell, 2014). They are more cognizant of debt and the source of credit. This is particularly important for those just entering the workforce, burdened with student debt. The young rely on high-cost sources of borrowing and their lack of understanding can undermine their credit score in the future. Financial knowledge allows a person to invest in more sophisticated assets which allows them to generate higher returns. Lusardi and Mitchell also carried out a three-question survey to measure financial literacy. They found that answering just one additional question correction leads to a 4% increase in probability to engage in future planning (in developed economies).
In India, financial literacy is a part of the National Strategy for Financial Education. As per the Reserve Bank of India, they evaluated the previous financial education policy and have made changes. The current financial literacy policy will focus on content, capacity, community, communication, and collaboration. There is large emphasis being placed on the capacity building and undertaking collaborative efforts.
How does this create jobs? This reminds me of the Google Ad that came out recently. They promote the Google Assistant by encouraging people to ask their questions and getting answers. A house-help gets answers to questions surrounding the banking system, is able to source credit and start her own business. Thus, financial literacy is key to entrepreneurial ventures. A study conducted in 2019 found that over 47% of start-ups failed because of problems arising out incorrect handling of basic finances. On a similar note, SHRM found that stress that stems from inadequate financial literacy affects performance at work. 83% of HR professionals reported that financial stress has a negative impact on overall employee performance. PwC had a similar conclusion in its study as well. Thus, financial literacy is important for sustainable entrepreneurial ventures that employ others and offer a steady pay as well as for productive employees.
India needs 20 million jobs each year and a vibrant entrepreneurial environment is critical to make this a reality. Small rural entrepreneurs who are financially literate will be aware of and are likely to access the right sources of finance for the activity on hand, likely to more prudent in the way money is deployed and significantly more likely to succeed.
Financially literate citizens are likely to avoid debt traps, deploy money more efficiently and use it to build assets, health and skills that can generate income rather than for one time consumption.
Financial literacy is an essential tool for survival and progress.