What is Financial Literacy? Why is it important?

Financial literacy is knowing how to handle your money and use it productively in more than one way. Often we spend our money carelessly and regret it later. Utilising your money in a way that proves useful in the present or sometime in future is why financial literacy is important. This is just a brief description of it. In a real sense, it is a very vast subject. 

Financial literacy involves things like budgeting, saving, investing and loans and interest. This skill is developed when one gets involved in financial transactions. 

What is financial literacy?

It is the ability to understand and effectively use financial skills. Financial skills include:

  • Budgeting 
  • Saving
  • Investing 
  • Credit management 
  • Financial management

You might deal with these in your day to life. But to acquire these skills one needs to understand the basic financial concepts. These financial concepts include the time value of money, compound interest, annualised returns and opportunity cost. 

Why is financial literacy important?

The answer is very simple. You are financially literate, you can manage your money more effectively. It increases your confidence to manage your money and allocates it towards your goals. 

  • Distributing your income in a way that your expenses get paid without disturbing your budget. Note how much income is coming in and distribute it accordingly. And make sure to keep a track of your expenses and make changes in your spending plan now and then. 
  • If you are financially literate, you know that while seeking a loan you look at for the one with the lowest rate of interest. Comparing different loan plans is very important. You also are well aware that paying credit card bills on time is for your good. Because after a certain time you get charged with interest. This will only increase your expenses. time
  • Emergency funds are very essential in today’s uncertain time. Start saving little by little separately for emergencies. If you are already a financial literate you know that saving money equivalent to your three or six-month income is a must. Use it when you are in dire need of money. 
  • Everyone has to stop working after a certain age. Maybe because of health issues or because of retirement. Thus, you need to have a retirement plan. You should be well aware of which accounts will help you secure a good life after retirement.

How to improve financial literacy skills?

  • Manage your bills properly. Use the auto-debit option for recurring bills. Don’t postpone paying bills for late as it may affect the entire budget.
  • Maintain a good credit score. If you have a good credit score you can secure low-interest rates on loans and credit cards. 
  • Manage your debts properly. Stop spending lavishly and start saving and increase repayments. This will reduce your liability and pay off loans with high interests first.
  • Start saving and investing more. Investments are a good way to increase your saving. Invest where the rate of return is high. Also, don’t spend needlessly and save that money for something better and use it effectively. 

Lack of financial literacy will lead to budget mismatch, higher expenses, accumulation of debt, poor credit score and financial frauds. 

Acquiring financial skills will help you make major financial decisions. It ensures that you have a stable present as well as a future. It is a necessity.



Literacy in India is a key for socio-economic progress, Despite government programs, India’s literacy rate increased only “sluggishly”. The 2011 census, indicated a 2001–2011 decadal literacy growth of 9.2%, which is slower than the growth seen during the previous decade.

There is a wide gender disparity in the literacy rate in India: effective literacy rates (age 7 and above) in 2011 were 82.14% for men and 65.46% for women. The census provided a positive indication that growth in female literacy rates (11.8%) was substantially faster than in male literacy rates (6.9%) in the 2001–2011 decadal period, which means the gender gap appears to be narrowing.
One of the main factors contributing to this relatively low literacy rate is usefulness of education and availability of schools in vicinity in rural areas. There is a shortage of classrooms to accommodate all the students in 2006–2007. In addition, there is no proper sanitation in most schools. The study of 188 government-run primary schools in central and northern India revealed that 59% of the schools had no drinking water facility and 89% no toilets. In 600,000 villages and multiplying urban slum habitats, ‘free and compulsory education’ is the basic literacy instruction dispensed by barely qualified ‘para teachers’. The average pupil teacher ratio for all India is 42:1, implying a teacher shortage. Such inadequacies resulted in a non-standardized school system where literacy rates may differ. Furthermore, the expenditure allocated to education was never above 4.3% of the GDP from 1951 to 2002 despite the target of 6% by the Kothari Commission. This further complicates the literacy problem in India. Several caste disparities also exist. Discrimination of lower castes has resulted in high dropout rates and low enrollment rates. The National Sample Survey Organization and the National Family Health Survey collected data in India on the percentage of children completing primary school which are reported to be only 36.8% and 37.7% respectively. On 21 February 2005, the Prime Minister of India said that he was pained to note that “only 47 out of 100 children enrolled in class I reach class VIII, putting the dropout rate at 52.78 percent.” It is estimated that at least 35 million, and possibly as many as 60 million, children aged 6–14 years are not in school.

The large proportion of illiterate females is another reason for the low literacy rate in India. Inequality based on gender differences resulted in female literacy rates being lower at 65.46% than that of their male counterparts at 82.14%. Due to strong stereotyping of female and male roles, Sons are thought of to be more useful and hence are educated. Females are pulled to help out on agricultural farms at home as they are increasingly replacing the males on such activities which require no formal education. Fewer than 2% of girls who engaged in agriculture work attended school. The provision of universal and compulsory education for all children in the age group of 6–14 was a cherished national ideal and had been given overriding priority by incorporation as a Directive Policy in Article 45 of the Constitution, but it is still to be achieved more than half a century since the Constitution was adopted in 1949. Parliament has passed the Constitution 86th Amendment Act, 2002, to make elementary education a Fundamental Right for children in the age group of 6–14 years.

Several states in India have executed successful programs to boost literacy rates:
• Bihar has significantly raised the literacy rate as per the 2011 census. The literacy rate has risen from 39% in 1991 to 47% in 2001 to 63.8% in 2011. The Government of Bihar has launched several programs to boost literacy, and its Department of Adult Education won a UNESCO award in 1981.

• Presently Tripura has the third highest literacy rate in India. According to the 2011 census, literacy level was 93.91 percent in Kerala and 91.58 percent in Mizoram, among the most literate states in the country. The national literacy rate, according to the 2011 census, was 74.04 percent.
projects implemented by the state government of Tripura to increase literacy in the state are:
10,000 Anganwadi centers have 100 percent enrollment.
Policy of no-fail till class VIII to prevent children from dropping out.
Midday meals in all schools with an eclectic menu for all days of the week to attract more students.
No tuition fee in government colleges.

• In Kerala a special program – titled improved pace and content learning (IPCL) – has been designed to provide basic education to such people. Kerala topped the Education Development Index (EDI) among 21 major states in India in the year 2006–2007. More than 94% of the rural population has access to a primary school within 1 km, while 98% of the population benefits one school within a distance of 2 km. An upper primary school within a distance of 3 km is available for more than 96% of the people, whose 98% benefit the facility for secondary education within 8 km. The access for rural students to higher educational institutions in cities is facilitated by widely subsidized transport fares. Kerala’s educational system has been developed by institutions owned or aided by the government. In the educational system prevailed in the state, schooling is for 10 years which is subdivided into lower primary, upper primary and high school. After 10 years of secondary schooling, students typically enroll in Higher Secondary Schooling in one of the three major streams— liberal arts, commerce or science. Upon completing the required coursework, students can enroll in general or professional undergraduate programs. Kerala launched a “campaign for total literacy” in Ernakulam district in the late 1980s, with a “fusion between the district administration headed by its collector on one side and, on the other side, voluntary groups, social activists and others”. Kala Jāthas (cultural troupes) and Sāksharata Pada Yātras (Literacy Foot Marches) were organized to generate awareness of the campaign and create a receptive social atmosphere for the program.

  • Himachal Pradesh underwent a “Schooling Revolution” in the 1961–2001 period that has been called “even more impressive than Kerala’s.”

• The government of Mizoram identified illiterates and organized an administrative structure that engaged officials and community leaders and manned by “animators” who were responsible for teaching five illiterates each. Mizoram established 360 continuing education centers to handle continued education beyond the initial literacy teaching and to provide an educational safety net for school drop-outs.

• Tamil Nadu’s midday meal program is among the best-known in the country. Starting in 1982, Tamil Nadu took an approach to promote literacy based on free lunches for schoolchildren, “ignoring cynics who said it was an electoral gimmick and economists who said it made little fiscal sense.” Then the chief minister of Tamil Nadu, MGR launched the program, which resembled a similar initiative in 19th century Japan, because “he had experienced as a child what it was like to go hungry to school with the family having no money to buy food”.


The National Literacy Mission, launched in 1988, aimed at attaining a literacy rate of 75 per cent by 2007. Its charter is to impart functional literacy to non-literates in the age group of 35–75 years. The Total Literacy Campaign is their principal strategy for the eradication of illiteracy. The Continuing Education Scheme provides a learning continuum to the efforts of the Total Literacy and Post Literacy programs.

The Sarva Shiksha Abhiyan (Hindi for Total Literacy Campaign) was launched in 2001 to ensure that all children in the 6–14-year age-group attend school and complete eight years of schooling by 2010. An important component of the scheme is the Education Guarantee Scheme and Alternative and Innovative Education, meant primarily for children in areas with no formal school within a one-kilometer radius. The centrally sponsored District Primary Education Programme, launched in 1994, had opened more than 160,000 new schools by 2005, including almost 84,000 alternative schools.

Girls’ education been neglected in slums

Women and girls in slums mostly don’t get the privilege of education in India. Their families or communities don’t support them in this cause. When the family does not have enough finance to provide education to all of their children, there the preference is given to boys. This way most of the women are not educated and they are not able to provide it to their daughters as well. So, in this vicious cycle education of most of the girls gets neglected. The situation is so deteriorating that many girls even lack basic literacy and numeric skills.

“I want to study and become a teacher. But I don’t know how to read these books, says Lakshmi, a 9 years old girl in slums while sitting with a pile of books of her brothers.

Lakshmi lives in a family of six members – father, mother, and her three brothers. Being the youngest as well as a girl she gets the disadvantage over education. Where all her brothers go to school, she isn’t allowed.

While finance being one of the major issues, there are others too.

“In our community, girls get married at a very young age by 12-14, so what is the point of their education. Eventually, they will have to serve their in-laws. Even if we get pushy about continuing a girl’s education after marriage, she will be stopped,” says Shakuntala, Lakshmi’s mother.

“See our Lakshmi, she is already 9. We have started searching for a suitable groom for her.”

Her father cited other concerns. “ There is a fear of abuse, distance from school to home, known- availability of transports, and lack of toilets. Due to this reason, I don’t send my daughter to school even if I want to. Safety is a big concern for me. Who’s going to take the responsibility if anything happens to her.”

Slum girls brought up with this mindset make them believe they are not worth enough compared to their brothers.

“We want our sister to gain an education. But our parents say she will get married and go to a different family whereas we have to go to school too, later on, get jobs and be a breadwinner for the family,” says Kundan, Lakshmi’s elder brother.

These situations make women vulnerable and dependant on men in life. Men start to think about them as mere objects leading to crimes like domestic violence, killings.

Without education, women have less knowledge and less power to negotiate.

All these things indicate that there is a bleak future for girl children in slums. Thus, to address this emerging issue, girls should be linked to formal/informal schooling in slums and ensured that at least they will attain the primary level of education that enables them to read and write.