FINANCIAL LITERACY

MODULE 1: FINANCIAL PLANNING AND

FINANCIAL PRODUCTS

A) Introduction to Saving, Time value of money, Management of

spending and financial discipline,
B) Banking products and services, Digitization of financial transactions:
Debit Cards (ATM Cards) and Credit Cards., Net banking and UPI,
C) Digital wallets, Security and precautions against Ponzi schemes and
online frauds.
 MODEL 2: INVESTMENT PLANNING AND
MANAGEMENT

A) Investment opportunity and financial products.

B) Insurance Planning: Life and non-life including medical insurance
schemes.
C) Introduction to basic Tax Structure in India for personal taxation,
Aspects of Personal tax planning.
 INTRODUCTION
• Financial Literacy: Financial literacy refers to the ability to
understand personal financial management about income, expenditure,
savings and budgeting.
• Financial literacy makes individuals become self-sufficient, so that he
can become financially stable.
• Financial Literacy is a “combination of financial awareness,
knowledge, skills, attitude and behavior necessary to make sound
financial decisions and ultimately achieve individual financial well-
being. “ (Atkinson and Messy, 2012)
• It is important for every individual irrespective of caste, gender, age,
color etc.
 IMPORTANCE OF FINANCIAL LITERACY

• (i) Better Financial Decision-Making- Financially literate individuals have the

knowledge and skills to make informed financial decisions that can positively
impact their financial future.
• (ii) Improved Money Management Skills- Financially literate individuals know
how to budget, save, invest, and manage credit and debt effectively, which can
lead to greater financial stability.
• (iii) Increased Financial Independence- Financially literate persons have the
ability to take control of their finances and make independent financial decisions,
reducing their dependence on others.
• (iv) Lower Debt Levels- Financially literate individuals are more likely to avoid
debt traps and manage debt responsibly, resulting in lower levels of debt and
interest payments.
 CONTINUE…..

• (v) Improved Financial Security- Financially literate persons are better equipped
to manage financial risks, such as unexpected expenses or job loss, and can
develop a plan to secure their financial future.
• (vi) Increased Confidence- Financial literacy can boost an individual’s
confidence in their ability to manage their finances, leading to a greater sense of
financial empowerment.
• (vii) Tax Efficiency- Financial literacy assists in better understanding of tax
implications on the income earned and how to claim deductions on tax.
 KEY ASPECTS OF FINANCIAL LITERACY
• Spending: To acquire any goods or services we have to spend money. Financial
literacy helps to understand how to spend wisely.
• Savings: Savings is the amount of money which is left with a person from his
income after the expenses are made . It helps in making our future secure, makes
us ready for emergencies and also helps us prepare for the various occasions of
life. So, our income is awarded into two consumption/expenses & savings.
Suppose, if your income is Rs. 100, out of this you plan to save Rs. 20 and spend
Rs. 80.
• Income = Expenses + Savings 100 = 80 + 20
• Investment: Investment is an action or the process of investing money for making
profit. It involves putting surplus money/savings into various financial instruments
(such as stocks, mutual funds, fixed deposits, etc.) to generate additional income.
 KEY PRINCIPLES OF FINANCIAL LITERACY

• (i) Earn-The first step in achieving financial literacy is knowing how much
money we make. Our income is the foundation upon which financial stability
rests. To empower earnings, adopt these strategies-
•  Diversify Skills: In today’s ever-changing job market, diverse skill sets are
invaluable. Invest in learning new skills or expanding expertise. The more
versatile we are, the more opportunities we have to earn.
•  Negotiate Worth: Don’t shy away from negotiating salary or rates. Present
achievements confidently. Negotiating effectively can significantly boost income
over time.
 SAVING
(ii) Save-Saving money is the cornerstone of achieving financial goals. A well-
structured savings plan involves setting aside a portion of income regularly, creating
an emergency fund, and working towards both short-term and long-term objectives.
•  Emergency Fund: Build an emergency fund that covers approximately three to
six months’ worth of living expenses. This safety net ensures to prepared for
unexpected financial challenges.
•  Budgeting: Create a budget that outlines income and expenses. Tracking
spending helps identify areas where we can cut back and allocate more funds
toward savings and investments.
•  Invest Wisely: Educate our self about different investment options, such as
stocks, bonds, mutual funds, and real estate. Work toward diversifying portfolio to
minimize risk and maximize potential returns.
 SPENDING
(iii)Spend-Spending habits play a significant role in financial journey. Being
mindful and purposeful about our spending can lead to greater financial freedom.
Here’s how to master spending-
•  Differentiate Needs and Wants: Assess whether it is a genuine need or a
fleeting want before purchasing. This practice can help to make more conscious
spending decisions.
•  Prioritize Quality Over Quantity: Invest in quality items with long-term
value, even if they come with a higher price tag. This approach often saves money
in thelong run.
•  Track Spending: Use budgeting tools or apps to track expenses. This insight
helps to identify spending patterns, make necessary adjustments, and allocate
more funds toward financial goals.
 SETTING PRIORITIES: NEED AND WANT
ANALYSIS
• ‘Needs are necessities, Wants are luxuries’ and financial literacy is not a want, it is
a need. In financial literacy its important to understand the difference between
these two. It will help you understand how to spend, save and invest money and
make optimal use of the available financial and other resources. It helps in setting
your priorities.
• NEEDs are anything that you ‘must have’ and WANTS are the luxuries that
are ‘good to have’.
• Example: Food (Pulses, vegetables, cereals, etc.) is a need but Sweets (Rasgulla,
Ice-cream, Halwa, etc.) is a want. So, anything that is not immediately required
and can be postponed is a Want. Sweets are not necessary for good health and that
is why it can be avoided for some time, so it is a want, but pulses, vegetables,
cereals are needed to get nutrition's and thus, these are a need.
 BORROWING

(iv) Borrow-Even the most financially secure people have to borrow money to
make big purchases, such as a new home or car. Lenders often require borrowers to
have a credit history. Good money management involves knowing how to compare
loans, analyze a credit report, maintain a healthy credit score, and make loan
payments on time. Here’s how to approach borrowing intelligently-
•  Understand Interest Rates: Before taking on any debt, understand the interest
rates, terms, and conditions associated with the loan.
•  Manage Credit Cards Wisely: Credit cards offer convenience but can also
lead to debt if not used responsibly. Pay your balance in full each month to avoid
accumulating interest charges.
•  Strategic Debt: While some debt, like student loans or a mortgage, can be
strategic, always borrow within your means and have a clear plan for repayment.
 PROTECTING
(v) Protect-Protecting income involves regularly reviewing bank accounts and
financial statements to check for errors, discrepancies, or fraud. Life is full of
uncertainties, but it can be safeguarding our financial well-being through proper
protection measures. Prioritize the following steps-
•  Insurance Coverage: Different types of coverage, like health, life, and
disability insurance, are essential to protect from unforeseen expenses and loss of
income.
•  Estate Planning: Regardless of age, having a will and an estate plan ensures
assets are distributed according to our wishes and minimizes potential conflicts.
•  Identity Theft Prevention: Safeguard our personal and financial information
by using strong passwords, regularly monitoring our accounts, and being cautious
about sharing sensitive data online.
 COMPONENTS OF FINANCIAL LITERACY

• (i) Personal Finance– A term that refers financial situation and goals and how
they are affected by our income, expenses, family size, living situation, and more;
plus, how we develop strategies for better budgeting, investing, and saving money.
• (ii) Budgeting – How we plan to spend our money. In other words, how much of
our income put aside for savings, expenses, and bills.
• (iii) Credit– Basically borrowing money from a lender with the expectation that it
will payback in instalments, usually plus interest charges.
• (iv) Debt – Money that we owe someone else. One is using other people’s money.
For instance, if someone takes out a short-term loan, uses a credit card, or borrows
money from the bank. All of these are included in the debt.
• (v) Investing– Putting money into something with the hope that it will bring a
higher income in the future, including stocks, real estate, and pension funds.
 TIME VALUE OF MONEY

• The time value of money (TVM) is a core financial principle stating that a specific
amount of money is worth more today than the same amount in the future. This is
because money can earn interest or returns if invested, and inflation reduces
purchasing power over time.
• It is a fundamental concept in finance that states that a rupee today is worth more
than a rupee in the future.
• This principle is based on the idea that money has a potential earning capacity,
known as the “ Opportunity cost”, which means that money can be invested to
earn returns over time
 CONTINUE…..

• Why Money Today is More Valuable

• Money available now can be invested to generate extra income through interest
or returns.
• Inflation erodes the value of money, meaning what can be purchased with a
certain sum today will usually cost more in the future.
• There is uncertainty about the future, so having cash today offers greater
security and financial flexibility.
• TVM has two components viz Present Value and Future Value
 CONTINUE…….
• Present Value: It is the current value of future payments in lumpsum, or several part
payments discounted at certain interest rate, which accounts for the opportunity cost of
money and inflation to determine how much a future amount is worth today.
• Key Formula: The basic formula to calculate the future value (FV) of money is:
• PV=FV/[1+(i/n)]^(n×t)
• Where: PV = Present value , FV= Future Value, i = Interest rate or expected rate of return,
n = Number of times interest is compounded per year, t= Number of years.
• Suppose you need to have ₹ 1,00,000 (FV) in 5 years (t). You expect to earn an annual
interest rate (r) of 8%, Compounded annually (n=1) then,
• PV=FV/[1+(i/n)]^(n×t)
• = 1,00,00/(1 + 0.08/1)^(1*5)
• = 1,00,000/(1.08)^5
• = 68,058
 CONTINUE…….
Future Value: It is the amount a present-day investment will grow to by a future
date, assuming a certain interest rate and compounding over time.
• Key Formula: The basic formula to calculate the future value (FV) of money is:
• FV=PV×[1+(i/n)]^(n×t)
• Where: PV = Present value , FV= Future Value, i = Interest rate or expected rate of
return, n = Number of times interest is compounded per year, t= Number of years.
• Imagine you invest $ 1,000 today (PV) at an annual interest rate (r) of 5%,
compounded daily (n=365) for 10 years (t)
• FV=PV×[1+(i/n)]^(n×t)
• = 1000(1 + 0.05/365)^(365*10)
• = $ 1648.66
 COMPOUND INTEREST

• Compound interest is a fundamental component of the time value of money

(TVM) concept. Compound interest refers to earning interest not only on the
original principal but also on the interest that has been previously added to the
principal, causing money to grow at an exponential rate over time rather than at a
linear rate.
• Relationship of Compound Interest to TVM
• The TVM principle states that money today is worth more than the same amount
in the future because it has the potential to earn interest.
 CONTINUE…….

• Compound interest accelerates this growth because interest is calculated

periodically on the updated balance, which includes previously earned interest.
• The greater the number of compounding periods, the faster the money grows,
increasing the future value and highlighting the importance of investing early.
• Compound interest is the mechanism by which invested money grows and is at the
heart of TVM calculations for investments, savings, loans, and virtually all
financial planning
 MANAGEMENT OF SPENDING AND INVESTING
DECISIONS
• The management of spending and investing decisions involves creating a structured
approach to handle income, expenses, savings, and investments to achieve both short-term
needs and long-term financial goals.
• Core Principles of Spending and Investment Management
• Budgeting: Setting a clear budget helps track how much income is earned, earmarking
appropriate amounts for necessary spending, discretionary expenses, and planned savings
or investments.
• Expense Prioritization: Mandatory expenses (like rent, groceries, utilities) should be
covered first. Discretionary expenses (entertainment, travel) should be managed within
limits to avoid unnecessary spending.
• Setting Financial Goals: Establish clear short-, medium-, and long-term goals such as an
emergency fund, children’s education, retirement, or property purchase. This guides both
spending control and investment choices.
 FINANCIAL PLANNING

• Financial planning is not a rule to follow but a constant exercise which includes
managing your money wisely. In order to achieve your goals, individuals should
make a proper plan for their investments, insurance, retirement, cash flow and
taxes. The graphic below depicts the broad purpose of financial planning. So that
their money is not getting wasted on non-essential items & they can generate
returns from it.
• It includes Tax Planning, Insurance Planning, Investment Planning, Retirement
Planning, Estate Planning, Cash Flow Planning
 SET YOUR OWN GOALS…..SMART

• S- Specific : I want to save and make an emergency fund for my family of Rs.
5000
• M- Measurable : I should start saving money from my pocket money.
• A- Attainable : Based on my current pocket money and expenses, I can save only
Rs. 200 per month
• R- Relevant : Emergency Fund will help my family in time of crisis
• T- Timely : I will be able to active this goal in 2 years
 BANKING PRODUCT AND SERVICES
• Core Banking Products
• Savings Account: Used for storing money and earning nominal interest. Variants
may include regular, premium, children and senior citizen accounts.
• Current Account: Primarily for business owners, enables frequent, high-value
transactions with overdraft facilities.
• Fixed Deposit (FD) & Recurring Deposit (RD): FD provides higher interest on
lump-sum deposits for fixed tenure; RD allows regular monthly deposits to build
savings over time.
• Loan Products: Personal loans, home loans, vehicle loans, business loans, and
mortgages cater to varying borrowing needs. Banks also offer overdrafts and
credit lines.
• Debit and Credit Cards: ATM-cum-debit cards enable access to funds and
payments, while credit cards allow purchases on borrowed credit up to a specified
limit
 BANKING PRODUCT AND SERVICES

• Auxiliary Services
• Digital Banking: Includes internet banking, mobile banking, and online payments,
allowing convenient fund transfers, bill payments, and account management.
• Wealth Management & Investment Services: Mutual funds, portfolio management,
insurance policies, and treasury/debt instruments are offered to help customers
grow wealth and manage risks.
• Safe Deposit Lockers/Safe Custody: Secure storage for valuables, important
documents, and securities.
• Account-Linked Services: Cheque books, passbooks, statement generation,
standing instructions for automated payments, and nomination facilities.
 DIGITIZATION OF FINANCIAL TRANSACTIONS
• Digitization of financial transactions refers to the process of transforming
traditional cash-based or paper-based financial activities into electronic or digital
formats using technology such as online banking, mobile payments, digital
wallets, and blockchain.
• Key Aspects of Digitization in Financial Transactions
• Digital transactions enable various payments and money transfers electronically,
eliminating the need for physical cash and checks.
• These digital processes are powered by technologies like mobile apps, internet
banking, point-of-sale (POS) devices, and secure payment gateways to facilitate
quick, convenient, and secure transactions.
• Advanced technologies also contribute to enhanced security through encryption,
multi-factor authentication, and AI-driven fraud prevention.
 BENEFITS OF DIGITIZATION IN FINANCIAL
TRANSACTIONS
• Speed and Convenience: Transactions complete in seconds anytime and anywhere,
removing the need to visit banks or carry cash.
• Increased Security: Encryption and fraud detection minimize risks compared to traditional
cash transactions.
• Cost Efficiency: Digital transactions reduce costs associated with cash handling, storage,
and transportation.
• Transparency and Recordkeeping: Electronic records facilitate easy tracking, taxation
compliance, and dispute resolution.
• Financial Inclusion: Provides access to banking and financial services to rural or
underserved populations via mobile and internet technologies.
• Global Reach: Supports seamless cross-border payments for individual and business
transactions, enhancing global trade.
 CHALLENGES AND CONSIDERATIONS

• Cybersecurity risks and digital fraud require continuous advancements in

protective measures.
• Adoption barriers exist, especially for older or less tech-savvy populations and in
regions with limited internet infrastructure.
• Legal and regulatory frameworks must evolve to accommodate digital financial
ecosystems safely.
 DIGITAL WALLETS
Digital wallets are electronic tools that store payment information securely for ease of use
in digital transactions. They incorporate multiple layers of security to protect users’ money
and data from fraud.
• Security Features of Digital Wallets
• Tokenization: Replaces actual card numbers with unique tokens during transactions,
protecting real card data even if intercepted.
• Encryption: Scrambles sensitive user data to make it unreadable to unauthorized parties.
• Multi-Factor Authentication (MFA): Requires additional verification like PIN,
biometric scans (fingerprint, facial recognition) beyond just passwords.
• Device-Specific Security: Uses phone’s biometric and secure lock features to restrict
access.
• Transaction Monitoring and Alerts: Real-time alerts on suspicious activity help in
quick detection of fraud
 PRECAUTIONS AGAINST PONZI SCHEMES

• Be deeply skeptical of investment opportunities promising high returns with little

or no risk.
• Avoid unsolicited investment offers and research thoroughly using regulatory tools
like FINRA’s Broker Check or SEC’s EDGAR database.
• Ensure investments are registered with regulatory authorities; demand
transparency and full understanding of any investment before committing funds.
• Report suspected Ponzi or investment scams to appropriate authorities to protect
oneself and others.
 PREVENTION OF ONLINE FRAUDS
• Never share banking login, passwords, OTPs, or CVV numbers with anyone or
over unsecured communication channels.
• Use strong, unique passwords and change them regularly; enable multi-factor
authentication wherever possible.
• Beware of phishing emails or messages requesting sensitive information; verify
sources before clicking links or downloading attachments.
• Monitor accounts frequently to detect unauthorized transactions early and report
them immediately.
• Ensure websites have HTTPS security protocol before entering sensitive financial
data.
• Keep devices updated, use antivirus software, and avoid using public Wi-Fi for
financial transactions without VPN protection.