Dr Dhiraj states, in Different Truths, that financial literacy is foundational. Break free from inherited money habits to master inflation, differentiate savings from investments, and secure a financial future.
Introduction
Money rarely arrives in a single, uniform form. It comes in different colours, shapes, and flows—sometimes as income, sometimes as savings, sometimes as debt, insurance, tax, or investment. It moves through our lives quietly, influencing choices far beyond balance sheets: where we live, how we plan, what we fear, and what we hope for. Yet for something so central to everyday life, money remains poorly understood, often reduced either to anxiety or aspiration.
Know Your Money aims to demystify personal finance using facts, not fear. It will focus on everyday decisions faced by individuals, without product promotion or technical jargon. Money may be personal, but understanding it should not be complicated. This column begins that journey. Know Your Money is designed to simplify the finance function for everyday life. It will cover saving and investment options, market basics, taxation, insurance, and long-term planning in a practical, unbiased manner. There will be no promises of quick wealth and no product endorsements. The goal is clarity, not complexity. Understanding money should be empowering, not intimidating.
A Nation of Savers
India is traditionally a nation of savers. Bank deposits, gold, real estate, and insurance have long been preferred over market-linked investments. While these choices offer safety and familiarity, they often fail to beat inflation over the long term.
For most Indians, money is not something that is formally taught; it is absorbed. We grow up watching how our parents save, spend, borrow, or avoid risk, and these behaviours quietly shape our own decisions. Financial habits are inherited long before they are questioned. Whether it is the preference for fixed deposits, the instinctive distrust of markets, or the belief that insurance and investment should be combined, these ideas are often passed down unquestioned from one generation to the next.
India’s financial landscape has expanded dramatically over the last two decades. Household incomes have risen, but so have financial responsibilities. According to government data, household out-of-pocket healthcare expenditure remains among the highest in the world, while education costs have risen faster than general inflation. At the same time, individuals now face choices involving credit cards, personal loans, mutual funds, insurance products, and digital investments—often without formal training. Without basic financial understanding, people either avoid investing altogether or jump in blindly, driven by tips, social media, or short-term hype. Both approaches can be damaging.
What Does Financial Literacy Really Mean?
Financial literacy is not about predicting markets or maximising returns. The OECD defines it as a combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decisions. In practical terms, it means understanding where money goes, what risks are being taken, and what trade-offs are involved. Even basic knowledge significantly improves financial outcomes over time.
Financial literacy is often misunderstood as advanced market knowledge or the ability to generate high returns. In reality, it is far more basic—and far more powerful. The OECD defines financial literacy as the combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decisions and ultimately achieve financial well-being.
This includes understanding trade-offs, recognising risk, and planning over time. A financially literate person does not need to predict interest rates or stock prices. They need to understand how money behaves across time, how inflation erodes purchasing power, how debt compounds, and how diversification reduces risk.
Even modest improvements in understanding can dramatically improve lifetime outcomes. Studies globally have shown that individuals with basic financial knowledge save more regularly, avoid excessive debt, and make more appropriate investment choices. Financial literacy does not eliminate risk, but it makes risk manageable.
Savings and Investments are not the Same
One of the most persistent mistakes in personal finance is treating savings and investments as interchangeable. Savings are designed for safety, liquidity, and certainty. Investments are designed for growth and necessarily involve uncertainty. Confusing the two leads either to excessive conservatism or reckless risk-taking.
India’s household balance sheets remain heavily skewed toward bank deposits and small savings schemes. According to central bank data, a large share of household financial assets is still parked in low-yield instruments. While these provide stability, they often fail to deliver positive real returns after adjusting for inflation and taxes.
By contrast, long-term data show that equity shares as an asset class have delivered average annual returns in the range of 11 to 12 per cent over extended periods. Even after accounting for volatility, equities have historically outperformed traditional savings when held patiently. Understanding this difference is central to long-term financial security, especially for goals such as retirement or children’s education.
The Quiet Impact of Inflation
Inflation may appear modest year to year, but its cumulative effect is severe. At an average inflation rate of about 6 per cent, purchasing power halves in roughly twelve years. This means money that feels adequate today may be insufficient tomorrow. Financial literacy helps individuals recognise why growth-oriented instruments become essential for long-term goals.
Money is more about Behaviour than Brilliance
Research across markets consistently shows that behaviour matters more than intelligence in determining financial outcomes. Regular saving, diversification, patience, and emotional discipline outperform market timing and complex strategies over time. Fear and greed remain the most destructive forces in personal finance.
Studies on retail investor behaviour show a familiar pattern: buying after rallies and selling during downturns. This behaviour destroys returns even when markets perform well over the long term. Financial literacy strengthens judgement. It reduces panic during corrections and overconfidence during booms. It replaces impulse with intention.
Ultimately, financial literacy is not about becoming wealthy quickly. It is about avoiding preventable mistakes, protecting future choices, and gaining control over uncertainty. In a world where individuals are increasingly responsible for their own financial outcomes, financial literacy is no longer optional—it is foundational.
Picture design by Anumita Roy
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