The Significance of Financial Literacy for Students and Parents

Finance

Mir Amir Sohel

9/20/20233 min read

In today's fiercely competitive world, the application of basic financial principles can be the difference between financial security and disaster. Financial literacy, especially for students and their parents, plays a pivotal role in ensuring a stable and prosperous future. Let's delve into this crucial topic through a real-life example.

Imagine a parent in 2012-13 who aspired to send their child to a top B-School for an MBA. They diligently saved Rs 10 lakhs-12 lakhs, equivalent to the MBA fees at that time, and parked the money in a fixed deposit. Fast forward to 2023, and they would have approximately 18-19 lakhs at hand, considering interest rates of around 6 percent-7 percent. However, the cost of an MBA from a top B-school in India in 2023 hovers around Rs 22 lakhs-25 lakhs. This example serves as a stark reminder of the consequences of investing all funds in an asset that fails to outpace inflation. And this is merely one illustration among many. Across various educational pursuits, the costs have soared significantly.

The pitfall of this situation could have been averted with prudent and inflation-aware investments. This is where financial literacy steps in. It equips individuals with the knowledge and tools to navigate such financial challenges effectively.

Guiding Principles for Financial Success

1. Beating Inflation: The Core Objective

One fundamental financial rule is to ensure that investments consistently outperform inflation. The purchasing power of money erodes over time due to inflation, and your investments should counteract this effect. To safeguard your financial future, it's imperative to put your money in assets that have the potential to surpass inflation rates.

2. Diversification: Mitigating Risk

Spreading your investments across different asset classes is a key strategy to minimize risk. Diversification shields your portfolio from the adverse impacts of a single investment's failure. This strategy acts as a financial safety net, ensuring that even if one investment underperforms, others can compensate.

3. Managing Exchange Rate Risk

For parents aspiring to send their children abroad for education, a critical aspect of financial literacy is understanding how to manage exchange rate risk. Investing in foreign currency assets can help mitigate the volatility associated with exchange rates, ensuring that the funds allocated for education remain secure and sufficient.

4. Regular Monitoring

Vigilance is paramount in financial planning. As you approach your financial goals, it's crucial to monitor your investments periodically. This allows for adjustments and fine-tuning of your financial strategy to ensure you remain on track to meet your objectives. Procrastination in this regard can be costly.

The Growing Importance of Quality Education

In today's hypercompetitive environment, quality education not only secures a livelihood but also unleashes an individual's true potential. The significance of education is undeniable, yet accessibility remains a challenge. According to data presented in the Rajya Sabha, over 12.5 lakh students were out of school in 2022-23, highlighting the disparity in educational access.

The situation is poised to become even more challenging in the future. A report by the UK India Business Council predicts that by 2030, India will have a staggering 140 million individuals of college-going age, the highest globally. This surge in demand, coupled with limited supply, is expected to drive educational costs upwards.

Private institutions have gained prominence in the education sector, with nearly half of all Indian children attending private schools. Government school enrolment has decreased significantly, emphasizing the changing preferences of Indian parents. As a result, parents and students must be financially prepared for the evolving education landscape.

Shifting the Paradigm: Financing Education

To address this evolving educational landscape, a paradigm shift in our approach to education financing is imperative. Education must receive unprecedented attention in our financial planning. When children dream of becoming scientists, CEOs, or pursuing any ambitious career, it becomes the responsibility of parents to make every effort to turn these dreams into reality.

Indian parents are renowned for their dedication to their children's aspirations. They are among the world's top savers. However, many still struggle to afford quality education due to a lack of financial literacy.

The Crucial Role of Financial Literacy

In conclusion, financial literacy encompasses every aspect that influences your financial well-being. It answers questions about where to invest, how to invest, how much to invest, managing loans when funds are inadequate, expense planning, and much more. Financial literacy is the roadmap to your financial goals. Embracing it empowers individuals to overcome seemingly insurmountable financial challenges, while its absence can make life significantly more challenging.

In this ever-evolving financial landscape, the knowledge and application of sound financial principles are not just beneficial; they are essential. Financial literacy is the key to securing a prosperous future for both students and parents alike.

The Significance of Financial Literacy for Students and Parents