Are we financially literate?

Financial literacy, an interesting thought, but how do one get that. How do one judge if he/she is financially literate? What are our sources where we can learn something about money? All these questions running through my mind, I dint really understand one thing - why we are not thought about money in schools when the ultimate aim of our education is earning money?

I just went back in time to my childhood. The three potential places where I could have got a little bit of financial knowledge was at home (through parents), school (through teachers), and church (oh yeah, I have attended lot of those catechism classes), but I don't remember a single thing that these three institutions thought me about managing money. Of course, my parents always encouraged me to save money, but that was in a very passive way. Parents always tell you things what you are not supposed to do, but never reason their decisions. As a kid, I had always felt they were trying to fool me rather than teach me something. A practical example of how things work would give a better understanding than hours of lecturing and ordering. I feel schools could have played a huge role in delivering financial education, but there wasn't a single lesson on basics of money. Forget school, even when I graduated with a Bachelor of Engineering degree from a prestigious institution, my knowledge about financial concepts was nil. I was going to earn a five figure salary soon, but how do I deal with it was not known to me.

The whole world is troubled with the current financial condition, but still there is very less done on the side of the spreading financial education. Even government isn't taking any responsibility. I heard that US has some sort of a council that does something with the concept of financial literacy. I don't think we have anything of that sort in India, and I really don't think that is gonna happen in India.

Coming back to the tittle of my post, are we really financially literate? I feel we all are hypocrites when it comes to managing money. We always carry a "we know it all" attitude and justify our financial decisions even though we know we have done a wrong choice. The funniest thing here is that we do a thorough research online before buying a cellphone or any other electronic product, we check the ratings on newspaper and on news channels before watching a particular movie, but when it comes to our investments, the neighborhood insurance agent is the king. We always depend on his wisdom, whereas he always tries give you the products which earns him better commissions.

How many of us think the best way to save tax is getting an insurance policy? How many of us take insurance as investment? How many of us think equities are always risky? If you think you belong to the above category, then I would consider you as financially illiterate.

Its an ongoing argument about whats good or bad for one's financial health or whats right or wrong for a particular individual in terms of wealth creation, but I would say realizing that we need help would be the first step toward financial well-being. The concept of visiting a financial planner is still not popular in India. When I say financial planner I'm not about talking about the insurance agent here. I mean a certified financial planner (CFP). Yes, we do have to pay for that, but this small price will keep the CFP accountable for the financial choices he makes for us. The free advices we get from the insurance agents or our friends or our colleagues can have dangerous implications on our financial health. Taking advices from the street is a like going to a chemist for our health care needs rather than the doctor. We all know what can happen with that.

The financial downturn that we started seeing from the beginning of last year has taught us some lessons for sure. With people getting laid off, job security is not taken to be granted anymore. An active approach towards managing the money is the need of the hour. At the end of 2007, I heard many of my friends regretting not investing in equity., but at the end of 2008, many of my other friends were talking about how their portfolios were slashed down to less than half of their initial investment. In between these, there were a group who were doing sound on their finances both before the beginning of 2008 as well as now. They saved, invested in different asset classes, changed their asset allocation and portfolio according to the situation, constantly learned about the concepts they were not sure of and sought help from specialists when unsure of what is to be done. It might seem like a lot of work, but all these might take not more than a couple of hours in the weekend. Once this becomes a habit and you see your money grow, I'm sure you will stop counting number of hours spent on this. A small price for a better future.

Ultimately, I must say there is no one who knows what is best for you other than yourself. Instead of relying on someone to save you, Its better you take up the responsibility. The power of knowledge is the greatest power. Lets take this financial turmoil a chance to set everything back on track. Let us get financially literate.

Why aren't the prices going down when inflation is so low?

Inflation - been a buzz word for quite some time now. If you have a habit of reading at least the newspaper headlines on a near-daily basis, you wouldn't have missed the inflation numbers. Well, I would say most of us are still ignorant about how inflation affects us directly or indirectly. What we do know is, when the inflation numbers makes it to the front page of most of the newspapers, it should be something serious. Inflation breaching 12% or touching zero, financial analysts always have list of problems associated with it. There is no ideal inflation number. Its just a relative indicator of how far or near we are from trouble.

One major misconception most of us have is inflation and prices are directly related. Let me try to explain it with an example. Say, the price of an item is Rs. 100 at same time last year and its Rs. 110 now - so the inflation is at 10%, which simply means the item is 10% expensive. So inflation is just an indicator of rate of price movement not the real prices. So when the inflation is at 0.44%, as is the case now, the Rs. 100 item last year is now at Rs. 100.44.

What happens when inflation nears zero - which means prices aren't increasing at all - that get us into deflation state or negative inflation.

Some smart readers would have already calculated that when the inflation starts moving negative the prices starts going down.

Now, is that a phenomenon to be happy about? The answer is no. You might be wondering how can we not feel happy about the prices going down. To understand that lets understand how the prices actually go down.

The main reason for prices to go down is demand-supply mismatch, i.e, either production is more than consumer demand or demand going down, may be due to recession. In both the cases, companies may have to sell their goods cheaper. As a consequence of this, companies start incurring loses. The end result of all this - companies trying cut cost. The easiest way of doing that - job cuts or layoffs.

Hope this helps improving your understanding of inflation/deflation. I have tried to keep it simple avoiding major financial terms.