Are you financially literate? Experts suggest the money habits you need for a secure future

We have entered an age where every generation, including teens, needs an astute grasp of their financial situation. When did this shift occur and how does it play out in a world of disappearing federal currencies and encrypted wallets? Qiraat Attar explores the money mindset

Many know how to make money, but fewer understand what it is to be financially literate.

Financial literacy is a long-term way of looking at our savings and investments. No one intends to work their entire lives, but expenditures don’t end, especially in the sunset years of our life. A solid financial plan can ensure that life is as smooth sailing when we’re retired as it is when we’re hustling in the prime of our life.

Building a safety net

Today, by the time you hit your early 20s, there has already been a significant investment in your future towards your education. Vivek Gangadhar, a financial planner with two decades of experience and hundreds of clients, spoke to us about the mindset of the youth and the common money mistakes.

“The youth believe in a ‘get rich quick’ mentality, but it can be dangerous. Initially, you might get some good returns, but ultimately, your entire capital can get wiped out. They’re also caught up in the shiny object syndrome, where they want the best of material comforts like the latest shoes, accessories, and gadgets, which may be out of reach at the moment. This causes them to get lured into EMIs, loans, and other debts, which can wipe away massive wealth when accumulated over a long time.”

Personal debt was admitted by 23% of UAE residents. Bank loans accounted for 38% of all obligations, followed by credit cards (32%) and student loans (15%)

He explains with a simple example. “A person’s total EMI of 10,000 INR per month (equals $125), if properly invested in a carefully selected investment portfolio of 15% interest rate, has the potential to yield around 3.7 crores ($ 465,000) in 25 years.”

According to a survey of 15-year-olds in the United States, 18 percent of respondents lacked the basic financial skills used in everyday situations, such as creating a simple budget and understanding an invoice. High schoolers scored an average of 48 percent, indicating the need for strong financial education at that level.

Today, a lack of such knowledge can be catastrophic. There are experts trained to help you save money and multiply it while still enjoying the occasional indulgence.

Putting the ‘earn’ in learn

A 2022 Investopedia Financial Literacy Survey of 1000 adults from each generation, including Gen Z (18-25), millennials (26-41), Gen X (42-57), and baby boomers (58-76) revealed that despite some investing experience, most Americans have only rudimentary knowledge about investment. Overall, 57% of adults polled by Investopedia are invested, but only one-third have advanced investing knowledge. Even fewer (one in four) reported having a thorough understanding of digital currency concepts such as cryptocurrency, blockchain, and non-fungible tokens (NFTs).

The survey revealed that millennials had the strongest grasp of investing at 44%. Gen X follows closely behind (37%), followed by Gen Z (31%) and baby boomers (26%).

On home turf, the Emirates Foundation for Youth Development published a research paper revealing some sordid facts about the Arab youth – 26% of young Arabs had some form of personal debt, rising to 52% in Saudi Arabia. Credit card culture is to blame for a large portion of the problem.

Personal debt was admitted by 23% of UAE residents. Bank loans accounted for 38% of all obligations, followed by credit cards (32%) and student loans (15%). The report also revealed that around 70% of Emiratis are in debt because of their penchant for owning luxuries.

57% of adults polled by Investopedia are invested, but only one-third have advanced investing knowledge. Even fewer (one in four) reported having a thorough understanding of digital currency concepts

Given the situation, it is of utmost importance for the Arab youth to have substantial financial means so that their ambitions can be supplemented by their income. The study suggests building financial literacy curricula into children’s early education to build money skills and responsible fiscal behavior that kids need, especially if their parents are poor at these skills too. For teens, outreach programs are an excellent way to teach them financial basics and some advanced lessons such as home ownership, mastering banking skills, and leveraging credit without abusing it.

The Emirati youth is also enamored with cryptocurrency, evidenced by “The Future of Financial Services Report,” which reveals that interest in digital assets is high, with two-thirds of UAE residents (67%) saying they want to invest in cryptocurrencies within the next five years.

Vivek also shed some light on the youth fad for cryptocurrency. Compared to older adults aged 45+, young UAE respondents aged 25-34 (74%) are more likely to say they are interested in cryptocurrencies.

“Cryptocurrency is money for the new generation. It’s a financial revolution. So, if you’re staying away from crypto, you lose. But I advise you to go for cryptocurrency, which has strong technology and blockchain backing it. Albeit, it has to be related to good gaming or Web3. There are more than 600,000 cryptocurrencies in the market, of which people know of around 20,000, and far fewer are credible. Therefore, one must always research and look for the founders behind the currency, for that builds credibility.”

Becoming a Mindful Midas

Vivek laments the lack of financial education. “Even as a chartered accountant, the Institute of Chartered Accountants of India doesn’t teach personal finance. Neither do the premier institutions like IITs offer any courses on financial literacy.”

However, you can take steps to get informed. Financial books are a great way to immerse yourself in concepts about personal finance. Some classic money mindset books on financial discourse are Rich Dad, Poor Dad by Robert T. Kiyosaki, Think and Grow Rich by Napoleon Hill, and You’re So Money: Live Rich, Even When You’re Not by Farnoosh Torabi.

Alternately, universities and some prolific finance writers have created comprehensive courses that will lead one through the steps to build your finance habit. You can find highly rated courses on Coursera, Udemy, and Khan Academy, or opt for specific courses like the Ramsey+ course by personal finance guru Dave Ramsey.

Apps that serve as portals for investment in stocks, mutual funds, and cryptocurrency also parallelly offer videos and short courses on strengthening your financial acumen. For instance, the Indian investment app Groww gives the market analysis of experts for every company, with percentages indicating if the experts believe it’s a good time to buy, sell or hold. Ideally, someone dipping their toes into the market can invest small amounts in learning about the basics of finance while simultaneously gaining hands-on experience and growing their funds.

In the case of HNI, their concerns are different, such as insurance, taxation, and savings after taxes. Capital preservation and managing with the right investment is their biggest worry

Keeping the net worth high

A set of people known as high-net-worth individuals (HNI) require a special kind of financial advice. Chakrivardhan and Chakravarthy, two financial consultants for this sought-after bracket, shed some light on the unique needs of these highly accomplished individuals like doctors, lawyers, or business leaders, who have their basic goals met but their aspirational dreams are yet to be manifested.

“Time is the biggest challenge for an HNI client. Due to lack of time, they cannot find the right person to manage their money and end up relying on suggestions from friends, family, or a bank for their investment. So, it’s all random investment, which does not help with growth.”

The advisers clarify that the management style is slightly different for this clientele. Firstly, it cannot be a one-time transaction with them, for they need several consistent meetings to thoroughly explore and understand their options.

Additionally, HNI clients need to be offered suitable product baskets to help them meet their financial goals. “A product is a financial scheme like a life insurance policy, mutual funds, fixed deposits, and bond funds, through which one can invest. The product should give the person access to move forwards. Ultimately, there is no bad or good product. It comes down to the suitability of the product. You need to look at if that product is aligned to your financial goal.”

Chakri and Chakra outline the differences between why HNI clients’ needs demand special attention. “An ordinary person invests to fulfill Maslow’s hierarchy of needs. But in the case of HNI, many of their needs are already met. Their concerns are different, such as insurance, taxation, and savings after taxes. Capital preservation and managing with the right investment is their biggest worry.”

Chakrivardhan and Chakravarthy, Financial Consultants

Time is the biggest challenge for an HNI client. Due to lack of time, they cannot find the right person to manage their money. So, it’s all random investment, which does not help with growth" — Chakrivardhan and Chakravarthy, Financial Consultants

A stitch in time saves millions

In the United States, over 15 million seniors are economically insecure, living at or below 200% of the federal poverty line (FPL). It reminds us that people who do not take financial literacy seriously in their younger days may face financial crises later in life.

Vivek explains, “20 years down the lane, wrong financial decisions can truly derail a person’s life, ruin their relationships. The number one reason for divorce across the world is financial discord.”

As he sees it, people come under pressure to meet life’s milestones, such as buying a new house and car even when they may not be ready, steeping them into debt. “They end up borrowing from the bank for a new house they can’t afford. If you borrow for 20 years under a housing loan, that’s 60 lac rupees. With a steady EMI, you could end paying for 20 years up to 1.28 or 1.3 crores, ultimately costing you double your house and giving you nowhere near the same in resale value.”

The psychological impact of financial instability is tremendous. Vivek says, “Financial stress can become cancerous and affect every area of your life – giving you low self-esteem and low competence in life. You end up with extremely limited options, thus working for a paltry salary and putting boundaries on your life.”

One needs to strike the right balance to have a solid financial portfolio while also enjoying the finer things in life. Thus, there is something to take from all generations for some knowledge about money. From our parents’ generation, we can learn how to be frugal, not impulse-driven but driven by absolute necessity, forgoing trendy purchases for savings for a rainy day. From the millennials, we can learn to enjoy the experiences life has to offer, such as a fabulous family vacation once a year and dining out for special occasions. And from the newest generations, we can learn income diversification, a return to minimalism, and a thorough exploration of all the available financial options to make our dream of a debt-free and stress-free future a reality.

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