Financial Fraud and the Literacy Gap: Educating to Safeguard Wealth
Sunil Gandhi
Advisor to Entrepreneurs, Executives & Families | Finance, Succession & Legacy Planning. Author of 11 books. Story Writer - Movie 'Uunchai'. Nominated for the best story @ Filmfare awards.
The alarming frequency of financial fraud in recent times highlights a critical issue in our society. Every day, people fall prey to unscrupulous fraudsters, exposing the dismal state of financial literacy, even among the educated population.
Financial literacy is an essential life skill, yet it is ironically undervalued in our education system.
Robert Kiyosaki, an educational entrepreneur, aptly said, “One of the reasons the rich get richer, the poor get poorer and the middle-class struggles in debt is because the subject of money is taught at home, not at school.”
The Organization for Economic Cooperation and Development (OECD) defines financial literacy as a combination of awareness, knowledge, skills, attitudes, and behaviors necessary to make sound financial decisions and achieve individual well-being.
According to the ‘Global Financial Literacy Barometer,’ India ranks 23rd among the 28 countries surveyed, with only 35 percent of its population considered financially literate.
A global survey by Standard & Poor’s Financial Services LLC (S&P) reveals that less than 25% of adults in South Asian countries, including India, are financially literate. Despite being home to 17.5% of the world’s population, nearly 76% of Indian adults lack basic financial knowledge.
The Financial Literacy of Educated Young Indians
Understanding the time value of money is fundamental to financial literacy. Money grows over time; if left idle, it diminishes in value. For instance, one rupee today could be worth Rs. 1.10 a year later with an interest rate of 10% per annum. Conversely, if not invested, its value might drop to Rs. 0.90 if the inflation rate is 10% per annum. This illustrates the powerful difference between money put to use and money left idle.
This underscores the importance of understanding financial concepts such as inflation and interest rates. The rate of inflation is the rate at which the prices of goods rise in a country, calculated by the RBI at both the retail and wholesale levels. If the inflation rate matches the interest rate on your investments, the purchasing power of your money remains unchanged. Therefore, the government’s challenge is to keep inflation low so that currency retains its value, while investors must seek returns that outpace inflation.
As T. Harv Eker wisely noted, “You become financially free when your passive income exceeds your expenses.”
The Cost of Money
Money comes at a cost. Borrowers pay interest, and savers earn interest; no money is free. Entrepreneurs often mistake equity money for free money because it doesn’t involve immediate interest payments or future interest commitments. However, equity money is, in fact, the most expensive form of capital. Failure to pay dividends can deter future investors and lower your company’s share value.
Start-up entrepreneurs should be cautious about diluting their stake too early. The earlier you dilute, the larger the percentage of shares you must give up. Saving even a small percentage of shares today can result in significant value as your company grows.
When borrowing, whether through personal loans or credit cards, the interest rates can be staggering. It’s crucial to assess the total cost before borrowing or overusing your credit card and failing to make timely payments.
Long-term vs. Short-term Investments
There are numerous investment avenues in financial markets, and understanding the tenure of your investments is key. This depends on the purpose of your investments—whether for retirement, children’s education, or future expenses like foreign travel. Align your savings with your future financial needs to avoid the costs of premature withdrawals.
Risk and Safety
Risk assessment is vital when investing. Some investment instruments, like equities or company fixed deposits, are inherently risky. While equity investments can offer the highest returns, company fixed deposits, though they provide a fixed return, are unsecured and could result in losses if the company fails.
Always perform a risk-return analysis before investing. Understand the risks involved and assess your risk tolerance. Avoid risky investments unless you are prepared to lose the money.
Resist the temptation to invest in schemes promising returns significantly higher than the market average. A prudent strategy for investing your risk capital is to focus on equity shares of established Indian blue-chip companies.
Insurance: Life and Health
Having life and health insurance is a sign of financial prudence. Neglecting to cover these risks can lead to financial instability. These policies protect you and your family from unforeseen medical expenses or the sudden loss of an income earner, safeguarding your financial plans.
The Discipline of Regular Investing
Investing requires discipline, which is why Systematic Investment Plans (SIPs) are so popular and widely offered by investment companies. Regular, systematic investments can help your money grow steadily.
Similarly, disciplined payment of dues, such as credit card bills and utility bills, can save you from incurring unnecessary interest costs. Financial indiscipline is costly.
Pay your utility bills, credit card bills, insurance premiums, and other dues before their deadlines. This is not only a healthy financial practice but also a sign of financial prudence.
Record Keeping
Proper record-keeping is crucial but often overlooked. Maintain records of your income, expenses, investments, and liabilities. This practice helps in analyzing unnecessary expenses and managing your investments effectively. Without proper records, you may miss out on some investments, which could be costly.
You spend the prime years of your life earning money. Don’t remain ignorant about how to manage and protect your hard-earned wealth.
As Alan Greenspan aptly stated, “The number one problem in today’s generation and economy is the lack of financial literacy.”
My two books on Financial Literacy: