A positive attitude is a must in every aspect of life; with the right attitude one can pretty much overcome all hurdles. At the same time an attitude alone cannot be sufficient without having the right knowledge and awareness. This fact applies to the financial world too, it is important to have the right financial attitude and be financially literate to have a smooth and successful life.
Financial Attitude: Why is it Important?
Having the right attitude towards managing your finances will ensure that you are not bogged down by unnecessary worries and make the best of available market opportunities. One should focus on getting the right information (this is where financial literacy comes in) and then make the best of the available information so that they can use it for their benefit.
When we talk about financial attitude then a person can be a conservative investor or an aggressive investor but the attitude is independent of the approach they follow. A conservative investor is one who is less likely to take risks and hence they are willing to settle for lower returns that come along with low-risk investments. Indians generally have a conservative approach, though we like to save a lot yet we are not able to invest it in a way that it generates optimum returns. Thus we need to have the right attitude which helps us move from being just savers to investors so that there is wealth creation.
The financial attitude of an individual is dependent on five factors namely: the income level, savings, expenditure, liabilities and the financial goals. Clarity about the financial goals goes a long way in determining the financial attitude of a person. While income level and liabilities cannot be changed easily, a person can make the necessary adjustments to savings and expenditure so that he/she is able to meet his/her financial goals.
Being disciplined is important in all aspects of life and having a disciplined financial attitude could prevent a lot of complications that may arise in a person’s life. Paying all EMIs and dues ensures that one stays out of the loan defaulter list, there is no dent on the credit score and one does not have to pay hefty fines and penalties due to missed/delayed payments. Again being disciplined in your approach towards savings and investments helps one in fulfilling their financial goals.
Financial Literacy: Why is it a Necessity?
A positive financial attitude can hardly be of any use unless one has the basic knowledge to back it. The financial world is complicated and it may not be possible to be aware of all intricacies and complexities but a few basic terms and issues need to be understood by one and all.
Thus when one invests they must be sure about the actual returns that they will get on their investment, is the interest calculated annually/semi-annually or quarterly as this will impact the overall returns and what are the tax implications of the investment. The actual return should always factor in the inflation rate; if the money is growing at a rate that is lesser than the inflation rate then the returns are said to be negative. For example, if you invest in a deposit that gives you 8% returns and you have to pay a tax of 10% on it then your post return tax is 7.2%; if the inflation rate is 7% then the actual return is 0.2%!
Again, when one is taking a loan there is a host of factors that need to be looked at and just the most obvious one which is the interest rate. You may choose to borrow from a lender who has the lowest personal loan interest rate but may realize that they have a higher processing fee and also a pre-payment penalty clause. Factors like other charges and fees, penalty clause, loan duration, whether the interest rate is fixed or floating are factors that must be a part of your decision-making process. It is important to aware of the importance of each of these aspects.
Being financially literate is not possible unless one is aware of the significance of credit rating and what impacts the calculation of credit scores. As per a survey conducted, 70% of the Indian population was unaware of credit rating and its importance. Though the credit score plays a vital part in the loan application scrutiny of an individual its significance now goes beyond just getting a loan application sanctioned. Recruiters may ask for the CIR of the applicant as part of the background check. The CIR is also an indicator of the financial health of an individual. There are five major factors that impact the credit score calculation; they are payment history, credit mix, loan tenure, credit inquiries and credit utilization. Keeping yourself updated about this is crucial.
The right financial attitude coupled with the right information will help one remain financially healthy and stable.