Why financial literacy for students and parents can be life changing

Application of some basic finance rules can save you from a financial disaster.

The importance of financial literacy for students and their parents cannot be underscored enough in today’s competitive world. Let’s try and understand this through an example.

Imagine a person in 2012-13 with a five to seven-year-old kid who has planned to send their kid to a top B-School to pursue an MBA. They set aside Rs 10 lakhs-12 lakhs as per the MBA fees at that time and keep all the money in a fixed deposit. Now, in 2023, they would have approximately 18-19 lakhs in hand, considering interest rates of around 6 percent -7 percent. However, the costs for an MBA from a top B-school in India in 2023 are around Rs 22 lakhs-25 lakhs. This example shows the consequences of investing all the funds in one asset that does not generate returns higher than inflation. And this is just one example. Take any course, and you will find that education costs have increased drastically.

This situation could have been avoided, had the parents invested wisely and with an eye on inflation, and an anticipation of what kind of costs to factor in. Simply put, financial literacy is essential to avoid such situations.

Application of some basic finance rules can save you from a financial disaster. Investments should be made in assets that beat inflation. You should spread your money across different asset classes to avoid the risk of failure in case of any adverse event. If you wish to send your child abroad for education, invest in foreign currency assets to mitigate the exchange rate risk. And most importantly, monitor your investments periodically because you cannot take the risk aggressively when you come closer to your goal.

Also read | How diversification helps when investing for your child's education

Let us see how the application of the above basic finance rules could have saved the parent in the above example.

- Spreading investments across assets reduces the risk.

- A portfolio that beats inflation and creates a corpus of more than the required amount saves from the problem of insufficiency of funds.

In a competitive world where everyone must struggle for survival, a quality education not only allows an individual to secure an occupation to fulfil their basic livelihood needs, but also allows one to recognise their true potential. That is why the importance of education is unquestionable. But is it easily accessible to everyone? Absolutely not. As per the data presented in the Rajya Sabha by the Minister of State for Education, Mr Subhas Sarkar, 12,53,019 students were out of school according to the data uploaded on PRABANDH Portal (2022-23).

And this accessibility is going to get increasingly difficult in the future. A few years back, the UK India Business Council published a report titled “Beyond The Top 200 – Effective Collaboration for Indian Higher Education”, which stated that, by 2030, India will have the highest number of people of college-going age – a staggering 140 million. And we know that increased demand with limited supply is going to push the prices upwards.

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Another piece of data that needs our attention is the share of private players in education. A report by Central Square Foundation, a non-profit organisation, titled “State of the Sector Report: Private Schools in India,” suggests that nearly half of all Indian children attend private schools. Government school enrolment has dropped to 50 percent from nearly 74 percent in 1978. And within private schools, the share of private-aided school enrolment has almost halved in this period, going from 23 percent to 11 percent. There can be numerous reasons for parents to choose high-cost, unaided private schools over other options. Whether this is desirable or not is a different topic altogether, but this data shows the changing mindset of Indian parents. All of this means parents and students have to be better prepared financially.

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For this, we need a paradigm shift in our approach towards education, especially its financing. It needs to be given more attention than ever. before. When a young kid dreams of becoming a scientist after watching the successful landing of Chandrayaan-3, or when one dreams of becoming a CEO like Sundar Pichai or Satya Nadella after pursuing an MBA from a top B-School, it becomes the responsibility of the parents to  make every effort to fulfil their children's dreams.

And we have no doubt that Indian parents do not leave any stone unturned for their children. They compromise on their necessities to fulfil their children's dreams. Indians are among the top in the world when it comes to saving. But still, many cannot afford to fulfil their education dreams. Why? Because of a lack of financial literacy.

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To conclude, financial literacy includes everything that impacts your financial health. Questions like where to invest, how to invest, how much to invest, how to take loans in case of inadequate funds, how to plan expenses, and much more show you the path to your goal. Hence, financial literacy is crucial. It allows one to overcome an impossible-looking financial challenge; on the contrary, lack of it makes life difficult.