lOMoARcPSD|37256594

NAVNEET COLLEGE OF ARTS COMMERCE & SCIENCE

Navneet Education Society’s Navneet College of Arts, Science and Commerce Gilderlane Mun.
School Bldg. Belasis Bridge, Opp. Rly. Stn. Mumbai Central, Mumbai 400008

PROJECT REPORT ON FINANCIAL LITERACY

BACHELOR OF COMMERCE (ACCOUNTS AND FINANCE)

SEMESTER VI
NAVNEET COLLEGE (MUMBAI CENTRAL)

Submitted by: SOHAM BHUPENDRA DAHAKE

Roll no.: 20

SUBMITTED TO
UNIVERSITY OF MUMBAI
ACADEMIC YEAR 2023 - 2024

PROJECT GUIDE
Prof. -
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Topic Name

A Project Submitted to
University of Mumbai for partial completion of the degree of

BACHELOR OF COMMERCE
(ACCOUNTS AND FINANCE)
Under the Faculty of Commerce

By
SOHAM BHUPENDRA DAHAKE
Roll No. 20

Under the Guidance of

Prof. _______

Navneet College of Arts, Science & Commerce

Mumbai Central, Mumbai - 400008
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CERTIFICATE

This is to certify that Mr/Ms. Soham Bhupendra Dahake has worked and duly completed his/her
Project Work for the degree of B.COM under the Faculty of Commerce in the subject of (BAF) and
her project is entitled “Financial Literacy” under my supervision.
I further certify that the entire work has been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree or Diploma of any University.
It is her own work and facts reported by her personal findings and investigations.

Project Guide External Examiner Name and Signature of the Guide

(Prof.)

Signature of Principal
College Seal
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DECLARATION

I the undersigned Soham Bhupendra Dahake here by, declare that the work embodied in this project
work titled “Topic - Financial Literacy” forms my own contribution to the research work carried out
under the guidance of Prof. Name is a result of my own research work and has not been submitted
to any other University for any other Degree/Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated as such
and included in the bibliography.
I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

DATE:

PLACE:

Signature of student (SOHAM DAHAKE)

Roll No. - 20 TYBAF

Certified by
Name and signature of the Guiding Teacher.
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ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do this project.
I would like to thank my Principal, Dr. Harsha Badkar for providing the necessary facilities
required for completion of this project.
I take this opportunity to thank our Coordinator Dr. Vijay N Singh for his moral support and
guidance.
I would also like to express my sincere gratitude towards my project guide Prof. Name whose
guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books and
magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my Parents and Peers, who supported me throughout my
project.
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RESEARCH METHODOLOGY

RESEARCH OBJECTIVE

To know the important factors of financial planning

To understand the theories of financial planning
To study the process of financial planning
To understand the impact of financial planning

RESEARCH SCOPE

This project on financial planning presents various aspects of financial planning for college
students. Financial planning is very important for every individual. If people understand its
significance at a younger age, achieving their future financial goals becomes more convenient as
you can invest in different products to meet your needs.

DATA COLLECTION
Secondary Sources:
Secondary Data is the data collected by someone other than the user. A common source of
secondary data includes organizational records and data collected through qualitative methodologies
or qualitative research.
The data for the study has been collected from various sources:
i. Books
ii. Internet
iii. Financial magazines

LIMITATIONS TO THE STUDY

Due to time constraints, a detailed study could not be done

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Table Of Contents

Sr. No Topic Page no

1 Introduction To Financial Literacy 8
2 Budgeting 12
2.1 What Is Budget? 13
2.2 Planning A Budget 14
2.3 How To Build A Budget? 15
2.4 How To Balance A Budget? 18
3 Saving Money 21
3.1 How To Save Money 22
3.2 Saving Wisely 25
3.3 Pay Yourself First 27
3.4 Types Of Saving Accounts 28
3.5 What Is Intrest and How It Works 30
4 Consumer Credit 31
4.1 What Is A Credit Score 32
4.2 How Do I Raise My Credit Score 36
4.3 Credit Cards 41
4.4 Choosing The Credit Card 44
4.5 Cash Vs Credit Cards 52
5 Money Personality 57
5.1 Money Personality 58
5.2 SMART Goals 62
5.3 Short-, Medium- and Long-Term Goals 66
6 Investment and retirement 70
6.1 Introduction to investment and retirement 71
6.2 Risk and return on investment 77
6.3 Planning for retirement 84
7 Conclusion 90
8 Bibliography 91

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UNIT 1

INTRODUCTION TO FINANCIAL LITERACY

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Introduction To Financial Literacy

Misconceptions about financial literacy:

Misconceptions about financial literacy are everywhere. Financial literacy isn't
just about creating and sticking to a budget, it's important for everyone, regardless of
income, age, and educational level.

What is financial literacy?

Simply, financial literacy means knowing how to handle your money wisely.
Many people struggle with financial literacy, even as adults. This is often due to
misconceptions or a lack of understanding about what it entails.

Introduction to Financial Literacy:

Financial literacy is a critical skill set that empowers individuals to make informed and effective
decisions regarding their finances. In today's complex and ever-changing economic landscape,
understanding financial concepts and possessing the ability to manage money wisely is essential for
achieving financial stability and success.

This introduction is a comprehensive overview of financial literacy, covering its importance, key
components, and benefits.

Importance of Financial Literacy:

Financial literacy is more than just knowing how to balance a chequebook or create a budget. It
encompasses a broad range of knowledge and skills related to earning, spending, saving, investing,
and protecting money.

Key Components of Financial Literacy:

1. Budgeting and Money Management:
Developing a budget is the foundation of sound financial planning. Financially
literate individuals understand the importance of tracking expenses, setting financial
goals, and living within their means.

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2. Saving and Investing:

Building wealth requires the ability to save and invest wisely. Financial literacy
teaches individuals about different savings and investment vehicles, risk management,
and long-term wealth accumulation strategies.

3. Debt Management:
Many individuals struggle with debt, whether it's from credit cards, student
loans, or mortgages. Financial literacy equips people with the knowledge to manage debt
responsibly, avoid predatory lending practices, and work towards becoming debt-free.

4. Understanding Financial Products:

From bank accounts and credit cards to insurance policies and retirement plans,
there are numerous financial products available in the market. Financially literate
individuals can evaluate these products effectively, compare their features and benefits,
and make informed decisions that align with their financial goals.

5. Financial Planning for Life Events:

Whether it's buying a home, starting a family, or preparing for retirement, major
life events often come with significant financial implications. Financial literacy helps
individuals plan and prepare for these events, ensuring they have the resources needed to
navigate life's milestones successfully.

Benefits of Financial Literacy:

1. Financial Stability:
By understanding how to manage money effectively, individuals can avoid
financial pitfalls, build emergency savings, and weather economic downturns more
resiliently.

2. Improved Decision-Making:
Financially literate individuals are better equipped to evaluate financial
opportunities and risks, leading to more informed decision-making and greater financial
success.

3. Empowerment:
Financial literacy empowers individuals to take control of their financial futures,

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reducing stress and anxiety related to money management and enabling them to pursue
their goals and dreams with confidence.

4. Generational Wealth:
By passing on their knowledge and values related to financial literacy,
individuals can create a legacy of financial stability and prosperity for future
generations.

5. Economic Growth:
A financially literate population contributes to economic growth by making
smarter financial decisions, investing in education and entrepreneurship, and
participating more actively in the economy.

In conclusion, financial literacy is a fundamental skill set that plays a vital role in shaping
individuals' financial well-being and overall quality of life. By educating themselves and others
about key financial concepts and practices, individuals can build a solid foundation for achieving
their financial goals and securing a brighter future.

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UNIT 2

BUDGETING

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2.1 WHAT IS A BUDGET?

A budget is a plan that helps you manage your money. It shows you how much
money you have, how much money you need to spend on different things, and how
much money you can save or use for other goals. A budget can help you make smart
decisions with your money and avoid problems like overspending, debt, or running out
of money.

Why do I need a budget?

Money is a limited resource, and you probably aren't able to buy everything you
want or need with the money you have. It's important to prioritize your expenses and
choose what is most important for you and your family. A budget can help!

Track your income and expenses.

Your income is the money you earn or receive from different sources, like your
allowance, gifts, or jobs. Your expenses are the money you spend on different things,
like food, clothes, bills, or entertainment. A budget can help you see how much money
you have and where it goes every month.

Set and achieve your goals.

Your goals are the things you want to do or have with your money, like saving
for a bike, a college fund, or a vacation. A budget can help you plan how much money
you need and how long it will take to reach your goals. It can also help you adjust your
spending habits to save more money for your goals.

Avoid or reduce debt.

Debt is the money you owe to someone else, like a bank, a store, or a friend.
Debt can be a problem because it can cost you more money in interest and fees, damage
your credit score, or cause stress and conflict with friends and family. A budget can help
you avoid or reduce debt by helping you spend less than you earn, pay off your bills on
time, and avoid borrowing money you don't have a clear plan for repaying.

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2.2 PLANNING A BUDGET

How do you start?

Learn about which format your budget will be in paper, printable sheet, spreadsheet, app.

Your budget needs to be something that you can look at and refer to frequently. There are multiple
ways of building a budget, and you should pick the one you are most comfortable using:

1) Pencil and paper:

You can write down your income and expenses on a piece of paper, and subtract
your expenses from your income to see how much money you have left. You can also
divide your expenses into categories, such as needs, wants, and savings, and decide how
much to spend on each one.

2) Printable sheets on the internet:

You can find many websites that offer free or cheap budget sheets that you can print
and fill out. These sheets may have different formats and features, such as charts, graphs,
or tips, to help you organize your money and track your progress.

3) Spreadsheet:
You can use a computer program, such as Excel, Google Sheets, or Numbers, to
create a budget spreadsheet. You can enter your income and expenses in different cells, and
use formulas and functions to calculate and compare your numbers. You can also customize
your spreadsheet with colors, fonts, and styles, and make changes easily.

4) Apps:
You can download apps on your phone or tablet that can help you create and manage
your budget. Apps like Empower, YNAB, or Mobills can connect to your bank account,
credit card, or other financial accounts, and automatically update your income and expenses.
Some apps can also give you alerts, reminders, or suggestions, to help you stay on track and
reach your goals.

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2.3 HOW DO YOU BUILD A BUDGET?

Build your budget by comparing your income against your spending. One way to build a budget is
to use the 50/30/20 rule.

The 50/30/20 rule divides your money into three categories:

o Needs
o Wants
o Savings

The 50/30/20 rule suggests that you spend 50% of your income on your needs, 30% on your wants,
and 20% on your savings. This way, you can balance your money and plan for your future.

How do you use the 50/30/20 rule to build your budget?

To use the 50/30/20 rule to build your budget, you need to follow these steps:

Step 1: Know your income

Your income is the money you earn or receive every month. It can come from a
job, an allowance, a gift, or a scholarship. Add up all your income sources and write
down the total amount. If your only income is your job, write down the amount you get
paid each month. This is your starting point for your budget.

Step 2: Calculate your needs budget

Your needs are the things you must have to live and be healthy. Examples include:
o Rent
o Utilities
o Food
o Transportation
o Insurance
o Basic clothing
To find out how much you can spend on your needs, multiply your income by 0.5.
For example, if your income is ₹2,000, your needs budget is ₹2,000 times 0.5 = ₹1,000.
This means you should try to keep your needs expenses below ₹1,000 every month.

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Step 3: Calculate your wants and budget

Your wants are the things you like to have but don't need. Examples include:
o Hobbies
o Entertainment
o Eating out
o Shopping
o Travel
To find out how much you can spend on your wants, multiply your income by 0.3.
For example, if your income is ₹2,000, your wants budget is ₹2,000 times 0.3 = ₹600.
This means you can spend up to ₹600 on your wants every month.

Step 4: Calculate your savings budget

Your savings are the money you put aside for your future goals. Examples
include:
o Emergency fund
o Retirement account
o College fund
Any other big purchase you are saving for
To find out how much you should save, multiply your income by 0.2.
For example, if your income is ₹2,000, your savings budget is ₹2,000 times 0.2 = ₹400.
This means you should save about ₹400 every month.

Step 5: Write down your actual spending

Now that we have calculated our budget, let's start sorting our actual spending.
Grab your latest bank statement, or log into your banking app, and start sorting your
actual expenses.
For example, if you see that you made a ₹200 payment towards your electric bill, write ₹200 under
the "Needs" budget. If you see a charge for movie tickets, write that amount under the "Wants"
budget.

Step 6: Compare your expenses to your budget

Subtract your expenses from your budget. This is your budget balance. If your

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budget balance is zero or positive, that means you are living within your means and have
some extra money. If your budget balance is negative, that means you are spending more
than you should and may have a budgeting problem.

Step 7: Adjust your budget

If your budget balance is negative in any of the three categories, don't panic!
Look at the other categories and see if there is money left in them, and use that extra
money to balance or offset the negative balance.
If there is no extra money, you need to find ways to reduce your expenses or increase your income.
If your budget balance is positive, you can decide how to use your extra money. You can spend it
on your wants, save it for your goals, or donate it to a cause.

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2.4 HOW DO YOU BALANCE YOUR BUDGET?

If you find any of your budgets (needs, wants, or savings) having a negative
balance, do not panic. Many different strategies can help bring your budget from a
negative to a positive.

How do I balance a budget?

Having a negative balance in your budget means that the income you brought in
was not enough the cover the expenses. To tackle this problem, you can either try to
increase your income or reduce your expenses. Even better if you can accomplish both.

Increasing your income

Most often people think that the only way to increase an income is to find a
better-paying job. That is most certainly the most common way, but other strategies can
also help. Here are some ways to increase your income:
i. Ask for a raise or more hours at your current job.
ii. Look for extra jobs or chores that you can do for money, such as babysitting, mowing lawns,
or selling crafts.
iii. Sell things you don't use or need anymore, such as clothes, books, or toys.
iv. Save your change and cash it in at a bank or a coin machine.
v. Ask for money or gift cards as a gift for your birthday or other occasions.

Decreasing expenses
When it comes to expenses, some expenses are easier to decrease than others.
Expenses that are the same every month, such as your rent, car payment, insurance, or
cell phone bill, are known as fixed expenses. These expenses are pre-determined by
somebody other than yourself, like a bank or a company. Changing these expenses
typically involves certain negotiations with the company or bank itself, and not all
negotiations result in expense reduction.
Other expenses, such as some utilities, groceries, or shopping can vary from month-to-month, and

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are called variable expenses. You have a lot more control over these and they are much easier to
decrease.
Some ways to save money on expenses are:
i. Compare prices and look for discounts or coupons before you buy something.
ii. Avoid impulse buying, which means buying things you don't need or didn't plan to buy.
iii. Use less water, electricity, and gas to lower your utility bills.
iv. Borrow, swap, or reuse items instead of buying new ones.
v. Pack your lunch instead of buying it outside.
vi. Choose free or low-cost activities for fun, such as reading, playing games, or going to the
park.

Shifting the funds

A short-term fix to a negative budget balance is to simply move funds from the
budget balance that was positive into the negative one. For example, if your savings
budget balance is negative, but your needs budget balance is positive, you can take the
extra money from your needs and move it onto savings. Note that this is only a short-
term solution, and we should try and figure out the cause of the negative balance.

Reducing expenses
Unit pricing: Spend less by paying more
Per unit pricing tells you how much you're paying per gram, per rupee, or per item. Paying attention
to per-unit pricing can help you figure out which product is the best deal.
For example, if you're shopping for Stationary, you might see two different brands. One costs ₹132
for 12 books, while the other costs ₹162 for 18 books. At first glance, it appears that the first option
is the best deal. But if you compare per-unit pricing, you'll see that the second option is cheaper:
The first option costs ₹11 per book
The second option costs only ₹9 per book
In conclusion, even though we paid more for the bigger pack of stationary, we spent less for each
book.

You may be surprised that most stores have already done the math for you.
Look at the price label below:

A store label for the price of sea salt. The

price, 2 Rupees and 49 Paise is the largest.

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An arrow points to the unit price, 78.3 Paise per gram, in the corner of the label.
Per-unit pricing is typically shown in smaller print on the side.
Per-unit pricing can be especially helpful when you're trying to compare different sizes of the same
product.
HOW DO I LOWER MY EXPENSES?

Negotiating bills
Sometimes it can be tough paying bills, especially when they're for services you rely on, like your
phone, internet, or cable. But there's good news: you may be able to negotiate a lower bill with your
service providers.

1. Know your options.

Before you call your service provider, research the competition. You'll be in a
better bargaining position if you know the rates and plans that other companies offer. If
you can mention a cheaper plan from a competitor, your service provider may be more
willing to negotiate.

2. Be polite but firm.

When you call customer service, be polite and respectful. Remember, you're
asking for a favor, so you want to be as friendly as possible. But at the same time, make
it clear that you're serious about wanting a lower bill. Tell them that you're considering
switching to a different provider if they can't work with you.

3. Ask for a supervisor.

If the customer service representative says they can't help you, don't be afraid to
ask for a supervisor. Sometimes the people higher up have more authority to negotiate.

4. Be persistent
If you don't get the answer you want the first time, call back again in a few days.
Sometimes different representatives are more helpful than others.

5. Look for a promotional offer.

If you're not successful in negotiating a lower bill, ask if there are any
promotional offers available. Sometimes service providers will give you a discount for a
certain amount of time if you sign up for a new plan or bundle multiple services

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together. Remember, it never hurts to ask! You might be surprised at how much you can
save just by negotiating with your service providers.

UNIT 3

SAVING MONEY

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3.1 HOW SHOULD I SAVE MONEY?

How do I save money?

i. There are many different methods people use to set money aside. Here are a few examples:
Some people automatically deposit a certain percentage of their paycheck into a savings account, so
they don't even have to think about it each time they get paid.
ii. Others keep a piggy bank or jar at home, where they add their spare change each day or
week.
iii. Another strategy is to create a budget and designate a certain amount each month to put into
savings.
iv. Some people use apps or services that "round up" their purchases to the nearest rupees and
put the extra change into a savings account.
v. Finally, some people use specific goal-setting strategies. For example, they might save
all ₹10 bills they receive, or try to save ₹5 every day for a month.

How you choose to save money is up to you.

Planned and unplanned expenses
Preparing for planned and unplanned expenses.
Saving money can be hard, but it's one of the most important things you can do to ensure your
financial stability. One of the first things you need to do when trying to save money is to understand
the difference between planned and unplanned expenses.
i. Planned expenses:
a. Planned expenses are things you know are coming, like rent, a car payment, or a
phone bill.
ii. Unplanned expenses:
On the other hand, are things that pop up unexpectedly—think a medical bill, car
repair, or last-minute gift.
Unplanned expenses can have a catastrophic impact on people's finances. For example, if your car
is the only way you can get to work, and that car breaks down, you are going to have to miss work

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or pay for rides to and from work until the car is fixed. If there is no money in savings for this type
of expense, you are going to have to borrow money and possibly put yourself in debt. Your income
may suffer if you end up missing work, and your budget will now have additional expenses in it.
Medical expenses are another type of unplanned expense that can also affect the income portion of
your finances. If you are ill, your ability to work will also be affected, as well as your income.

Emergency fund
While it is impossible to predict if any of these events will happen in the future,
it is important to be prepared, just in case. Best way to do this is to start an emergency
fund. Emergency fund is a savings account specifically set aside for unexpected
expenses. The goal is to have enough money in the fund to cover costs if something
unexpected comes up. Many experts recommend having at least three to six months’
worth of expenses saved up in an emergency fund.

Emergency fund
If you are following the 50/30/20 rule for budgeting, you are already setting
aside 20% of your income for savings. Now, let's break that down even further. We
already know that having an emergency fund is essential to protecting all aspects of our
budget. An emergency fund is where most, if not all your savings should go until that
fund reaches its intended amount.
The recommendation is that your emergency fund has three to six months' worth of living
expenses/needs in it. Expenses like dining out and entertainment should not be included in this
calculation, as they can easily be eliminated in case of an emergency. So, what does that look like in
real life example?
Example
Bhagwandas, who works as a store manager, has a monthly salary of ₹52000. Bhagwandas has
decided to start building an emergency fund and knows that she should have three to six months'
worth of expenses in that fund. Looking at her monthly budget, Bhagwandas identified the
following as her essential living expenses:
Expense Amount
Rent ₹11,000
Utilities ₹2200
Car payment ₹4600
Insurance ₹850
Groceries ₹6000

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Phone & ₹1290

internet
TOTAL ₹25,940

We can say that Bhagwandas has about ₹26,060 worth of living expenses per month. If her
emergency fund is to have three months' worth of expenses, then her emergency fund should
have ₹78,180 in it.
But what if it's six months' worth of expenses? In that case, he should have ₹1,56,360 in emergency
savings.
Bhagwandas has been following the 50/30/20 rule and is saving 20% of his income.
If he is going to try and save three months' worth of expenses, it is going to take him about 15
months to do that.

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3.2 SAVING WISELY

Saving money over time by splitting the cost throughout the year.

 Pop quiz!
What's easier to come up with - ₹10 or ₹520?
The answer is obviously ₹10. But, did you know that saving ₹10 per week is the same as
saving ₹520 per year? Breaking down savings goals into smaller pieces is a very powerful saving
strategy for any type of planned expenses.

What are planned expenses?

Planned expenses are any type of expenses that are predictable and occur on a
repeating basis. They can be as frequent as daily, like buying lunch, or yearly, like car
registration. Because you know that these expenses are coming, you can prepare for
them in advance, and make their impact on your pocket much less noticeable.
For example, let's take the November-December holiday season. Financially, this is one of the most
stressful times for most people, as they tend to spend more than at any other time of the year.
Luckily, that stress can be greatly lowered by following these tips:
Figure out what you need to save for: Whether it's a vacation, a new car, or a college education, set
a goal so you know how much you need to save.
Example, let's plan on saving for holiday shopping.
i. Set an amount and a time frame for your goal:
Let's say the holiday season just ended and you have 11 months left before you need
to start shopping for gifts again. This year you spent about ₹550 on gifts for your immediate
family. This means you need to start saving ₹50 each month, or roughly ₹11 per week.

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ii. Put your money in a separate account:

This will help you avoid spending it on other things. There is no limit on how many
accounts you can have, so consider having an account for each planned expense. This helps
you keep an eye on each account separately, and will give you a better idea how close you
are to reaching your goal.
iii. Make saving automatic:
Consider setting up an automatic transfer from your checking account to your
savings account each month or week. It is least noticeable if you schedule it on the same day
you are getting paid. This way, you won't have to remember to transfer the money yourself.
iv. Adjust your budget, if needed:
If you're having trouble saving enough each month, take a look at your budget and
see where you can cut expenses. For example, if you go out to eat twice a week, you could
reduce that to once a week and put the extra money into your savings account.
v. Be patient:
Saving for a big expense can take time, but it's worth it in the end. Stay focused on
your goal and resist the temptation to dip into your savings for other things.

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3.3 PAY YOURSELF FIRST

How to structure your paychecks around paying yourself first.

You might have heard people say "you should always try and pay yourself first". The phrase "pay
yourself first" generally refers to the idea that when you receive income, you should prioritize
saving money for yourself before paying bills or other expenses.

Paying yourself first

How you pay yourself first will depend on how often you get paid. Some people
get paid every week, others every other week, some twice per month, and others once
per month.

Pay period Example Number of pay periods per year

Weekly Every Friday 52
Biweekly Every other Friday 26
Semi- Every 1st and 15th of the month 24
monthly
Monthly Every 1st of the month 12

Refer to the table above to see how many pay periods you have in a year. This will help you figure
out the amount you need to save each time you receive a paycheck.
Example
For example, let's say you want to save ₹65,000 for a new laptop:
a. If you're paid weekly, you need to save ₹1,250 each time you get paid.
b. If you're paid biweekly, you need to save ₹2,500 with each paycheck.
c. If you're paid semi-monthly, you need to save ₹2,710 each time you get paid.

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d. And, if you're paid monthly, you need to save ₹5416 each paycheck.

This method works for any savings goal. Let's say you want to save ₹15,000 for a vacation and you
are paid every two weeks. You would divide ₹15,000 by 26 pay periods to get ₹576.92 per
paycheck. This amount will then be put aside into savings and when the vacation time finally
arrives, you will have all the money save up - no stress, no worry.
By syncing your savings with your paycheck, you are able to save money before you get the chance
to spend it, thus, pay yourself first.

3.4 DIFFERENT TYPES OF SAVINGS ACCOUNTS?

Choosing a savings account

A savings account is a great way to save money, earn interest, and grow your
wealth over time. But with so many different types of savings accounts to choose from,
it can be tough to decide which one is right for you.

Consider your goals

First and foremost, consider your goals. Are you saving for a specific purchase,
like a car or a house, or are you just looking to build up an emergency fund? Knowing
what you're working towards will help you choose the right account for your needs.

Think about initial deposit requirements

Some banks have minimum initial deposit requirements for their savings
accounts. If you're starting with a small amount of money, this could be an important
factor to consider.

Consider access restrictions

Different banks have different rules about how often you can withdraw or access
your money. Some will let you withdraw from your savings account as often as you like,
while others have restrictions on how many times per month you can access your funds.
Make sure you understand the rules before signing up for a savings account so you don't
run into any unpleasant surprises.

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Shop around
Finally, don't forget to shop around. Each bank has its own set of features and
fees when it comes to savings accounts. Compare them to find the one that best suits
your needs.

Following are different types of saving accounts:

i. Traditional savings account
ii. High-yield savings account
iii. Money market account
iv. Certificate of deposit (CD)

Traditional savings account-

A traditional savings account is the most common type of savings account.
Banks will usually offer you a small amount of interest for keeping your money with
them. Interest rates are typically low, but these accounts are usually a great place to start,
as they are easy to open and come with no fees.

High-yield savings account-

A high-yield savings account usually offers a higher interest rate than a
traditional savings account. This can be a good option if you want to grow your money
faster, but there may be some restrictions, such as a minimum balance requirement or
withdrawal limits.

Money market account-

A money market account is a type of savings account that usually has a higher
interest rate than a traditional savings account. You may be able to write checks from a
money market account but these accounts may also have fees.

Certificate of deposit (CD)-

A CD is a type of savings account where you agree to keep your money with the
bank for a certain amount of time (a couple of months to a couple of years). In return,
the bank will give you a higher interest rate. If you withdraw your money before the
time is up, you may have to pay a penalty.

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3.5 WHAT IS INTEREST AND HOW DOES IT WORK?

Introduction
Any time you save money you have different methods of doing it. You can save
all loose change in a jar, or you can transfer money into some sort of a savings account.
The main difference between these two choices is that the amount of money in the jar
will never increase on its own, while money in a savings account will. That increase is
called interest.

What is interest?
Interest is like a reward the bank gives you for trusting them to look after your
money. The more money you have in your account, and the longer you keep it there, the
more interest you can earn.

How does interest work?

The bank calculates interest as a percentage of the total amount in a bank
account. For example, if the bank pays 1% interest, that means you'll earn ₹1 for
every ₹100 in your account over the course of a year. If there is ₹500 in your account,
then you will earn ₹5 in interest over a year.
It may not seem like a lot, but the great thing about interest is that it builds on itself. For example, if
you start with ₹500 in your account and you earn ₹5 in interest over the course of a year, you now

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have ₹505 in your account. The next year, the bank will calculate your interest based on that new,
higher amount. The interest you gain each year will continue to grow.
And if you keep adding more money to your account on top of that, your interest will grow even
faster. While it's not a get-rich-quick scheme, earning interest is a great way to grow your money
over time.

UNIT 4

CONSUMER CREDIT

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4.1 WHAT IS A CREDIT SCORE?

Introduction-
Credit scores, why they are important, and the effects they can have on your
finances.
A credit score is a number that helps lenders, like banks and credit card companies, decide whether
to lend you money. It's important because the higher your credit score, the easier it will be for you
to get approved for loans and credit cards.

Calculation of credit score:

Your credit scores are calculated by credit bureaus based on the information
provided by banks, financial institutions, and other lenders. The primary credit bureau in
India is the Credit Information Bureau (India) Limited, commonly known as CIBIL.
Other credit bureaus operating in India include Equifax, Experian, and CRIF High Mark
gathers this information and puts it all together. They look at things like:
o How long you've had credit accounts, like credit cards or student loans
o How much money you owe
o Whether you make your payments on time
o If you've ever filed for bankruptcy
The credit bureau will give you a score between 300 and 900. Each score, then, represents a

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credit rating. The higher your score, the better the rating. Here's what the different ranges of scores
mean:

1. 300-579: Poor
It will be hard to get approved for loans or credit cards, and you may have to pay
higher interest rates.

2. 580-669: Fair.
You might get approved for some loans and credit cards, but you may not get the
best interest rates.

3. 670-739: Good.
You should be able to get approved for most loans and credit cards, and you should
get good interest rates.

4. 740-799: Very-Good.
You'll have an even easier time getting approved for loans and credit cards, and
you'll get some of the best interest rates.

5. 800-900: Excellent.
You'll have no problem getting approved for loans and credit cards, and you'll get the
best interest rates available.

Why is credit score so important?

Credit score is primarily important when applying for loans or credit cards. It not
only determines if you qualify for a loan, but it also determines the interest (how much)
you will be paying for the loan.
Take a look at the scenario below. Ram and Laxman are both looking at buying this car. They are
both offered the same price and term (60 months) and the dealership is using their credit scores to
determine the financing.

Car with a price of 15,00,000 Rupees and 60 months of financing available

Laxman Ram
Credit score 789 560

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Interest rate 2.29% 9.49%

Monthly payment ₹25,572.5 ₹27,372.5
Total payment ₹15,34,35 ₹16,42,35
0 0
Total interest ₹34,350 ₹1,42,350
Table showing calculation of intrest payable by Laxman and Ram

Because of Laxman's high credit score, his interest rate was lower than Ram's, which resulted in
lower monthly and total payments. In the end, Laxman paid ₹1,08,000 less for the identical car.

In addition to being used by lenders to decide whether to give you a loan or credit card, your credit
score can also be used in other ways:
a. Landlords may check your credit score to decide whether to rent an apartment to you.
b. Employers may check your credit score as part of a background check.
c. Utility companies may check your credit score to decide whether to require a deposit from
you when you sign up for service.
In summary, your credit score can have a big impact on many aspects of your life. It affects your
ability to borrow money, the interest rates you'll be charged, and even where you can live and work.
That's why it's so important to make sure you have a good credit score and work to improve it if
needed.

How do I find out what my credit score is?

There are a few different ways you can go about finding out your credit score:
Many credit card companies will provide your credit score to you for free as part of your account
benefits. Check your account online or contact your credit card company to see if they offer this
service.
You can use one of the many free credit score websites, or apps like Credit Karma to check your
score. Be aware that some of these sites will require you to sign up for an account and may offer
additional services for a fee.
You can purchase your credit score directly from one of the three major credit bureaus (Experian,
Equifax, or TransUnion). Each bureau has its own methods for calculating your score, so your score
may differ slightly between each bureau.
Finally, you can request a free copy of your credit report from each of the three credit bureaus once
per year. While this report won't contain your credit score, it will contain all the information that is
used to calculate your score. You can use this information to get a rough idea of where your credit

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stands.

Here's an overview of how credit scores are typically calculated in India:

1. Payment History (35% Weightage):

i. Payment history is one of the most critical factors in determining credit scores. It reflects
whether you have paid your bills and EMIs on time.
ii. Late payments, defaults, and delinquencies can negatively impact your credit score.
iii. Consistent, timely payments demonstrate responsible financial behaviour and can positively
influence your credit score.

2. Credit Utilization (30% Weightage):

i. Credit utilization refers to the percentage of your available credit limit that you are currently
using.
ii. High credit utilization ratios indicate that you are heavily reliant on credit, which can be
perceived as risky behavior and may lower your credit score.
iii. It's generally recommended to keep your credit utilization ratio below 30% to maintain a
healthy credit score.

3. Length of Credit History (15% Weightage):

i. The length of your credit history reflects how long you have been using credit accounts.
ii. A longer credit history demonstrates stability and experience in managing credit responsibly,
which can positively impact your credit score.
iii. Individuals with limited credit history may have lower scores, as there is less data available
to assess their creditworthiness.

4. Credit Mix (10% Weightage):

i. Credit mix refers to the variety of credit accounts you have, such as credit cards, loans, and
mortgages.
ii. Having a diverse mix of credit accounts can indicate responsible financial management and
may positively influence your credit score.
iii. However, it's essential to manage all types of credit responsibly to maintain a good credit
score.

5. Recent Credit Inquiries and Applications (10% Weightage):

i. This factor considers the number of recent inquiries made by lenders when you apply for
new credit accounts.
ii. Multiple inquiries within a short period may suggest that you are actively seeking credit,
which could be perceived as risky behavior and may lower your credit score.

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iii. It's important to apply for credit only when necessary and to avoid multiple inquiries within
a short timeframe.

4.2 HOW DO I RAISE MY CREDIT SCORE?

Different behaviors that can raise or lower an individual's score, such as the length of credit history,
frequency of credit inquiries, and overall debt-to-credit ratio.

Raising your credit score

There are several things you can do to raise your credit score:
• Pay your bills on time:
Late payments can have a negative impact on your credit score, so it's important to
pay all your bills on time and in full whenever possible.

• Keep your credit utilization low:

Your credit utilization is the percentage of your available credit that you're using.
For example, if you have a credit card with a ₹1,000 limit and you're using ₹500 of it, your
credit utilization is 50%. If you're using more than 30% of your available credit, it can hurt
your credit score.

• Monitor your credit report:

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Keep an eye on your credit report to make sure there aren't any errors that could be
hurting your score. If you find any inaccuracies, be sure to dispute them right away.

• Build a longer credit history:

Your credit score is partly based on how long you've been using credit. So, the
longer you have a credit history, the better. Do not close any credit accounts, even if you
have not used them in a while.

• Avoid applying for too many new credit accounts:

Every time you apply for a new credit account, your credit score takes a small hit. If
you apply for multiple new accounts in a short period of time, it can add up and impact your
score.

• Keep a mix of credit types:

Having different types of credit (like a mortgage, car loan, and credit card) can show
that you're able to manage different types of debt, which can boost your credit score.

Improving your credit score from fair to good, or excellent will not only make it easier to get
approved loans, but will also save you money in interest.

What Factors Lower A Credit Score?

There are a number of things that can hurt your credit score. Here are six
common factors:
Missing payments. If you miss payments on a credit card or loan, it will show up on your credit
report and negatively affect your score.

• Having too much debt:

If you have a lot of debt compared to your income, this will raise your debt-to-
income ratio and make you look riskier to lenders. This can also negatively affect your
credit score.

• Applying for too many credit cards or loan:

Every time you apply for a new credit card or loan, the lender will check your credit
report. This is called a "hard inquiry," and it can lower your credit score by a few points.

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• Defaulting on a loan:
If you stop making payments on a loan and the lender charges it off as a loss, this
will seriously damage your credit score.

• Having a short credit history:

If you're just starting to build credit, you may not have enough history for lenders to
determine how responsible you are with credit. This can result in a lower credit score.

• Bankruptcy:
Filing for bankruptcy will significantly damage your credit score, and the bankruptcy
will stay on your credit report for up to ten years.

What Is A Credit Report

Introduction:
A credit report is a detailed summary of an individual's credit history, including
information on loans, credit cards, and other financial accounts. It is important because
lenders, landlords, and other entities often use credit reports to assess an individual's
creditworthiness and decide whether or not to extend credit or approve an application.

What Is A Credit Report And Why Does It Matter?

You may have heard the term credit report before, but do you know what it is
and why it matters? A credit report is a document that shows how you use money and
pay your bills. It is like a report card for your financial behavior. It can affect your
chances of getting a loan, a credit card, a car, a house, or even a job. Here are some basic
facts and tips about credit reports that you should know.

What Is In A Credit Report?

A credit report contains information about your personal and financial history, such as:

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• Your name, address, date of birth, and social security number

• Your current and past accounts, such as credit cards, loans, mortgages, and utilities
• Your payment history, such as whether you pay on time, late, or miss payments
• Your credit limit, balance, and available credit
• Your public records, such as bankruptcies, foreclosures, liens, or judgments
• Your inquiries, such as when you apply for new credit or check your own credit

Who Creates And Updates Your Credit Report?

Credit cards are issued and managed by various financial institutions, including
banks and non-banking financial companies (NBFCs). These institutions offer a wide
range of credit card products tailored to different customer segments and needs. Here's
an overview of the entities involved in creating and updating credit cards in India:
Banks:
• Most credit cards in India are issued by banks, including public sector banks, private sector
banks, foreign banks, and cooperative banks.
• Banks typically offer credit cards as part of their retail banking services and may have tie-
ups with card networks such as Visa, Mastercard, American Express, or RuPay to facilitate
card transactions.
• Banks are responsible for issuing credit cards to eligible customers, setting credit limits,
managing card accounts, and providing customer support services.

Non-Banking Financial Companies (NBFCs):

• Some NBFCs in India also offer credit cards to customers. These companies may specialize
in certain types of credit cards or cater to specific customer segments.
• NBFCs offering credit cards operate under the regulatory framework set by the Reserve
Bank of India (RBI) and may partner with banks or card networks to issue and manage
credit cards.

Card Networks:
• Card networks such as Visa, Mastercard, American Express, and RuPay provide the
infrastructure and technology required to process credit card transactions.
• These networks facilitate transactions between merchants, card issuers (banks/NBFCs), and
cardholders, ensuring seamless payment processing and security.
• While card networks do not issue credit cards themselves, they play a crucial role in
enabling card payments and setting industry standards for security and interoperability.

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Credit Information Companies (Credit Bureaus):

• Credit bureaus such as Credit Information Bureau (India) Limited (CIBIL), Equifax,
Experian, and CRIF High Mark collect and maintain credit information on individuals and
businesses.
• Credit bureaus provide credit reports and credit scores to banks and NBFCs to assess the
creditworthiness of applicants for credit cards and other financial products.
• Banks and NBFCs use credit reports and scores from credit bureaus to evaluate the risk
associated with issuing credit cards and determining credit limits.

Overall, the creation and updating of credit cards involve collaboration between
banks, NBFCs, card networks, and credit bureaus. These entities work together to offer a
diverse range of credit card products, manage card accounts, process transactions
securely, and assess the creditworthiness of card applicants. They also use a system
called FICO to calculate your credit score, which is a number that summarizes your
credit risk. Your credit score can range from 300 to 900, with higher scores being better.

How Can You Access And Review Your Credit Report?

You have the right to access and review your credit report for free once
every 12 months from each of the three credit bureaus. You can request your free credit
report online at www.annualcreditreport.com, by phone at 1-877-322-8228, or by mail.
You should check your credit report regularly to make sure it is accurate and complete.
If you find any errors or fraud, you can dispute them with the credit bureau and the
source of the information.

What Is The Difference Between A Credit Report And A Credit History?

Credit Report:
A credit report is a document that contains detailed information about your credit
history. It usually includes information about your current and past loans, credit cards,
and other lines of credit. It will also contain information about whether you have made
payments on time, defaulted on any loans, or filed for bankruptcy.

Credit History:
A credit history, on the other hand, is a broader term that refers to your overall

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track record when it comes to borrowing and repaying loans. While a credit report
contains specific details about your credit history, the term "credit history" itself can
refer to the bigger picture of how you have managed credit over time.

A credit report will contain specific details about each of the loans you have taken out, such as the
date the loan was opened or closed, the balance, and payment history. But a credit history is more of
a summary, and might describe your borrowing history more generally, such as noting that you
started borrowing money ten years ago, have always made payments on time, and have paid off
most of your balances.

Why Is A Credit Report Important?

Credit reports are important for you to keep an eye on. By reviewing your credit
report regularly, you can see if there are any errors or inaccuracies that need to be
corrected. This is important because mistakes on your credit report can negatively affect
your credit score, which can make it harder for you to get credit in the future.
Additionally, reviewing your credit report can help you watch for signs of identity theft,
such as accounts you don't recognize being opened in your name.

4.3 CREDIT CARDS

What Is A Credit Card?

Credit cards are a type of payment card that lets you borrow money from a bank
or credit card company. You can use that borrowed money to buy things at stores,
restaurants, and other places that accept credit cards as payment.
When you use a credit card, you're basically making a promise to the bank or credit card company
that you'll pay back the money you borrowed. They keep track of how much you owe, and you have
to pay at least a little bit back each month.
The bank or credit card company also charges you interest, which is like a fee for borrowing the
money. The longer you take to pay back the money, the more interest you'll have to pay.

Why Do I Need A Credit Card?

There are a few reasons why people might want or need a credit card. Here are a few:
- It's a convenient way to pay for things without carrying around cash.
- It can help you build credit, which is important if you want to take out a loan or mortgage in

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the future.
- Some credit cards come with rewards or cash back, which means you can get a little bit of
money back for every dollar you spend.
There are also reasons why people might not want or need a credit card:
- It can be easy to overspend and get into debt when you don't have to pay for things right
away.
- If you don't pay your bill on time, your credit score can go down, which could make it
harder to get a loan or mortgage in the future.
- You'll have to pay interest, which means you'll end up paying more for things than if you
just used cash.
Ultimately, it's up to each person to decide if they want or need a credit card. If you do decide to get
one, it's important to use it responsibly so you don't get into too much debt.

Choosing A Credit Card: Credit Card Types

How to choose the best credit card for your lifestyle.

Different types of credit cards:

When it comes to credit cards, there are quite a few different types to choose
from. Each type of card comes with its own set of features and benefits, so it's important
to think about what's most important to you before selecting one.

A. Standard Credit Cards

These are the most basic credit cards. They have a credit limit, which is how
much you can spend. You have to pay back what you spend, plus interest, which is a fee
for using the credit. You can pay the full amount or a part of it every month. Some
standard credit cards have annual fees, which are charges you pay every year to use the
card.

B. Rewards Credit Cards

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These are credit cards that give you some benefits for using them, such as points,
cash back, miles, or discounts. You can use the benefits for things like gift cards,
merchandise, or travel. Rewards credit cards may have higher interest rates or annual
fees than standard credit cards, and they may have rules or limits for the benefits. They
are a great choice for people who are disciplined about paying off their balances each
month.

C. Secured Credit Cards

These are credit cards that need you to deposit some money as a guarantee that
you will pay back what you spend. The deposit is usually the same as your credit limit.
You can get the deposit back when you stop using the card or switch to a regular credit
card. Secured credit cards are for people who have no credit or bad credit, and want to
improve their credit score.

D. Student Credit Cards

These are credit cards for college or university students. They usually have lower
credit limits and interest rates than regular credit cards. Student credit cards can help
students build and keep a good credit history, which can help them after graduation. But
students also have to be careful not to spend too much or miss payments, as this can hurt
their credit score and cause debt problems.

E. Business Credit Cards

These are credit cards for business owners or employees who need to pay for
business-related expenses, such as travel, supplies, or equipment. They usually have
higher credit limits and interest rates than personal credit cards, and they may offer some
benefits, such as rewards, cash flow, or tax deductions. Business credit cards can help
separate personal and business finances, and track and manage spending.

F. Store Credit Cards

These are credit cards that are issued by specific retailers, such as department
stores, gas stations, or online shops and they can only be used at those retailers. They
usually have lower credit limits and higher interest rates than other credit cards, but they
typically offer some benefits, such as discounts, coupons, or loyalty points.
As you can see, there are many different types of credit cards to choose from. Consider your

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spending habits and your financial goals to help you choose the card that's right for you.

4.4 CHOOSING A CREDIT CARD: WHAT TO LOOK FOR

How to choose the right credit for you.

Once you are ready to apply for a credit card, there are things you need to consider when comparing
across choices.
1) Apr/Interest Rate:
One of the most important things to consider is the interest rate, or APR, of the credit
card. This is the amount of interest you'll be charged on any unpaid balance. While it's ideal
to pay off your credit card balance in full each month, sometimes that's not possible. If you
anticipate carrying a balance, you'll want to choose a card with a low interest rate so you
don't end up paying too much in interest charges.

2) Annual Fee:

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Many credit cards come with an annual fee. This is a fee you pay each year simply
for having the card. If you're on a tight budget, you may want to look for a card with no
annual fee. On the other hand, some cards with annual fees offer additional benefits that
may be worth the cost.

3) Rewards And Perks:

Some credit cards offer rewards or perks for using the card. For example, you may
earn points for every dollar you spend that can be redeemed for travel, gift cards, or other
rewards. Some cards offer cash back on purchases. If you're interested in earning rewards,
be sure to research the specific rewards program to make sure it aligns with your interests
and spending habits.

4) Credit Limit:
Your credit limit is the maximum amount you're allowed to spend on the card. This
amount is set by the credit card company and is based on your credit score and income. If
you anticipate using your card frequently, you may want to look for a card with a higher
credit limit so you don't run into any issues.
5) Other Fees And Penalties:
Lastly, be sure to review any other fees or penalties associated with the card. Some
cards may charge a late payment fee, an over-the-limit fee, or a foreign transaction fee.
Knowing what fees you could be charged will help you avoid any surprises down the line.

Overall, choosing the right credit card comes down to your specific needs and spending habits. By
doing your research and considering the factors above, you can find a card that will work well for
you.

Where Do I Find This Information?

In India, information regarding Annual Percentage Rate (APR), annual fees, rewards, and penalties
associated with credit cards can typically be found in the following places:

Credit Card Issuer's Website:

- Most banks and NBFCs provide detailed information about their credit card products on
their official websites.
- You can visit the credit card section of the issuer's website to explore different card options
and review their features, fees, rewards programs, and terms and conditions.

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- Look for sections labeled "Credit Cards," "Product Details," or "Fees and Charges" to find
information about APR, annual fees, rewards, and penalties.

Credit Card Brochures and Flyers:

- Banks and NBFCs often distribute brochures, flyers, or promotional materials that highlight
the features and benefits of their credit card products.
- These materials may include information about APR, annual fees, rewards programs, and
penalties, as well as any promotional offers or special discounts available to cardholders.

Terms and Conditions Document:

- When you apply for a credit card, the issuer will provide you with a terms and conditions
document outlining the contractual agreement between you and the issuer.
- This document contains detailed information about the card's APR, annual fees, rewards
structure, and penalties, along with other important terms and disclosures.
- Review the terms and conditions carefully before applying for a credit card to understand
your rights and obligations as a cardholder.

Customer Service Representatives:

- If you have specific questions about APR, annual fees, rewards, or penalties associated with
a credit card, you can contact the issuer's customer service department for assistance.
- Customer service representatives can provide clarification on card features, fees, and terms,
and address any concerns you may have about the credit card product.

Comparison Websites and Financial Portals:

- There are several online platforms and financial portals in India that offer tools and
resources for comparing credit card products.
- These websites typically provide side-by-side comparisons of different credit cards,
including details about APR, annual fees, rewards programs, and penalties.
- Use these comparison tools to research and compare credit card options from various issuers
to find the best fit for your financial needs and preferences.

By exploring these sources, you can access comprehensive information about APR, annual fees,
rewards, and penalties associated with credit cards in India and make informed decisions when
choosing a credit card product.

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Each credit card issuer is required to provide the following information:

Term Explanation
APR This is referred to as the Annual Percentage Rate (APR) or the finance charge. It
represents the yearly interest rate applied to any outstanding balance on the credit
card account if the full amount is not paid off by the due date.
Other APRs Some credit cards may have different APRs for various types of transactions. For
example, there might be separate APRs for purchases, balance transfers, and cash
advances.
Variable rate Credit cards may have variable APRs, meaning the interest rate can fluctuate
information based on market conditions or other factors. Terms and conditions provided by
the issuer will specify under what circumstances the rate can change and how it
will be determined.
Grace period Credit card terms include information about the grace period, which is the period
during which cardholders can pay their outstanding balance without incurring
interest charges.
Annual fee Some credit cards charge an annual fee for card membership. The terms and
conditions document provided by the issuer will detail the amount of the annual
fee, if applicable.
Minimum This represents the smallest amount of interest that can be charged if the credit
finance charge card bill is not paid in full. The terms and conditions provided by the issuer will
specify this amount.
Transaction Credit cards may charge fees for various types of transactions, such as balance
fees transfers, cash advances, or foreign currency transactions. The terms and
conditions document will outline these fees.
Penalty fees Penalty fees may be charged for late payments, exceeding the credit limit, or
other violations of the card agreement. The terms and conditions provided by the
issuer will specify the amount of these fees.

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UNDERSTANDING CREDIT CARD TERMS

The Schumer Box* is a summary of key credit card terms that lenders are required to provide to
consumers. It is intended to allow people to easily compare rates, fees, and other details in order to
make informed decisions when choosing a credit card.
*(While the Schumer box terminology and format may not be directly applicable in India, credit
card issuers are required to provide clear and transparent information to consumers regarding key
terms, fees, and charges associated with credit card products, typically in the terms and conditions
document provided to applicants and cardholders)

Let's see how credit card terms listed in the Schumer box apply to real-world situations. Below is a
Schumer box for a credit card issued by a local bank:
Annual Percentage Rate (APR) 18.99%
Grace Period 25 days

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Annual Fee ₹0
Balance Transfer Fee 3% of the amount transferred

Scenario 1:
Laxmibai wants to sign up for this credit card, but she's not sure how much it will
cost her if she does not pay off her balance in time. This scenario is relevant to the first
row of the Schumer box, which shows the card's APR. In simple terms, Laxmibai will be
charged ₹18.99 for every ₹100 she owes over the course of the year.

Scenario 2:
Tanhaji wants to transfer a balance from one credit card to this new card. His
current card has a ₹45 annual fee so, he's excited to see that there's no annual fee, but
he's not sure what happens if he transfers his balance. This scenario is relevant to the last
row of the Schumer box, which shows the balance transfer fee. If Tanhaji
transfers ₹1,000 from his current card, he will be charged ₹30.
His new balance will be ₹1,030.

Scenario 3:
Nathuram has just made a big purchase on this credit card, but he wants to avoid
paying any interest on it. This scenario is relevant to the second row of the Schumer box,
which shows the card's grace period. Nathuram has 25 days before the bank starts to add
interest to his balance.
Comparing Two Credit Cards
Let's look at another scenario that shows the decision-making process when comparing two
different credit card options.
Credit card A Credit card B
Annual Percentage Rate (APR) 12.99% 17.99%
Grace Period 30 days 21 days
Annual Fee ₹0 ₹45
Late Fee ₹20 ₹35
Foreign Transaction Fee ₹1.50 per ₹0
transaction

Scenario 1:

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Saraswati frequently travels to Mexico to visit family and friends and she uses
her credit card to pay for all her purchases, both at home and in Mexico. She is a
responsible credit card user and always pays her balance in full each month. She wants
to keep her annual costs as low as possible.
Saraswati would be better off with the credit card B, as it has no foreign transaction fees. Although
it has an annual fee, it would be offset by the savings she would receive from not having to pay a
fee on each foreign transaction.

Scenario 2:
Ganesh rarely travels outside of the US, so foreign transaction fees are not a
concern for him. He often carries a balance on his credit card from month to month, and
is most concerned with avoiding high interest charges.
Ganesh would be better off with the credit card A, as it has a significantly lower APR. The longer
grace period would also benefit him, as it gives him more time to make his payments before
incurring any late fees.

Scenario 3:
Madhuri is a sporadic credit card user and doesn't travel outside of the US.
Sometimes she pays her balance in full, while other times she carries a balance for a few
months. She is not particularly concerned with the APR, but wants to avoid any late fees
or annual fees if possible.
Tina would be better off with the credit card A, as it has no annual fee and a lower late payment fee.

Credit Cards: The Good And The Bad

What Are The Benefits Of Having A Credit Card?

Credit cards can be useful in many scenarios. Here are some of the benefits of using one.
1. Build credit:
This is probably the biggest benefit of using a credit card. Using a credit card
responsibly will help you build a strong credit score. A strong credit score will make it
easier for you to get approved for loans, and qualify for lower interest rates. This will
potentially save you thousands of Rupees on big purchases like a car, or a home.

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2. Rewards:
Many credit cards offer rewards like cash back, travel points, or discounts on
things you buy. These rewards can add up over time, and you can use them to save
money or get free stuff. Certain stores also offer interest-free financing if using a store
credit card, which means that you can make a purchase at the store, but pay it back over
time without any extra costs.

3. Emergencies:
A credit card can be helpful in an emergency. If you have an unexpected bill or a
car repair, you can use your credit card to pay for it. Just make sure you pay it off as
soon as possible so you don't end up paying a lot of interest.

4. Convenience:
A credit card is convenient for everyday purchases. You don't have to carry
around cash, and you can use it in a lot of places and online. If you don't have enough
cash on hand to pay for something, you can put it on your credit card and pay it off later.

5. Purchase protection:
Some credit cards offer purchase protection. This means that if you buy
something with your credit card and it breaks or doesn't work, the credit card company
might help you get your money back. This can give you some peace of mind when
you're making a big purchase.

As you can see, there are many benefits to using a credit card. Just remember to use it responsibly
and pay off your balance in full each month so you don't end up in debt.

What Are Some Drawbacks Of Having A Credit Card?

Many people use credit cards on a regular basis, but they may not realize that there are some
potential drawbacks to doing so.
Here are a few things to keep in mind when it comes to using credit cards:
1. Interest:
One of the biggest issues with credit cards is that they often come with high
interest rates. If you don't pay off your balance in full each month, you could end up
paying a lot more than you originally spent due to the interest charges.

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2. Debt:
Credit cards can make it easy to get into debt. It's tempting to use them to buy
things you can't afford, and if you don't pay your bill on time, your debt can quickly
snowball. Owing too much on your credit card, and not making your payments on time
are two mistakes that will seriously damage your credit score. If your credit score
plummets, it will be harder to get loans or credit in the future, and you will be paying a
much higher interest rate.

3. Fees:
Credit cards often come with a variety of fees, such as annual fees, late payment
fees, or over-the-limit fees. These fees can add up over time, and they can be costly if
you're not careful. Make sure the look over the Schumer box so that these fees do not
come out as a surprise.

4. Overspending:
Another problem with credit cards is that they can make it easy to overspend. It's
a lot easier to swipe a card than it is to hand over cash, and you may not think twice
about buying something you don't really need. Over time, this type of spending can
really add up and hurt your budget.
Overall, credit cards can be a convenient way to make purchases, but they come with some potential
risks. Make sure you use them responsibly to avoid getting into trouble.

4.5 CASH VS. CREDIT CARD

What is the best way to pay for something?

There is not necessarily a "best" way to pay for something – it depends on your personal
preferences and financial situation. Typically, people use cash, debit, or credit cards as payment

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methods, but there are other ways to pay for something. Let's look at the three most common ones
and then other payment options.

Types of payment methods

1. Cash:
Cash can be a good option if you want to avoid overspending, as you're limited
to the amount you have on hand. However, carrying large amounts of cash can be risky,
and you won't be able to make large purchases this way.

2. Debit Cards:
Debit cards pull money directly from your bank account, so you don't have to
worry about incurring interest charges like you would with a credit card. However, some
people don't like that debit card transactions can take a few days to process, which can
make it difficult to keep track of your account balance.

3. Credit cards:
Credit cards allow you to borrow money to make purchases, which can be
helpful if you don't have the funds readily available. Additionally, some credit cards
offer rewards like cash back or travel points. However, if you don't pay your bill in full
each month, you'll be charged interest on your outstanding balance. Credit cards can also
be a temptation to overspend, which can lead to accumulating debt.

Payment Pros Cons

Method
Credit Card Allows purchases without immediate Can lead to overspending
funds
Offers consumer protections High interest rates

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Can help build credit score Potential to damage credit score

Debit Card Avoids overspending Less consumer protection
Convenient Vulnerable to fraud
No interest charges
Cash Accepted in-person anywhere Can't be used online
Helps with budgeting Inconvenient or unsafe to carry in large
amounts
Table showing pros and con’s

What Are Other Ways To Pay For Items?

There are ways that consumers can buy things on credit without using a credit card.
Here are four common alternatives:
1. Rent-to-Own:
With rent-to-own agreements, consumers can take home items like furniture,
electronics, or appliances, and make weekly or monthly payments on them until they are
paid off. Rent-to-own stores usually do not require a credit check, which makes them a
popular option for people with bad credit. However, consumers should be aware that
they usually end up paying much more for items than they would if they bought them
outright.

2. Store Credit:
Many retailers offer store credit (or in-store financing), which lets consumers buy
items and pay for them over time. Store credit can come in the form of a line of credit
(like a credit card), or an installment plan, where consumers make fixed monthly
payments over a set period of time. For example, if you buy a new TV from a store that
offers store credit, you can pay for it in 12 monthly installments. While some stores offer
zero-interest financing, others may charge interest or fees.

3. Installment Agreements:
An installment agreement is a type of contract that lets a consumer buy a product
or service and pay for it over time. It is similar to store credit, but it can be used for a
wider range of purchases. For example, you might use an installment agreement to buy a
car, pay for a medical procedure, or even finance a vacation. With an installment
agreement, you agree to make fixed monthly payments for a set period of time, usually
with interest.

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4. Layaway:
Layaway is a purchasing arrangement that some stores offer to customers. With
layaway, a customer can reserve an item they want to buy, and make payments towards
the total cost over time. For example, if you want to buy a TV that costs ₹500 but you
do not have the full amount at the time. With layaway, you can pay for the TV by paying
a certain amount each week or month until you've paid the full retail cost. Once you've
paid in full, you can take the TV home.
Layaway is sometimes used as an alternative to credit cards or other forms of borrowing, as it
doesn't usually involve interest charges. However, some stores might charge a service fee for setting
up a layaway plan.

Comparing Payment Methods

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Comparing different payment methods: cash, card, rent-to-own, installment, store financing, and
layaway.
When paying for small purchases, like coffee or a haircut, paying cash is almost
always the best choice. You do not have to worry about its impact on your budget, or
paying any unnecessary fees like interest, processing fees, or minimum charge fees. But,
when it comes to bigger purchases, cash may not always be readily available or best.
Let's look at some scenarios and compare different payment methods.

Scenario 1: Buying a TV
Let's assume you are thinking about buying a TV. The total cost, after taxes, is ₹55,000. You
have ₹20,000 saved already. Below are the options available to you:
Method Terms Total Notes
Cash None ₹55,000 will have to wait until fully
saved up
Credit card 20.99% APR, 30 days grace ₹55,000 have to pay off fully in 30 days
period + interest to avoid interest
In-store 6 months interest-free ₹55,000 6 payments of ₹9,166.67
financing
Layaway ₹5 set up fee, equal monthly ₹555 will have to wait to take home
payments

Choosing the best option will depend on a mix of your current financial situation, your discipline,
and your own emotions.
If your only concern is paying the lowest cost, then cash and in-store financing are the best choices.
Credit card may be a choice here, as well, if you can pay off your balance in 30 days. However, if
you want to be able to take the TV home with you immediately, and will not have the entire amount
saved up in the next month, then in-store financing becomes the best choice.

Scenario 2: Buying furniture

In this scenario, let's assume you are moving from a one-bedroom to a two-bedroom apartment and
you need to buy furniture for the second bedroom. The total cost to furnish the bedroom is ₹7,000.
You have just put down a deposit for the apartment, so you do not have enough cash to buy the
furniture outright. On top of that, your credit score is low, since you just started building your credit
history. Let's look at all the payment options and try to decide on the best one.
Method Terms Total Notes

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Cash None ₹7,000 no cash saved up

Credit card 29.99% APR, 31 days grace ₹7,000 have to pay off fully in 31 days to
period + interest avoid interest
In-store 9 months interest-free ₹7,000 not approved
financing
Layaway ₹5 set up fee, equal monthly ₹7,005 will have to wait to take home
payments
Rent-to-own ₹676 per month for 12 months ₹8,120 no credit check, 16% interest

In this scenario, we see that two of the options are not available: cash and in-store financing. Cash is
unavailable because there is no cash saved up to fully pay off the furniture. In-store financing is also
unavailable since the application for the store credit card was not approved, due to a low credit
score. This leaves us with three options: credit card, layaway, and rent-to-own.
If your main goal is to pay the lowest cost, then the best choice would be your credit card, as long
as you pay it off before the grace period ends. If you cannot pay off the balance in 31 days, then the
second lowest cost would be layaway, as long as you do not need the furniture immediately. This
would be the best choice if the second room is a guest room that would not be used immediately.
If you need the furniture immediately and will probably take a year to pay off, then rent-to-own
becomes the best choice. Even though the total cost initially appears to be the highest, it is
actually lower than the credit card's total cost.
Finding the best payment option depends on many factors, from your finances, budget, timeline,
and even emotions. It is always a good idea to write all your options down and eliminate the ones
that do not work for your situation.

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UNIT 5

MONEY PERSOALITY

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5.1 MONEY PERSONALITY

Figuring out your money personality means learning how you feel about saving, spending, and
growing your money. Knowing your money personality helps you make better financial choices that
are right for you.

What is money personality?

Your money personality is a representation of your attitudes and habits when it
comes to dealing with money. Understanding your money personality can help you
make better financial decisions and reach your financial goals.

How do I determine my money personality?

Do you tend to save money, or do you spend it as soon as you get it? Your
money personality has something to do with how you answered that question. Money
personalities can be described in a few different ways.
- Some people are savers—they put money away and think about long-term goals.
- Other people are spenders—they love to buy things and might not be as good at saving.
- There are also investors, and balanced money personalities.

Do you know your money personality?

Take a quiz below, and let's figure it out!
Money Personality Quiz
Answer each question with A, B, C, or D, and keep track of your choices.

1. When you receive money as a gift, you are most likely to...
A. Spend it right away on something you want.
B. Save it for something you need.
C. Invest it or donate it to a good cause.
D. Split it between spending, saving, investing, and donating.

2. When you are shopping, you are most likely to...

A. Buy whatever catches your eye, regardless of the price or quality.
B. Compare prices and quality, and look for discounts and deals.
C. Avoid shopping unless it is absolutely necessary, and buy only the essentials.
D. Have a budget and a shopping list, and stick to them.

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3. When you have a financial goal, you are most likely to...
A. Forget about it or give up on it if it takes too long or requires too much effort.
B. Work hard and save diligently, even if it means sacrificing other things.
C. Seek advice and guidance from experts or mentors, and follow their recommendations.
D. Plan and track your progress, and reward yourself for reaching milestones.

4. When you face a financial challenge, you are most likely to...
A. Ignore it or hope it goes away, and continue spending as usual.
B. Cut back on your expenses and look for ways to increase your income.
C. Ask for help from your family, friends, or professionals, and accept their support.
D. Analyze the situation and come up with a realistic and flexible solution.

5. When you think about your financial future, you are most likely to...
A. Live in the moment and not worry about tomorrow.
B. Have a clear vision and a detailed plan for achieving your goals.
C. Be optimistic and confident that things will work out for the best.
D. Be cautious and prepared for any possible risks or opportunities.

Scoring And Results

For each question, give yourself the following points for each answer:
A: 1 point
B: 4 points
C: 5 points
D: 2 points

Add up your points and find your money personality profile below.
Total Personalit Characteristics
y
5-9 point Spender You enjoy spending money and living in the moment, but you may have
s trouble saving or planning for the future. You may also struggle with debt
or impulse buying.
10-14 Balancer You are good at managing your money and making smart decisions, but
points you may also be prone to stress or indecision. You may miss out on some
opportunities or experiences because of your cautiousness.

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15-19 Saver You are excellent at saving money and reaching your goals, but you may
points also be too frugal or rigid. You may neglect your present needs or wants,
or have difficulty sharing or spending your money.
20-25 Investor You are savvy and strategic with your money, and you seek to grow your
points wealth and make a positive impact. You may also be adventurous and
willing to take risks, but you may be too optimistic or overconfident, and
ignore some of your basic needs.

Money Personality Strategies

There are four general money personalities: saver, spender, balancer, and
investor. Once you identify your money personality, there are strategies you can apply to
your everyday living to optimize your finances even further.

In our previous chapter, we talked about four different ways people handle money. Some people are
savers, some are spenders, some like to balance things out, and some like to invest. Each personality
has its own strengths and weaknesses. In this chapter, we're going to give you some tips to help you
make the most of your money personality.

1) Saver:
Savers are very careful with their money. They don't like spending more than they have
to and they are always looking for ways to cut costs. They are good at budgeting and saving, but
they might miss out on opportunities to make their money grow because they are hesitant to take
risks.
If you are a saver:
Remember that it's okay to spend some of your money on things that make you happy.
This could include hobbies, health, or education.
Make sure your budget isn't too strict. Let yourself have some fun sometimes, and make
changes to your budget when you need to.
Think about sharing your money with people who might need it more than you do. You could
give it to family, friends, or charities.
Be proud of what you have and enjoy your money!

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2) Spender:
Spenders, on the other hand, love using their money. They often spend impulsively and
can have a hard time sticking to a budget. Sometimes they will even go into debt to buy things
they want. Spenders might enjoy life in the moment more than savers, but they can end up with
a lot of stress if they don't manage their money carefully.
If you are a spender:
Set aside a portion of your income for savings or investments before you spend
anything.
Use cash or debit cards instead of credit cards to avoid overspending or paying interest. Set a
limit for how much you can spend on non-essential items each month, and stick to it.
Review your spending habits and identify areas where you can cut costs or find cheaper
alternatives.
Find other ways to reward yourself or have fun that don't involve spending money.

3) Balancer:
Balancers try to strike a healthy balance between the other three money personalities.
They are careful with their money but still enjoy spending on things they love. They also look
for ways to invest and grow their money. Balancers often have the best of all worlds, but it can
be tough to stick to this middle ground.
If you are a balancer:
Relax and enjoy your money sometimes, and treat yourself to something you want or need.
Be ready to learn about new chances to make more money. Make sure to find out all you can
before you say "no."
Talk to people you trust to get help, but don't forget to listen to yourself too.
Be happy when you do well, and be proud of working hard.

4) Investor:
Investors are all about making their money grow. They are willing to take risks to get a
higher return on their investment. This has the potential to make them wealthier, but they also
run the risk of losing money if things don't go as planned.
If you are an investor:
Make sure you don't put all your money into one investment. Save some money for
emergencies.
Think about what you could gain or lose from your investments. Don't just hope everything will
work out.

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5.2 SMART Goals

SMART goals is a method to set specific, measurable, achievable, realistic, and time-bound
objectives. They help you stay focused and organized, making it easier to track progress and
accomplish your goals.

How to write SMART financial goals

Have you ever dreamed of saving enough money to buy a car, travel, or retire
comfortably? These are examples of financial goals. Financial goals can help you plan
your budget, track your progress, and stay motivated.
But not all financial goals are created equal. Some goals are vague, unrealistic, or hard to measure,
which can make them difficult to reach. For example, saying "I want to save more money" is not a
very helpful goal, because it does not explain how much money, why you want to save, or when
you need the money to be saved by.

A better way to write financial goals is to use the SMART method.

SMART stands for
S - Specific
M - Measurable,
A - Achievable,
R - Realistic,
T - Time-bound.
These are five criteria that can help you make your goals clear, realistic, and trackable.

Let's look at each one in more detail and turn the basic goal of, "I want to save money" into a
SMART goal.

S-Specific:
A specific goal tells you exactly what you want to accomplish. This means that
when you set a goal for yourself, you should try to make it as detailed as possible. By
making your goal specific, you know exactly what you need to do in order to achieve it.
For example, we can make our goal specific by changing it to, "I want to save money for an
emergency fund".

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M-Measurable:
A measurable goal tells you how you will know if you are making progress or if
you have achieved your goal. It answers the question: How much or How many. A
measurable goal helps you monitor your performance and celebrate your success.
For example, we can make our goal measurable by changing it to, "I want to save ₹1,000 for an
emergency fund."

A-Achievable
An achievable goal tells you if your goal is realistic and possible, given your
current situation, resources, and abilities. It answers the question: How can I do it? For
example, the goal of saving ₹1,000 for an emergency fund is achievable, if you have a
steady income, a budget, and a savings account. An achievable goal challenges you but
does not overwhelm you.
For example, we can make our goal achievable by changing it to, "I want to save ₹1,000 for an
emergency fund by saving ₹50 per paycheck."

R-Realistic
A realistic goal is something you believe you can reach or accomplish. It's
something that fits into your life, your abilities, and your resources, but it also considers
your limitations. For instance, if you earn ₹1000 a week, saving ₹800 a week might not
be realistic. But saving ₹200 could be!

Achievable and realistic may seem similar but they have slight differences. When a goal is
achievable, it means you have the skills, resources, and abilities to reach it.
For example, if we look at our previous achievable statement "I want to save ₹1,000 for an
emergency fund by saving ₹50 per paycheck. Since you have a job, this goal is achievable. But if
you have bills, food and other essentials, and maybe also want to hang out with friends
occasionally, saving ₹50 each paycheck might not be realistic. So, you may change the amount to a
smaller one, or change the statement to "I want to save ₹1,000 for an emergency fund by
saving ₹50 every other paycheck.

T-Time-bound
A time-bound goal tells you when you want to achieve your goal or what is your deadline. It
answers the question: When will I do it? A time-bound goal helps you create a sense of urgency and

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accountability.
For example, we can make our goal Time-bound by changing it to, "I want to save ₹1,000 for an
emergency fund by saving ₹50 per paycheck for 20 weeks."

Writing your own SMART goals

Writing your own SMART goals involves creating personalized objectives that
are Specific, Measurable, Achievable, Realistic, and Time-bound. This process helps in
setting clear and attainable targets, which ultimately improve your chances of personal
and professional growth.

How to write your own SMART financial goals

Now that you know what SMART goals are, you can use them to write your own
financial goals. Here are some steps to follow:
Think of a financial goal that you want to achieve. It can be short-term (within a year), medium-
term (within a few years), or long-term (more than five years). It can be related to saving, spending,
earning, investing, or giving money. For example, you may want to save for a car, pay off your
student loans, start a business, or donate to a charity.
Write down your goal in one sentence, using the SMART criteria. Use the questions and examples
above to help you. For example, you may write, "I want to save ₹5,000 for a used car by
saving ₹200 from each monthly paycheck for 25 months, because I want to have more
independence".
Check your goal for clarity, realism, and relevance. Ask yourself: Is my goal specific enough? Can I
measure my progress? Is my goal achievable with my current resources and abilities? Is my goal
realistic given all the limitations? Is my goal time-bound with a realistic deadline?
Adjust your goal if needed. If your goal is too vague, broad, or easy, make it more specific, narrow,
or challenging. If your goal is too ambitious, complex, or hard, make it more realistic, simple, or
manageable. For example, you may adjust your goal of saving ₹5,000 for a car to ₹4,000, or
to ₹6,000. You may also adjust your timeline, your savings amount, or your income source,
depending on your situation.
Write down the action steps that you need to take to achieve your goal. These are the tasks,
strategies, or habits that will help you move closer to your goal. For example, some action steps for
saving ₹5,000 for a car may be opening a separate savings account, creating a budget, cutting down
on unnecessary expenses, finding a second job, or setting up monthly automatic transfers.
Review your goal and action steps regularly. Track your progress, celebrate your achievements, and
address any challenges or obstacles that may arise. For example, you may review your goal and

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action steps every month, and record how much money you have saved, what worked well, and
what needs improvement. You may also reward yourself for reaching milestones, such as
saving 25%, 50%, or 75% of your goal.
SMART financial goals examples
Here are some examples of common financial goals, and how to make them
SMART. You can use them as inspiration or reference for your own goals.

Saving for an emergency fund

Vague goal: I want to save some money for emergencies.
SMART goal: I want to save ₹3,000 for an emergency fund by putting ₹100 aside from each
biweekly paycheck for 30 weeks, because I want to be prepared for unexpected expenses and avoid
going into debt.

Paying off debt

Vague goal: I want to pay off my credit card debt.
SMART goal: I want to pay off my ₹2,000 credit card debt by paying ₹200 extra every month
for 10 months, because I want to save money on interest and improve my credit score.

Buying a car
Vague goal: I want to buy a car.
SMART goal: I want to buy a ₹5,000 used car by saving ₹200 from each monthly paycheck
for 25 months, because I want to have more independence.

Saving for retirement

Vague goal: I want to save for retirement.
SMART goal: I want to save ₹5,00,000 for retirement by contributing 10% of my income to a
401(k) plan for 30 years, because I want to enjoy a comfortable and secure lifestyle when I stop
working.

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5.3 SHORT-, MEDIUM-, AND LONG-TERM GOALS

Short-, medium-, and long-term goals

Manage your money by setting short, medium, and long-term financial goals.
Achieving your dreams and securing your future becomes simple with this step-by-step
guide to smart money planning and goal-setting.

Financial goals and planning: short, medium, and long term

You have learned how to set SMART goals for your money, but how do you plan
for different types of goals? Depending on your needs and wants, you may have short-,
medium-, and long-term financial goals. These goals have different time horizons and
risk levels, and require different strategies to achieve them.

Short-, Medium-, And Long-Term Financial Goals

Short Term Financial Goals-
Short term financial goals are goals you want to achieve in less than a year, such
as buying a new phone, saving for a trip, or paying off a small amount of debt. These
goals are usually low risk, meaning you are unlikely to lose money or face unexpected
costs. To reach these goals, you need to budget your income and expenses, and save a
portion of your money in a safe and accessible place, such as a bank account or a money
jar.

Medium Term Financial Goals-

Medium term financial goals are the ones you want to achieve in one to five
years, such as buying a car, saving for college, or starting a business. These goals are
usually moderate risk, meaning you may face some uncertainty or fluctuations in your
income, expenses, or returns. To reach these goals, you need to plan your income and
expenses, and invest a portion of your money in a diversified and flexible way, such as a
mutual fund or a certificate of deposit.

Long Term Financial Goals-

Long term financial goals are the ones you want to achieve in more than five

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years, such as buying a house, saving for retirement, or leaving a legacy. These goals are
usually high risk, meaning you may face significant changes or challenges in your
income, expenses, or returns. To reach these goals, you need to project your income and
expenses, and invest a portion of your money in a growth-oriented and long-lasting way,
such as a stock or a bond.

Goal Time Example Risk Strategy

Type Frame Level
Short Less than a Buying a new phone, saving Low Budget and save in a bank
term year for a trip, paying off a small account or a money jar
debt
Medium One to five Buying a car, saving for Moderate Plan and invest in a mutual
term years college, starting a business fund or a certificate of
deposit
Long More than Buying a house, saving for High Project and invest in a stock
term five years retirement, leaving a legacy or a bond

How to create a financial plan with short-, medium-, and long-term goals
Creating a solid financial plan is crucial for managing money effectively and
achieving financial goals. Learn the essential steps to build a financial plan that works
best for you, ensuring future stability and success.

How to create a financial plan

A financial plan is a roadmap that helps you reach your financial goals. It
consists of four main components: a budget, a savings plan, a debt repayment plan, and
an investment plan.

A Budget is a plan that shows how much money you earn, spend, and save each month. It helps you
track your income and expenses, identify your needs, and wants, and balance your spending and
saving. You can use a spreadsheet, an app, or a website to create and monitor your budget.

A Savings plan is a plan that shows how much money you save each month for your short-,
medium-, and long-term goals. It helps you prioritize your goals, allocate your income, and build
your savings.

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A Debt Repayment plan is a plan that shows how much money you pay each month to reduce your
debts, such as credit cards, student loans, or car loans. It helps you lower your interest costs,
improve your credit score, and free up your cash flow.

An Investment plan is a plan that shows how much money you invest each month to grow your
wealth and achieve your long-term goals. It helps you diversify your portfolio, balance your risk,
and return, and take advantage of compound interest.
Tools and resources to help you create and monitor your financial plan
Creating and monitoring your financial plan can be challenging, but there are
many tools and resources that can help you. Here are some examples:

- Apps: You can use apps like Mint, YNAB, or Personal Capital to track your budget,
savings, debt, and investments, and get personalized advice and alerts.
- Websites: You can use websites like NerdWallet, Investopedia, or Khan Academy to learn
more about financial topics, compare products and services, and access calculators and
quizzes.
- Calculators: You can use calculators like Bankrate, SmartAsset, or FinAid to estimate your
savings, debt, and investment needs and outcomes, and adjust your plan accordingly.
- Advisors: You can use advisors like financial planners, counselors, or coaches to get
professional guidance and support, and help you create and implement your plan. Your bank
may offer this service for free.

Financial plan in a real-life scenario

Let's see what financial plan looks like in real-life.
Shivaji is a 25-year-old electrician who wants to create a financial plan with short-, medium-, and
long-term goals. Here are some steps he takes:
He sets his SMART financial goals:

Goal Amount Time Frame Type

Emergency fund ₹1,000 5 months Short term
Certification course ₹5,000 2 years Medium term
Down payment for a ₹20,00 10 years Long term
house 0

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Carlos earns ₹3,000 a month from his full-time job. To help save extra money, Carlos works
various freelancing jobs on the weekend and earns an additional ₹500 a month. He
spends ₹1,800 on rent, utilities, food, transportation, and family support. He puts ₹450 into a
retirement plan at work. He has ₹15,000 in credit card debt on which he pays the minimum
payment of ₹357 a month.

He creates his financial plan:

Component Amount Next Steps Tool
Budget Earn: ₹3,500 Review and update monthly, adjust Mint
Spend: ₹1,800 Save: ₹350 for changes in income or expenses,
set aside money for irregular or
unexpected costs
Savings Save: ₹200 for emergency Complete emergency fund Nerd
Plan fund; ₹100 for certification in 5 months, increase savings Wallet
course; ₹50 for down payment amount for certification course and
down payment, research and
compare savings and investment
products and services
Debt Pay: ₹357 for credit card debt Increase payment once emergency Bankrate
Repayment fund and certification course are
Plan done, pay more than the minimum
whenever possible
Investment Invest: ₹450 in a retirement plan Monitor and readjust, if needed Robo-
Plan advisor

By creating a financial plan with short-, medium-, and long-term goals, just like Carlos, you can
take control of your money, achieve your dreams, and secure your future. Remember to review and

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update your plan regularly, and celebrate your progress and success. Happy planning!

UNIT 6
INVESTMENT AND RETIERMENT

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6.1 Introduction To Saving And Investing

Why save and invest

Saving and investing are two important ways you can take control of your
financial future. Saving allows you to set aside money for future use, while investing
allows you to grow your money over time. Both have benefits for varieties of goals.

Saving and investing: what's the difference?

You might have heard the terms saving and investing used interchangeably,
like saving for retirement when actually you are investing in a 401k. Although they are
related, saving and investing are different ways to achieve your financial goals. In this
chapter, we'll explore the benefits of saving and investing, compare the two, and provide
tips on how to balance them based on your income, expenses, and objectives.

 Saving:
Saving means putting money aside for future use. For example, you might save
money by keeping it in a bank account, where it remains safe and earns a little bit of
interest. Some common reasons to save include having money for emergencies, short-
term goals like a new phone, or even long-term goals like buying a car or going to
college.

 Investing:
Investing, on the other hand, means putting your money into assets that can grow
in value over time. Examples of investment options include real estate, stocks, bonds,
and mutual funds. By investing, you hope that the money you put in will grow and be
worth more in the future. Investing can help you achieve long-term goals, like home
ownership or retirement.

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Saving And Investing Options

There are many ways to save and invest your money. Here are some examples:
- Bank accounts: A safe place to store your money, and you can often earn a small amount of
interest.
Certificates of deposit (CDs): A type of savings account that usually earns higher interest than a
regular savings account, but requires you to leave your money untouched for a set period.

- Stocks: Buying shares in a company, making you a part-owner. You can make money if the
company's value goes up, but you can also lose money if the company's value goes down.
- Bonds: Lending money to a company or government, who promises to pay you back with
interest.

- Mutual funds: A pool of money from many investors that is used to buy a diverse mix of
stocks, bonds, or other investments.

Savings Vs. Investing

When deciding whether to save or invest, it's essential to consider factors like
liquidity, risk, return, and time horizon.
i. Liquidity refers to how easily you can access your money. Savings accounts have high
liquidity, as you can withdraw your money anytime. Investments, however, might not be as
easy to sell and convert to cash.
ii. Risk is the potential for your money to lose value. Saving in a bank account is generally low
risk, while investing in stocks or bonds has a higher risk, as their value can go up and down.
iii. Return is the amount of money you gain or lose on your investment. Savings accounts
typically have low returns, while investments like stocks and bonds have the potential for
higher returns.
iv. Time horizon is how long you plan to keep your money invested or saved. Generally, if you
need your money soon, saving is the better option. If you have a long time before you need
the money, investing can help your money grow more.

How Saving And Investing Can Work Together

Saving and investing can complement each other in helping you achieve your
financial goals. For example, you might save money for emergencies and short-term
goals, while investing for long-term goals like retirement. By having both savings and

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investments, you can ensure that you have money available for immediate needs and
also have your money growing for the future.

Save Or Invest?
To balance saving and investing, consider the following tips:
- Create a budget: Track your income and expenses to see how much money you can set aside
for saving and investing.
- Establish an emergency fund: Save at least three to six months' worth of living expenses in a
bank account for emergencies.
- Set clear goals: Determine your short-term and long-term financial goals and decide whether
saving or investing is the best way to achieve them.
- Diversify your investments: Don't put all your money into one type of investment. Instead,
spread it across different types of assets to reduce risk.
- Review and adjust: Check your progress regularly, and adjust your saving and investing
strategies as needed.

The Types And Functions Of Financial Institutions And Markets

Financial institutions are organizations like banks, credit unions, and investment
companies that help people manage and grow their money. Financial markets are places
where people can buy and sell things like stocks, bonds, and commodities, in order to
make investments and trade with each other.

What are financial institutions?

In our world of money and finance, there are special organizations that help us
save, invest, and manage our money. These organizations are called financial
institutions. They include banks, credit unions, insurance companies, and brokerage
firms. Financial institutions play a big role in our lives, helping us do things like save for
college, buy a car, or even start a business.

What are financial markets?

Imagine you want to buy or sell things like stocks, bonds, or other financial
assets. To do this, you need a place where buyers and sellers can come together to trade
these assets. That place is called a financial market. There are different types of financial
markets, such as stock markets, bond markets, and money markets. These markets are
essential for the smooth functioning of our economy and play a key role in helping

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businesses and governments raise money.

Why do we need financial institutions and markets?

Financial institutions, like banks and credit unions, can be really helpful. They
help you manage your money, build your credit, and get more money over time. Here
are some ways they can benefit you:
Imagine two friends, Alex and Jamie. They both work hard and make the same amount of money.
But there's a big difference in how they handle their money. Alex saves money under the mattress,
has no bank account, and cashes their paycheck at a local check-cashing place. Jamie, on the other
hand, has a bank account and uses financial institutions and markets for his own benefit.

 Everyday needs:
Alex always carries cash because they don't have a bank account. This can be risky and
inconvenient. When they need to pay a bill, Alex has to go to the post office or the store to pay
in person. Jamie, however, has a bank account, which makes it easy to pay bills online or with a
debit card. Plus, if Jamie ever loses his wallet, he can contact the bank to cancel the card and
protect his money.

 Saving money:
Since Alex keeps all their money under the mattress, they don't earn any interest on their
savings. This means that if Alex saves ₹1,000 for a year, it will still be worth only ₹1,000.
Jamie, however, has a savings account at a bank. This account earns interest, so if Jamie
saves ₹1,000 for a year, he might earn ₹30 in interest, making the total ₹1,030.

 Investing:
Both Alex and Jamie want to grow their money, but they have very different approaches.
Alex doesn't know much about investing, so they stick to saving money under the mattress.
Jamie, on the other hand, knows that investing can help him build wealth faster. Jamie uses
financial institutions and markets to invest in stocks or bonds, which can potentially provide
higher returns than just saving money in a bank account.

 Safety and protection:

Alex's method of keeping money under the mattress is not only outdated, but it's also

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risky. If there's a fire or a burglary, Alex could lose all their savings. Jamie's money, on the
other hand, is protected by the bank's security measures and federal insurance. Even if the bank
gets robbed or if the bank goes out of business, Jamie's money is insured up to ₹250,000 by the
Federal Deposit Insurance Corporation (FDIC).

 Access to loans:
In the future, both Alex and Jamie might need to borrow money, maybe for college or to
buy a car. Alex will have trouble getting a loan because they don't have a bank account or a
credit history. Jamie, however, has a relationship with a bank and has built a credit history by
using a credit card responsibly. This makes it easier for Jamie to get a loan with a good interest
rate.
As you can see, financial institutions and markets play a crucial role in our lives and, if you take
advantage of them, you can make your money work for you.
How do we use financial institutions and markets?
Let's look at some examples of financial institutions and markets and how they serve different
saving and investing needs.

 Banks:
Banks are a popular choice for people who want to save money in a secure place and
earn interest. They also provide loans and credit cards to help people finance large purchases,
like homes and cars. Banks may also offer investment products and services, such as stocks and
mutual funds. In reality, your bank might be a one-stop-shop, where you can take care of all
your financial needs.

 Lenders:
Lenders are institutions that lend money to people and businesses. While most banks and
credit unions do this, there are some companies who only lend money and do not provide any
other services, like checking or savings account. They charge interest on the borrowed amount,
which is their main source of income.

 Credit unions:
Credit unions are similar to banks, but they are member-owned and you typically have to
qualify to become a member. For example, there are teacher credit unions, or town credit unions
(you have to live in a certain town to be a member). Credit unions usually offer better interest
rates on savings and lower interest rates on loans. They also provide a range of financial

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services, just like banks.

 Brokerage firms and investment companies:

These companies help people invest their money in stocks, bonds, and other financial
assets. They often charge fees or commissions for their services. For example, you might open
an account with a brokerage firm to invest ₹1,000 in a stock or mutual fund.

 Insurance companies:
Insurance companies provide protection against financial losses due to accidents, natural
disasters, and other unexpected events. They collect premiums from policyholders and use the
money to pay out claims when needed. For example, you might buy homeowners insurance to
protect your house from damage due to a fire.

 Financial advisers:
Some financial institutions, like financial advisers and wealth managers, provide advice
to help people make informed decisions about saving, investing, and managing their money.
They may charge fees for their services, or earn commissions based on the products they
recommend.

 Financial markets:
Financial markets are where financial trades happen, but most people don't actually go
there to trade stocks, bonds, or other securities. Instead, they rely on financial institutions, like
banks or investment firms, to act on their behalf. So even though you might buy stocks or invest
in a mutual fund, you're not actually the one making the trades- the financial institution is doing
that work for you.

 Stock markets:
Stock markets are places where people can invest in shares of companies, like Apple or
Amazon. They allow investors to buy and sell stocks, which represent ownership in the
company, and potentially earn profits as the company grows.

 Bond markets:
Bond markets are where people can invest in bonds, which are loans made to companies
or governments. Investors who buy bonds receive regular interest payments and get their
principal amount back when the bond matures.

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 Money markets:
Money markets are a type of financial market where people can invest in short-term debt
securities, like Treasury bills and certificates of deposit.

Conclusion
Understanding financial institutions and markets is essential for making smart
decisions about saving and investing your money. By exploring the different types and
functions of these organizations, you can identify the best options for your needs and
preferences. Whether you're saving for a rainy day, investing in your future, or
borrowing money for a big purchase, financial institutions and markets are there to help
you achieve your financial goals.

6.2 Risk And Return Of Investment Options

Investing: Risk and return

Risk and return are two important concepts to understand when it comes to
investing. Different types of investments have different levels of risk and return, and
investors should choose options that match their goals and risk tolerance.

What Is Risk And Return In Investing?

When you decide to invest your money, there are two important things to consider: risk and return.
Risk is the uncertainty or variability of the outcome of an investment. In simpler
words, it means that there's a chance your investment may not make as much money as
you hoped, or you could even lose some or all of your investment.
Return, on the other hand, is the gain or loss from an investment over a period of
time. It tells you how much money you made, or lost, on your investment. If you have
a positive return, that means your investment has made money. If your return
is negative, then you have lost money.

How are risk and return related?

Risk and return are related because generally, the more risk you take with an
investment, the higher the potential return. But, taking more risk also means more
potential for loss.

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Factors that influence risk and return include the type, quality, and duration of the investment, the
market conditions, and the investor's behavior. For example, if you invest in a company with a
strong track record, your risk might be lower, but so might your return. On the other hand, if you
invest in a new company with an unproven track record, you could make a lot of money if the
company succeeds, but you also risk losing your entire investment if the company fails.
The higher the risk an investor is willing to take, the higher the potential return they can expect on
their investment.

Risk: How can I tell how risky an investment is?

We group investments into three categories: low risk, high risk, and moderate risk and return. It is
hard to know how well an investment will do, but there are some general groups we can put them
into:
- Low-risk, low-return investments: Treasury bills are an example of this type of investment.
They are issued by the government and are considered very low-risk, but they also offer
lower returns compared to other investments.
- High-risk, high-return investments: Penny stocks are an example of this type of investment.
These are stocks of small companies that trade at very low prices. They can offer huge
returns if the company does well, but they also carry a higher risk of loss.
- Moderate-risk, moderate-return investments: Index funds are an example of this type of
investment. These are funds that aim to match the performance of a specific market index.
They offer diversification and generally have a lower risk than individual stocks, but they
can still offer decent returns.
As you can see, we do not have a low-risk, high return (everyone would invest into that) or high-
risk, low-return (why would anyone invest into that?). So, remember, risk and return always go
hand-in-hand - when one is low, so is the other one, and vice-versa.

Risk & return Types of investment

Low-risk & low-return money markets, treasury bills, bonds
Moderate-risk & moderate-return mutual funds, index funds
High-risk & high-return stocks, cryptocurrency,
commodities

Return: Return On Investment (ROI)

Imagine you have ₹100 to invest in something. You know that if you make a
good choice, you can turn that ₹100 into even more money. This is where ROI, or

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Return on Investment, comes in. ROI helps you figure out how much money you've
made from an investment compared to how much you put in. So, if you invested
your ₹100 and it turned into ₹150, your ROI would be 50%. That means you
made 50% more money than you started with.
Knowing how to calculate ROI can help you decide where to put your money, whether it's a
company stock, a business, or even a college savings account. Smart choices today can lead to big
rewards tomorrow.
To calculate the return on investment (ROI) for an investment, you can use this simple formula:

ROI =Current value of Investment −Initia l Investment

x 100
Initial Investment

For example, if you invested ₹1,000 in a stock and it is now worth ₹1,200, your ROI would be:

ROI =1200−1000
x 100=20 %
1000

This means that you made a 20% return on your investment.

But, also, if you invested ₹1,000 in a stock and it is now worth ₹900, your ROI would be:

ROI =900−1000
x 100=−10 %
1000

Is This A Good Return?

- No, Negative return means you have lost money

A lot of the time, you can find the ROI for different investments online. So, you don't have to do
any math. This is helpful when you're trying to decide what to do with your money, like buying
stocks or investing in general.
But sometimes, you can't find the ROI on the internet, or you're starting your own business. In that
case, it's important to know how to calculate ROI on your own.

Rule of 72
Now that we know what ROI is, we can take investment planning one step further - into the future!
For this, you need the Rule of 72. The Rule of 72 is a simple math formula that
helps us estimate how long it will take for our money to double when we invest it. All

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we have to do is divide the number 72 by the interest rate or ROI. The answer we get
tells us approximately how many years it'll take for our money to double.
For example, if we invest our money and earn an interest rate of 6%, we would do this:
72/6 = 12 years. So, it would take about 12 years for our money to double.

Why is the Rule of 72 useful?

The Rule of 72 is helpful because it shows us the power of investing and how our
money can grow over time. When we invest, we want our money to grow and make
more money for us. By using this simple rule, we can quickly see how long it will take
for our money to double at different interest rates.

How can we use the Rule of 72 with ROI?

Remember, ROI helps us figure out how much money an investment makes. We can use the Rule of
72 together with ROI to see how our money should behave in the future.
For example, imagine you invest ₹500 into a mutual fund with an 8% ROI. You completely forget
about it, and about 9 years later you check the account and find out that it grew to ₹1,000.
In 9 more years, it will become ₹2,000, and in 9 more ₹4,000! And it will keep doubling, as long as
the ROI, or the interest rate remains around 8%.

Conclusion
In conclusion, investing is one way to grow your money and reach your
goals faster. Remember, higher risks often lead to higher returns, but it's important to be
smart about it. Keep the Rule of 72 in mind to quickly estimate how long it'll take to
double your investment. Next, start learning about investment options and make your
money work for you, as you step into the world of financial growth and success.

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Stocks, Bonds, Mutual Funds, And Diversification

When you start thinking about investing your money, you might hear about
stocks, bonds, and mutual funds. These are some of the most common investment
options available to you. But what are they, and how do they work? Let's explore these
three investment options and how you can use them to grow your money and achieve
your financial goals.

How do I invest and make money?

Investing can be an exciting way to grow your money- it is a game of risk and
return. If you've never invested before and are thinking about it, you might be wondering
about the different types of investment options out there. In this chapter, we'll explore
the most common investment options: stocks, bonds, and mutual funds. We'll explain
how you can make money with each option and discuss the importance of diversification
to reduce risk and increase returns.

Stocks: When you buy a stock, you're actually buying a small piece of ownership in a company.
For example, if you buy a share of Plum, you become a part-owner of the Plum company. Stocks
offer the potential for capital appreciation (when the value of the stock increases) and dividend

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income (when the company shares its profits with stockholders). However, stocks can be riskier and
more volatile than other investments because they depend on the company's profitability and
growth.
With stocks, you can make money in two ways: by selling them at a higher price than you bought
them, and/or by receiving dividends. For example, if you bought a share of Plum at ₹100 and later
sold it for ₹150, you would make a ₹50 profit.
Another way to make money with stocks is through dividends, which are payments companies
make to their shareholders from their profits. Not all companies issue dividends and the amount you
receive may vary. So, in addition to the ₹50 profit from the sale, you may also receive dividend
income from your Plum shares, increasing your total return on investment.

Bonds: Bonds are a type of investment where you lend your money to a government or a
corporation. In return, the issuer of the bond promises to pay you fixed interest payments and repay
the principal at the end of the bond's term. Bonds typically offer lower risk and return compared to
stocks, but they depend on the issuer's creditworthiness and interest rate changes.
You make money with bonds by receiving interest payments and getting your principal back at the
end of the bond's term. For example, if you buy a ₹1,000 bond with a 5% annual interest rate, you
would receive ₹50 in interest payments each year, and get your ₹1,000 back when the bond
matures
.
Mutual funds: A mutual fund is a type of investment where a lot of people pool their money
together in order to buy a bunch of different stocks, bonds, or other investments. By doing this,
they're able to reduce their risk because if one of the investments doesn't do well, they still have all
of the other investments to fall back on. Mutual funds are managed by professionals, so you don't
have to worry about picking the right stocks or bonds yourself.
You make money with mutual funds in three ways: by receiving dividends or interest from the
fund's investments, by selling your shares in the fund at a higher price than you bought them, and
by receiving capital gains distribution
.
Diversification: If there is one phrase to perfectly describe diversification, then it is: don't put all
your eggs in one basket. Diversification is a strategy to reduce risk and increase return by having a
mix of different types of investments that are not highly correlated. In other words, when some
investments in your portfolio are doing poorly, others might be doing well, which can help balance
out your overall returns.

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To diversify your portfolio, you can:

- invest in a mix of stocks, bonds, and mutual funds.
- choose investments from different industries and sectors.
- include both domestic and international investments.

When thinking about diversifying your portfolio, you must also think about a few other things.
- Risk Tolerance: Figure out how much risk you're willing to accept with your investments.
If you prefer less risk, you might want to allocate a larger part of your portfolio to safer
assets like bonds or dividend-paying stocks. On the other hand, if you're okay
with more risk, you may choose to invest more in growth-focused stocks or other high-risk
opportunities.
- Time Horizon: Think about how long you plan to keep your investments before needing the
money. If you have a longer time frame, you may be able to invest in riskier assets, as you'll
have more time to recover from potential market downturns. However, if your time frame is
shorter, you may want to focus on safer investments like bonds.
- Financial Goals: Determine what you want to accomplish with your investments, such as
saving for retirement, paying for a child's education, or buying a home. Your goals will help
guide your investment choices and find the right balance of risk and return in your portfolio.

Conclusion
Now that you have an understanding of the basics of stocks, bonds, and mutual funds you can start
making informed decisions about your investment options. By diversifying your portfolio, you can
reduce risk and increase returns, setting yourself up for a successful financial future. Always
remember to do thorough research before making any investment decisions, and consider talking to
a financial advisor if you're unsure about where to start. There is a good chance your bank already
has one!

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6.3 Planning For Retirement

The costs of retirement and how to estimate them?

Planning for retirement is one of the most important steps you can take to ensure
financial security and well-being in the later years of life. However, there are many
challenges and uncertainties that can make retirement planning difficult. Let's discuss the
main challenges and uncertainties, and tips to reduce your expenses and increase your
retirement income.

Why do I need to plan for retirement?

Did you know that people nowadays are spending just as many years retired as
they were working? Imagine working 30 years, receiving a regular paycheck, and then,
you retire, and that paycheck stops. How will you pay for your day-to-day expenses for
the next 30 years?
Unfortunately, Social Security is only a small amount and usually starts much later in life. In fact, it

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can be really hard to live off of Social Security alone. So, if you want to retire early or live
comfortably during retirement, you should start planning and saving now.

Challenges And Uncertainties

Planning for retirement means you need to think about following things:
Longer life expectancy:
People are living longer, which means you might need more money to cover your
expenses for a longer period of time. As mentioned earlier, it is important to plan on
being retired for just as many years as you were working.

Rising care costs:

As you get older, you might need more medical or long term care, and these
costs can add up. You should plan on seeing a doctor more often, and potentially
needing more regular medications.

Inflation:
The cost of living usually goes up over time, so it's important to plan for how
inflation might affect your retirement expenses. Your grocery bill today won't be the
same when you retire - it will likely cost more money to buy the same items.

Market fluctuations:
The value of your investments can go up and down, which can impact your
retirement savings. If the investment market goes down close to your retirement, you
may end up with less money than you had planned.

Changes in social policies and programs:

Government programs, like Social Security, might change over time, so it's
important to stay informed and plan accordingly. Sadly, cuts and restructuring of these
programs happen often and that can impact your retirement.

Benefits And Consequences Of Planning (Or Not Planning) For Retirement

Planning for retirement has many benefits, such as:
Having enough income and savings:

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If you plan well, you'll have enough money to cover your expenses and to do the
things you want to in retirement.

Maintaining your standard of living:

By planning, you can make sure you have enough money to continue living the
way you want to.
On the other hand, if you don't plan for retirement, you might face some consequences, like:

Retirement savings gap:

You may not have enough money saved to cover your expenses, which could
lead to a lower standard of living, or having to go back to work.

Financial stress:
Not having enough money saved can cause stress and worry during your
retirement years.

Estimating retirement expenses in detail

When planning for retirement, it's crucial to think about the various costs you
might encounter. These can vary depending on factors such as your lifestyle, the location
where you reside, your health status, and your family situation. To better prepare for
your retirement, consider the following main categories of expenses:

Housing:
Housing expenses go beyond just rent or mortgage payments. They also include
property taxes, home maintenance costs, utilities, and homeowner's or renter's insurance.
If you plan to pay off your mortgage before retiring, your housing expenses may be
lower. Keep in mind that maintenance costs may increase as your home ages.

Food:
Food expenses include groceries, dining out, snacks, and drinks. These costs can
vary depending on your eating habits, dietary preferences, and the frequency of dining
out. It's essential to account for any changes in your eating habits during retirement, such
as cooking more at home or eating out more often.

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Transportation:
Transportation costs encompass car expenses (such as fuel, maintenance,
insurance, and registration), public transportation fares, and travel expenses for
vacations or visiting family. Consider how your transportation needs may change in
retirement – for example, you may drive less if you no longer commute to work, or you
may travel more frequently for leisure.

Health care:
Health care expenses can be a significant part of your retirement budget. They
include insurance premiums (for Medicare or supplemental policies), out-of-pocket costs
for medical services, prescription medications, and over-the-counter drugs. As you age,
your health care needs and expenses may increase, so it's essential to plan for potential
changes in your health.

Entertainment:
Entertainment costs cover hobbies, trips, and other recreational activities. Think
about how you'll spend your free time in retirement and factor in any additional
expenses for new hobbies or increased travel. Also, consider costs for memberships,
subscriptions, and tickets for cultural or sporting events.

Insurance and taxes:

Don't forget to account for any ongoing insurance policies (such as life or long-
term care insurance) and taxes on your retirement income and investments.

To estimate your retirement expenses accurately, you can use methods like the replacement ratio,
the budgeting approach, or an online calculator.
 The replacement ratio is calculated by estimating what percentage of your pre-retirement
income you'll need during retirement (usually around 70% to 80%).
 The budgeting approach involves creating a detailed budget for your retirement expenses,
considering all the categories mentioned above.
 Online calculators can help you estimate your expenses based on factors like your age,
income, and savings.

Tips for reducing retirement expenses and increasing income

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Here are some tips to help you reduce your retirement expenses and increase your retirement
income:
- Downsize: Consider moving to a smaller home or getting rid of things you don't need to
lower your costs.
- Relocate: Moving to a less expensive area can help you save money on housing, taxes, and
other expenses.
- Work part-time: If you're able and willing, you can work part-time during retirement to earn
extra income.
- Delay retirement: If you wait a few more years before retiring, you can save more money
and increase your Social Security benefits.
Remember, it's never too early to start planning for retirement. Ideally, if you are working, you are
also saving for retirement at the same time.

Sources Of Retirement Income-

Knowing about the different sources of retirement income, like Social Security,
employer-sponsored plans, and individual plans, is essential because it helps you make
informed decisions about your financial future, ensuring you have enough money to
support the lifestyle you want during your golden years.

Understanding sources of income during retirement:

When you think about retirement, you might imagine yourself traveling the
world, spending time with your family, or finally having the time to pursue your
hobbies. But, to enjoy your retirement, you must have a steady source of income. In this
article, we'll discuss the main sources of income during retirement and how they work.
Social security:
Social security is a government program that provides a monthly payment to
retirees. It is funded by taxes that are taken out of everyone's paycheck. Paying into
social security is mandatory for every employee and their employer.
When you work, you pay into the social security system. When you retire, you can apply to receive
monthly payments from the system. The amount you receive is based on how much you earned
while you were working and how early you retire.
While social security is an important part of retirement, it is typically not enough to live off of. The
average monthly social security payment is around ₹1,600 ^1. This is not enough for most people to
live comfortably, so it is important to save for retirement in other ways as well.

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Employer-sponsored plans:
Most people save for retirement with the help of their employer through
retirement plans like 401(k), 403(b), 457, or pension. These plans are called employer-
sponsored plans because your employer is the one who sets up a retirement account for
you, and both you and your employer can contribute money to it.
Sometimes, employers even match your contributions, meaning they'll add extra money to your
account. This is called a matching contribution.
This is a great way to grow your retirement savings faster.
Employer-sponsored plans are usually voluntary, which means you don't have to participate if you
don't want to. But if your employer offers matching contributions, it can be a good idea to take
advantage of it in order to get some free money added to your retirement savings.
When you retire, you will be able to access the money in your retirement plan. Depending on the
type of plan, you might be able to receive a lump-sum payment, periodic payments, or a
combination of both.

Individual savings:
Individual savings for retirement differ from Social Security and employer-
sponsored retirement plans in that they are completely under your control. With
individual savings, you are the one who decides how much you want to save, where you
want to save it, and what types of investments you want to make.
One of the main benefits of individual savings for retirement is that they give you more control over
your retirement income. You can choose to save as much as you want, and invest in a variety of
different accounts and assets. For example, you might choose to open an Individual Retirement
Account (IRA) and make regular contributions to it. Or, you might invest in stocks, bonds, or
mutual funds. You might even choose to purchase real estate as an investment.
When you decide to retire, you can access your individual savings in a variety of ways, depending
on the type of account or asset you have. For example, with an IRA, you might choose to take
withdrawals as needed. With stocks, bonds, or mutual funds, you can sell them to get some money.
If you own real estate, you might choose to sell the property or rent it out for additional income.

Conclusion
Social security, employer-sponsored plans, and individual savings are all
important sources of retirement income. Each one has its own strengths and weaknesses.
While social security benefits provide a steady income, they are often not enough on

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their own to sustain a comfortable lifestyle in retirement. Employer-sponsored plans can

offer additional income, but they may not be available to everyone. Finally, individual
savings allow people to take control of their own retirement planning, but they require
discipline and foresight. Combining all three sources can help provide a solid foundation
for a secure and comfortable retirement.

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CONCLUSION
In conclusion, financial literacy serves as a cornerstone for individuals seeking to
achieve financial stability and success. Through this comprehensive journey into
financial literacy, we have explored various essential topics that are crucial for managing
personal finances effectively.

Budgeting, the fundamental aspect of financial planning, empowers individuals

to allocate their income wisely, prioritize expenses, and achieve financial goals. By
understanding the concept of budgeting, planning, and balancing budgets, individuals
can take control of their finances and make informed decisions.

Saving money is another key component of financial literacy, allowing

individuals to build a financial cushion, prepare for emergencies, and work towards
long-term financial goals. By adopting smart saving habits, such as paying oneself first
and utilizing different types of saving accounts, individuals can cultivate a strong
financial foundation.

Consumer credit and understanding credit scores play a vital role in financial
literacy, influencing access to credit and overall financial health. Learning how credit
scores are calculated, raising credit scores, and making informed decisions about credit
cards can help individuals navigate the world of consumer credit responsibly.

Understanding one's money personality and setting SMART goals are essential
steps in aligning financial behaviors with personal values and aspirations. By identifying
short-, medium-, and long-term goals, individuals can create a roadmap for financial
success and monitor progress towards achieving those goals.

Investment and retirement planning are critical aspects of long-term financial

well-being. By understanding the concepts of risk and return on investment and planning
for retirement early, individuals can build wealth and secure a comfortable retirement
future.

In summary, financial literacy empowers individuals to make informed decisions

about money management, budgeting, saving, credit, investment, and retirement
planning. By equipping oneself with the knowledge and skills necessary for financial

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success, individuals can navigate life's financial challenges with confidence and achieve
their financial goals. Ultimately, financial literacy is not just about managing money; it's
about creating a life of financial security, freedom, and opportunity.

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BIBLIOGRAPHY:

1. Kapoor, Jack R., Les R. Dlabay, and Robert J. Hughes. "Personal Finance." McGraw Hill
Education, 2019. This comprehensive textbook covers various aspects of personal finance,
including budgeting, saving, credit management, and investment.

2. Ramsey, Dave. "The Total Money Makeover: A Proven Plan for Financial Fitness." Thomas
Nelson, 2013. Dave Ramsey offers practical advice on budgeting, saving, debt management, and
wealth-building strategies in this bestselling book.

3. Kobliner, Beth. "Get a Financial Life: Personal Finance in Your Twenties and Thirties." Simon &
Schuster, 2017. Beth Kobliner provides practical guidance on budgeting, saving, investing, and
navigating the financial challenges of young adulthood.

4. Hunt, Mary. "The Smart Woman's Guide to Planning for Retirement: How to Save for Your
Future Today." Adams Media, 2018. Mary Hunt offers valuable insights and strategies for women
to plan for retirement and achieve financial security.

5. Federal Trade Commission (FTC). "Understanding Your Credit Score." Available at:
https://www.consumer.ftc.gov/articles/0057-understanding-your-credit-score. This resource from
the FTC provides detailed information on credit scores, how they are calculated, and steps to
improve them.

6. Securities and Exchange Board of India (SEBI). "Introduction to Mutual Funds." Available at:
https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=5. SEBI's
guide to mutual funds offers insights into investment options, risk management, and retirement
planning.

7. Reserve Bank of India (RBI). "Financial Education." Available at:

https://www.rbi.org.in/scripts/FinancialEducation.aspx. The RBI's financial education portal

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provides resources and tools for improving financial literacy and making informed financial
decisions.

8. Government of India. "Pension Fund Regulatory and Development Authority (PFRDA)."

Available at: https://www.pfrda.org.in/. PFRDA's website offers information on retirement
planning, pension schemes, and regulatory guidelines for retirement funds in India.

These resources offer valuable insights and guidance on various aspects of financial literacy,
budgeting, saving, credit management, investment, and retirement planning.

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