FINANCIAL LITERACY:

LONG NOTES UNIT 1

Chapter 1: Introduction to Financial Literacy

Financial literacy is the ability to understand and manage your finances effectively. It
includes knowing how to budget, save, invest, and plan for future needs. Financial literacy is
essential because it helps people make informed financial decisions. Without financial
literacy, it can be easy to fall into debt, miss opportunities to save, or fail to plan for the
future.

The need for financial literacy arises from the complex financial decisions we face daily.
Whether it's managing personal expenses, saving for retirement, or investing in the stock
market, understanding financial concepts is crucial for achieving financial well-being. When
you're financially literate, you're better equipped to make sound decisions that can lead to
financial security. Additionally, financial literacy prevents individuals from being swayed by
bad financial advice and helps them avoid financial crises.

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Chapter 2: Personal Finance Concepts

Personal finance refers to how individuals manage their money, including saving, investing,
borrowing, and planning for future financial needs. Understanding personal finance helps
you take control of your financial situation.

Savings: Savings is money set aside for future needs or emergencies. It's a way of
protecting yourself from unexpected expenses. Savings are usually low-risk, but they provide
you with security for the future.

Investment: Investments are assets that can grow in value over time or generate income.
For example, stocks, bonds, or real estate are common investments. Unlike savings,
investments carry a higher risk but can offer higher returns. It's important to balance your
investments based on your risk tolerance.

Borrowing: Borrowing occurs when you take money from a lender with a promise to repay it
with interest. Common types of borrowing include loans, credit cards, and mortgages.
Borrowing should be done wisely to avoid accumulating unmanageable debt.

Income and Expenses: Income is the money you earn from work, investments, or other
sources, while expenses are the money you spend on daily needs. A good financial plan
involves ensuring that your income exceeds your expenses, allowing you to save and invest.
Surplus/Deficit: If your income exceeds your expenses, you have a surplus, which can be
saved or invested. If your expenses are higher than your income, you have a deficit, and you
might need to adjust your spending or find ways to increase your income.

Assets and Liabilities: Assets are things you own that have value, such as property, savings,
or investments. Liabilities are the debts you owe, such as loans or credit card balances.
Managing both assets and liabilities is important for achieving financial stability.

Inflation: Inflation is the rate at which the general level of prices rises, leading to a decrease
in the purchasing power of money. Over time, inflation can erode the value of your savings,
so it's important to consider inflation when making financial decisions.

Time Value of Money: The concept of time value of money means that a certain amount of
money today is worth more than the same amount in the future. This is because money has
the potential to earn interest or appreciate in value over time. Therefore, delaying spending
and investing early can help you accumulate wealth.

Active and Passive Income: Active income is earned through your work, such as salary or
wages. Passive income, on the other hand, is earned from investments or assets that
generate income without much active involvement, such as rental income or dividends from
stocks.

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Chapter 3: Financial Planning

Financial planning is the process of creating a strategy for managing your finances to
achieve your financial goals. It involves assessing your current financial situation, setting
goals, and developing a plan to reach those goals.

Financial Planning Process: The financial planning process includes several key steps:

1. Assess Current Situation: This involves taking a close look at your income, expenses,
savings, debts, and assets to understand where you currently stand financially.

2. Set Financial Goals: These are the objectives you want to achieve, such as buying a
house, saving for retirement, or paying off debt.

3. Make a Plan: This step involves creating a budget, deciding how much to save and invest,
and how to pay off debts.

4. Take Action: Implement your plan by saving money, investing, and reducing unnecessary
expenses.
5. Monitor and Review: Regularly review your progress and adjust your plan if necessary to
stay on track with your goals.

SMART Financial Goals: To ensure your goals are achievable, use the SMART criteria:

S: Specific – Your goal should be clear and well-defined.

M: Measurable – You should be able to track your progress.

A: Achievable – The goal should be realistic and attainable.

R: Relevant – The goal should align with your values and life priorities.

T: Time-bound – Set a deadline to achieve your goal.

Three Pillars of Investments: When making investment decisions, consider three important
factors:

1. Safety: The degree of risk involved. Low-risk investments include government bonds or
savings accounts.

2. Liquidity: The ease with which you can access your investment. Cash and stocks are
more liquid than real estate.

3. Return: The profit you earn from the investment. Higher returns often come with higher
risk.

Risk and Return: Risk refers to the uncertainty of an investment’s return. Generally,
higher-risk investments can offer higher returns, while lower-risk investments provide more
stability but lower returns. A good financial plan balances risk and return to suit your financial
goals and risk tolerance.

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Chapter 4: Banking and Digital Payment

Understanding banking and digital payment systems is crucial in today’s financial world.
These services help individuals manage their money efficiently, and they provide access to
loans, savings, and payment systems.

Types of Banks: There are several types of banks:

Commercial Banks: These banks provide a wide range of services to individuals and
businesses, such as savings accounts, loans, and credit facilities.

Central Banks: These regulate the economy, control inflation, and issue currency (e.g.,
Reserve Bank of India).

Cooperative Banks: These are smaller, member-based institutions focused on providing

affordable financial services to a specific community or group.

Development Banks: These focus on financing projects for industrial and economic
development (e.g., NABARD in India).

Banking Products and Services: Banks offer various services:

Loans: These can be short-term, medium-term, or long-term, depending on the purpose

(e.g., home loans, education loans, personal loans).

Deposits: These include savings accounts, fixed deposits, and recurring deposits where you
can earn interest on your savings.

Other Services: Banks provide services like wealth management, insurance, and foreign
exchange.

Types of Bank Deposit Accounts:

Savings Account: A basic account for storing money and earning interest. Ideal for
day-to-day expenses.

Term Deposit: A fixed deposit where money is locked for a set period at a fixed interest rate.

Current Account: Mainly used by businesses for frequent transactions. No interest is earned,
but it offers more flexibility.

Recurring Deposit: An account where you deposit a fixed amount monthly and earn interest.

PPF (Public Provident Fund): A government-backed savings scheme offering tax benefits
and long-term growth.
Formalities to Open a Bank Account: To open a bank account, you generally need
documents like a PAN card, proof of address, and completion of the KYC (Know Your
Customer) process.

Cashless Banking and Digital Payments:

E-banking: Internet banking allows you to perform banking transactions online, such as
checking account balances or transferring money.

ATM and Debit/Credit Cards: These provide easy access to cash and allow for purchases
without cash.

App-based Payment Systems: Services like Google Pay, PayTM, and PhonePe let you
make payments directly from your smartphone using linked bank accounts.

Banking Complaints and Ombudsman: If you face issues with banking services, you can
lodge a complaint with the bank. If the issue is unresolved, you can approach the Banking
Ombudsman for a resolution.