EDU561: Enterprise, Innovation and Enrichment in Education

Weeks 3 & 4 Tutorial questions

Tutorial 1

Explain the benefits of financial education?

Being financially literate is a skill that brings forth an assortment of benefits that can
improve the standard of livingStandard of LivingThe standard of living is a term used
to describe the level of income, necessities, luxury, and other goods and services that
are generally for individuals through an increase in financial stability.

Listed below are the assortment of benefits of being financially literate:

 Ability to make better financial decisions

 Effective management of money and debt
 Greater equipped to reach financial goals
 Reduction of expenses through better regulation
 Less financial stress and anxiety
 Increase in ethical decision-making when selecting insurance, loans,
investments, and using a credit card
 Effective creation of a structured budget

Making steps to becoming financially literate is an important component of life that

can ensure financial solidity, reduce anxiety, and stimulate the achievement of
financial goals.

Discuss the effects of having low levels of financial literacy?

 Prohibits individuals from becoming productive members of the economy

and society in the same way that the inability to read or write
disadvantages generations
 Decreases the chances of assessing financial risks or opportunities. This
makes financial choices riskier and potentially damaging
 Handicaps anyone seeking to be financially secure. For example,
financial illiteracy can increase the chances of losses due to fraud or
scams
 Magnifies the physical and mental issues associated with being in debt
and lessens the chances of finding an appropriate debt solution
Financial illiteracy can have detrimental physical, mental and socioeconomic effects on
people of all ages and all walks of life.
Why do we need to teach financial literacy in schools?
Financial literacy is crucial for helping consumers to manage these factors and save
enough to provide adequate income in retirement while avoiding high levels of debt that
might result in bankruptcy, defaults, and foreclosures. Yet, in its "Report on the
Economic Well-Being of U.S. Households in 2019," the Board of Governors of the
U.S. Federal Reserve System found that many Americans are unprepared for
retirement. One-fourth indicated they have no retirement savings, and fewer than four
in 10 of those not yet retired felt that their retirement savings are on track. Among
those who have self-directed retirement savings, nearly 60% admitted to feeling low
levels of confidence in making retirement decisions. 1 2

Low financial literacy has left millennials—the largest share of the American
workforce—unprepared for a severe financial crisis, according to research by the TIAA
Institute. Even among those who report having a high knowledge of personal finance,
only 19% answered questions about fundamental financial concepts correctly. Forty-
three percent report using expensive alternative financial services, such as payday
loans and pawnshops. More than half lack an emergency fund to cover three months’
expenses, and 37% are financially fragile (defined as unable or unlikely to be able to
come up with $2,000 within a month in the event of an emergency). Millennials also
carry large amounts of student loan and mortgage debt—in fact, 44% of them say they
have too much debt.1 3

Though these may seem like individual problems, they have a broader effect on the
entire population than previously believed. All one needs is to look at the financial crisis
of 2008 to see the financial impact on the entire economy that arose from a lack of
understanding of mortgage products (creating a vulnerability to predatory lending).
Financial literacy is an issue with broad implications for economic health, and an
improvement can help lead the way to a global economy that is competitive and strong.

What is the role of financial planning in personal finance?

1. It provides direction to your goals or dreams. Financial

planning helps you understand your goals better in terms of why you
need to achieve these goals and how they impact other aspects of your
life and finances.
2. Planning encourages you to manage inflation. You are aware of the
price of various things and activities. You plan your budget in a
better manner.
 3. Financial planning makes you disciplined towards money. You do
not spend unnecessarily. You keep a check on your savings and
spending.
4. By planning your finances, you plan for the future. You are able
to gain visibility into your finances in the future. You have a fair idea of
how much money would you have, say ten years down the line. You
would be aware of the returns your investments should earn to achieve
your goals.

1. Income – When you have a financial plan, you manage your income better.
You are aware of how much you earn from salary, interest earned, dividends,
etc. This will help you to understand how much you are earning and if it is
enough to earn to achieve your objectives. (if you have a choice or if you don’t
have a choice at all)

2. Expenses – We spend money on basic needs, wants and splurge on

luxuries. If we plan our finances, we will keep an eye on our expenses. Even if
we go overboard in one month, we will know how much to cut back in the
following months to stay within budget. Spending changes with changes in
lifestyle and stage of life. This will help us determine income requirements and
we can make changes in our earning capability accordingly.

3. Savings – You record your income and expenses in the plan. Therefore you
know your savings. Planning gives you an idea of how much money you need to
achieve your objectives. You make a budget and therefore can assess whether
you are within budget or overspending. This will help you understand your
savings rate and how much you need to save to reach your goals.

4. Investment – A plan will help to choose the right investments as per your
income capacity, risk profile, and goals. The plan will have an investment
portfolio and asset allocation details. This can help you to have a balanced
portfolio at all times.
5. Taxation – Thinking about taxes in the last week of March is not a prudent
idea. With a financial plan, you can assess your tax outgo at the beginning of
the financial year. You can plan your finances such that you pay the least
amount of tax in a legal manner.

6. Retirement – We all want a carefree, relaxed retirement. It is possible only

if you plan your finances such that your lifestyle is taken care of. You should
have cash reserves to take care of medical expenses and other emergencies. A
proper plan will have the retirement goals listed and the income, expenses, and
investment details. This will help you determine steps to achieve your goals.

7. Estate Planning – Estate planning refers to the provisions made regarding

your wealth and its distribution smoothly after your death. The amount of
wealth is not important here but the details regarding how assets and liabilities
are to be taken care of are important. The financial plan will have a broad
outline of what is to be done so that those taking care of your finances know
what steps are required to be taken to manage your estate.

8. Ups and downs of Financial Status – There are many changes in our life.
You get married, you can lose your job, you win a lottery or a loved one
becomes critically ill. You make some money decisions that affect your standard
of living. Such changes can lead to positive or negative changes in your financial
status. The importance of personal Financial planning anticipates financial
requirements in different conditions and ensures smooth financial flow
at all times.

How does financial literacy and education help one achieve financial
security?

undamental Components of Financial Literacy

Financial literacy consists of several financial components and skills that allow an
individual to gain knowledge regarding the effective management of money and debt.
Below are the fundamental components of financial literacy that should be learned.

1. Budgeting

In budgetingBudgetingBudgeting is the tactical implementation of a business plan. To

achieve the goals in a business’s strategic plan, we need some type of budget that
finances the business plan and sets measures and indicators of performance., there are
four main uses for money that determine a budget: spending, investing, saving, and
giving away.

Creating the right balance throughout the primary uses of money allows individuals to
better allocate their income, resulting in financial security and prosperity.

In general, a budget should be composed in a way that pays off all existing debt while
leaving money aside for saving and making beneficial investments.

2. Investing

To become financially literate, an individual must learn about key components in

regards to investing. Some of the components that should be learned to ensure
favorable investments are interest rates, price levels, diversification, risk mitigation,
and indexes.

Learning about crucial investment components allows individuals to make smarter

financial decisions that may result in an increased inflow of income.

3. Borrowing

In most cases, almost every individual is required to borrow money at one point in
their life. To ensure borrowing is done effectively, an understanding of interest rates,
compound interest, time value of moneyTime Value of MoneyThe time value of
money is a basic financial concept that holds that money in the present is worth more
than the same sum of money to be received in the future. This is true because money
that you have right now can be invested and earn a return, thus creating a larger
amount of money in the future. (Also, with future, payment periods, and loan structure
is crucial.
If the criteria above are understood sufficiently, an individual’s financial literacy will
increase, which will provide practical borrowing guidelines and reduce long-term
financial stress.

4. Taxation

Gaining knowledge about the different forms of taxation and how they impact an
individual’s net income is crucial for obtaining financial literacy. Whether it be
employment, investment, rental, inheritance, or unexpected, each source of income is
taxed differently.

Awareness of the different income tax rates permits economic stability and increases
financial performance through income management.

5. Personal Financial Management

The most important criteria, personal financial management, includes an entire mix of
all of the components listed above.

Financial security is ensured by balancing the mix of financial components above to

solidify and increase investments and savings while reducing borrowing and debt.

Achieving an in-depth knowledge of the financial components discussed above

guarantees an increase in an individual’s financial literacy.