Financial Literacy

The National Endowment for financial education defines financial literacy as “the ability to read,
analyze, manage, and communicate about the personal financial conditions that affect material
well-being. It includes the ability to discern financial choices, discuss money and financial issues
without (or despite) discomfort, plan for the future, and respond competently to life events
that affect every day financial decisions, including events in the general economy” ( Incharge
education Foundation, 2017). To put it simply, it is the ability to use knowledge and skills to
manage one’s financial resources effectively for lifetime financial resources effectively for
lifetime financial security” (Mandell, 2009). Meanwhile, Hastings, et al. (2013) refers to financial
literacy as:
1. Knowledge of financial products (e.g. a stock vs. a bond, fixed vs. adjustable rate mortgage);
2. Knowledge of financial concepts (e. g. a inflation, compounding, diversification, credit
scores);
3. having the mathematical skills or numeracy necessary for effective financial decision
making; and
4. being engaged in certain activities such as financial planning.
Public and private institutions alike have recognized the need for financial literacy to be
incorporated in the school curriculum. Financial education and advocacy programs of the public
and private sectors have been identified as key areas in building an improved financial system
in the Philippines (Go, 2017). Republic Act 10922, otherwise known as the “Economic and
Financial Literacy Act,” mandates DepED to “ensure that economic and financial education
becomes an integral part of formal learning.”
The Council Economic Education, the leading organization in the United States that focuses on
the economic and financial education of students from Kindergarten through high school
developed six standards gearing toward deepening students’ understanding of personal finance
through an economic perspective. The standards and key concepts are summarized in the table
below.

Standards Key Concepts

Earning income  Income earned or received by people
 Different types of jobs as well as different forms of income earned or
received
 Benefits and costs of increasing income through the acquisition of education
and skills
 Government programs that affect income
 Types of income and taxes
 Labor market

Buying goods  Scarcity, choice, and opportunity cost

and services  Factors that influence spending choices, such as advertising, peer pressure,
and spending choices of others
 Comparing the costs and benefits of spending decisions
 Basics of budgeting and planning
 Making a spending decision
 Payment methods, costs, and benefits of each
 Budgeting and classification of expenses
 Satisfaction, determinants of demand, costs of information search, choice of
product durability
 The role of government and other institutions in providing information for
consumers
Saving  Concept of saving and interest
 How people save money, where people can save money, and why people
save money
 The role that financial institutions play as intermediaries between savers and
borrowers
 The role government agencies such as the Federal Deposit Insurance
Corporation (FDIC) play in protecting savings deposits
 Role of marketing in determining interest rates
 The mathematics of saving
 The power of compound interest
 Real versus nominal interest rates
 Present versus future value
 Financial regulators
 The factors determining the value of a person’s savings over time
 Automatic savings plans, “rainy-day’’ funds
 Saving for retirement

Using Credit  Concept of credit and the cost of using credit

 Why people use credit and the sources of credit
 Why interest rates vary across borrowers
 Basic calculations related to borrowing (principal, interest, compound
interest)
 Credit reports and credit scores
 Behaviors that contribute to strong credit reports and scores
 Impact of credit reports and scores on consumers
 Consumer protection laws

Financial  Concept of financial investment

investing  Variety of possible financial investment
 Calculate rates of return
 Relevance and calculation of real and after-tax rates of return
 How diversification can reduce risk
 How financial markets react to changes n market conditions and information
Protecting  Concepts of financial risk and loss
Insuring  Insurance (transfer of risk through risk pooing)
  Managing risk
 Identity theft
 Life insurance products
 How to protect oneself against identity theft

Increased personal financial literacy affects one’s financial behavior. These changes in behavior pay
dividends to society as well. People who work, spend, save, borrow, invest, and manage risk wisely are
less likely to require a government rescue. Financial literacy does not totally eliminate the need for a
social safety net because even the most prudent individual can encounter financial difficulties.

State Financial in the Philippines

 World Bank study in 2014 estimated 20 million Filipinos saved money but only half had bank
accounts.
 Asian Development Bank (ADB) study in 2015 revealed that PH does not have a national strategy
for financial education and literacy.
 In 2016, Bangko Sentral ng Pilipinas (BSP) released the national strategy for inclusion, stating
that while institutions strive to broaden financial services, financial literacy should also
complement such initiatives.
 As per Standard & Poor’s (S&P) Ratings services survey last year, only 25 percent of Filipinos are
financially literate. This means that about 75 million Filipinos have no idea about inflation, risk
diversification, insurance, compound interest, and bank savings.
 Ten years after discovery of the stock market, still less than one percent of PH population is
invested in it.
 More than 80 percent of the working middle class have no formal financial plan.

Because of these findings, public and private sectors alike have recognized the need to strengthen
financial education in the country.

Developing Personal Financial Literacy

One’s attitude about money is heavily influenced by the parent’s attitude and behavior about money.
The attitudes you formed early in life probably affect how you save, spend, and invest today. Do you
behave similarly or differently from your parents about handling money?

There are six major characteristic types in how people view money

Frugal: Frugal people seek financial security by living below their means and saving money.

Pleasure: Pleasure seekers use money to bring pleasure to themselves and to others. They are more
likely to spend than to save.

Status: Same people use money to express their social status. They like to purchase and “show off” their
branded items.

Indifference: Some people place very little importance on having money and would rather grow their
own food and craft their own clothes. It is as if having too much money makes them nervous and
uncomfortable.
Powerful: Powerful people use money to express power or control over others.

Self-worth: People who spend money for self-worth value how much they accumulate and tend to judge
others based on the amount of money they have .

Which characteristic closely resembles your attitude about money? Explain your answer.

Fixed expenses remain the same year-around. Car payment is an example. Variable expenses occur
regularly but the amount you pa varies. Electric and gas bills are examples of these.

Needs vs. Wants

Financial discipline starts with an ability to recognize whether expenses are needs or wants, and
followed by ability to prioritize needs over wants. Needs are essential to our survival.

Here are practical steps you can undertake to enhance your financial literacy.

Setting Financial Goals

Setting financial goals is the first step to managing one’s financial life. Goals may be short, medium, and
long-term. Short-term goals can be measured in weeks and can provide instant gratification and
feedback.

Developing a Spending Plan

Time and effort are necessary to build a sustainable spending plan. Three easy steps are proposed below
when developing your personal spending plan:

1. Record – keep a record of what you spend.

2. Review – Analyze the information and decide what you do.

3. Take action – Do something about what you have written down.

Importance of saving

Because no one can predict the future with certainly, we need to save money for anything that might
happen. Here are some reasons why saving is important:

 Emergency Bolster – you should save money to avoid going to debt just to pay emergency
situations, like unexpected medical expenses and damages caused by calamities or accidents.
 Retirement- You will need savings/investments to take the place of income you will no longer
receive when you retire.
 Future Events- You need to save for future events like weddings, birthdays, anniversaries, and
travels so as not to sacrifice your fixed expenses.
 Instability of Social Security – Pensions from social security should only serve as supplementary
and not the primary source f income after retirement.
 A Little Goes a Long Way- Small consistent savings go a long way.

There are two ways to save:

 Save before you spend; and
  Save after you spend wisely.

In order to stick to savings habit, you should:

1. Commit to a month;

2. find am accountability partner;

3. find a savings role model who is successful with his/her money, through tried and true savings;

4. write your goal down and track it; and

5. avoid tempting situations (don’t go to the mall to “hang out”).

 Financial literacy is the ability to use knowledge and skills to manage one’s financial resources
effectively for lifetime financial security.
 Financial literacy enables people to understand and apply knowledge and skills to achieve a
lifestyle that is financially balanced, sustainable, ethical, and responsible.
 One’s attitude about money money is heavily influenced by the parents’ attitude and behavior
about money.
 Standards for developing understanding of financial literacy include earning income, buying
goods and services, saving, using credit, financial investing, protecting, and insuring.

Read the questions and instructions carefully. Follow what is asked and write your answers in the space
provided.

1. How well do you understand personal finance concepts? Rate your knowledge below.

4: Above Average Knowledge

3: Average Knowledge

2: Limited Knowledge

1: No Knowledge

2. Financial literacy requires skills to aid you in making responsible and ethical financial decisions.

These skills include being able to set goals, create and keep current a budget, formulate a
spending plan, and keep organized records. Think about your overall skills in those mentioned and mark
where you feel your overall skills level is.

4: Above Average Skill

3: Average Skill

2: Limited Skill

1: No Skill

3. Behavior is applying what you learn to bring positive impact. Positive financial behavior brings
numerous benefits. Paying bills and debts on time and making regular deposits in savings account are
positive financial behaviors. Rate your ability to practice positive financial behavior.
 4: Above Average Ability

3: Average Ability

2: Limited Ability

1: No Ability

4. How does your current budget pie chart look like? Using the following categories, map your ideal
budget plan using a pie chart. You may use more categories as needed.

a. Housing

b. Electric bills

c. Internet

d. Food

e. Dept

f. Education

g. Transportation

1. Differentiate among the following financial goals: short-term, medium-term, and long-term financial
goals. Give examples for each.

Goals Definition Examples

Short-term

Medium-term

Long-term