WHAT IS FINANCIAL LITERACY (FL)?

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 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 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., 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 republic 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 for formal learning”.

The Council for 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 and Services  scarcity, choice and opportunity costs

 factors that influence spending choices. Such as advertising, peer pressure, and spending
choices of others
 comparing the costs and benefits of spending decisions
 basic of budgeting and planning
 making a spending decisions
 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 • the 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 markets in determining interest rates
• the mathematics of savings
• 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 overtime
• 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 source 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 Investing • concept of financial investment
• variety of possible financial investments
• calculate rates of return
• relevance and calculation of real and after-tax rates of return
• how markets cause rates of return to change in response to variation in risk and maturity
• how diversification can reduce risk
• how financial markets reacts to changes in market conditions and information
Protecting and Insuring • concepts of financial risks and loss
• insurance (transfer of risk through risk pooling)
• managing risks
• identity theft
• lie insurance products
• how to protect oneself against identity theft
The Benefits of Financial Literacy

One’s level of financial literacy affects one’s quality of life significantly. It determines one’s
ability to prove basic needs, attitude toward money and investments, as well as one’s
contribution to the community. Financial literacy enables people to understand and apply
knowledge and skills to achieve a lifestyle that is financially balanced, sustainable, ethical and
responsible.
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. But taking responsibility for one’s financial life cultivates
proper decision-making skills and discipline. Most of the responsibility for managing financial
matter rests with the individual. That responsibility if easier for adults to bear when they have
learned the basics of personal finance in their youth.
Financial Literacy in the Philippines

In his article “State of Financial Education in the Philippines,” Go (2017) indicated several findings of researches with regards
to the state of financial literacy in the country including the following:
 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 financial 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% of Filipinos are financially literate. This mean
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. Last November 27-28, 2018 more than 100 leaders, decision-makers, influencers, and representatives from public
and private institutions, civic society, and the academe gathered for the first ever Financial Education Stakeholders Expo
organized by BSP. The Expo is designed to build an organized network of players that share a vision of financially literate
citizenry and cohesively implement a variety of initiatives to achieve this vision. This is in line with the BSP advocacy for
financial education and supports the BSP mandates of maintaining price stability, financial stability, and efficient payments
system. It is the BSP’s conviction that a financially educated Filipino is an empowered Filipino who is able to make wise
financial decisions that positively impact personal financial circumstances and consequently contribute to inclusive and
sustained economic development.
The Expo supports Republic Act No. 10922 which designates second week of November as Economic and Financial
Literacy Week. It is also aligned with the objectives of the Philippine National Strategy for Financial Inclusion, particularly
the pillar on Financial Education and Consumer Protection.
Developing Personal Financial Literacy
One’s attitude about money is heavily influenced by the parents’ 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 (Incharge, 2017).
Frugal: Frugal people seek financial security by living below their means and saving money. They rarely buy luxurious
items; they save money instead. They save money because they believe that money will offer protection from unprecedented
events and expenses.
Pleasure: Pleasure seekers use money to bring pleasure to themselves and to others. They are more likely to spend than to
save. They often live beyond their means and spend more that they earn. If they are not careful and do not change, they may
fall into deep debt.
Status: Some 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.
Spending Patterns

Are you prudent or have been accused of spending money lavishly? Or are you somewhere in between? Individuals have different
spending patterns. Before one can come up with a financial improvement plan, one needs to analyze his/her spending habits. There are two
common spending patterns: habitual spending and impulsive spending. Habitual spending occurs when one spends out of a habit, when one
buys the same item daily, weekly or monthly. Daily items may include rice, water, and a cup of coffee. Weekly items may be grocery items.
Monthly items are the electricity and internet bills. Impulsive spending occurs when one mindlessly purchases items that he or she does not
need. Many people are often enticed by monthly sales at the malls with the attitude that they may lose the items the following day.
Fixed vs. Variable Expenses
Fixed expenses remain the same year around. Car payment is an example. Variable expenses occur regularly but the amount you pay
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. Wants are things that you would like to have but you can live without, such as new clothes or
a new cellphone model. You want them but not necessarily need them. Too many wants can ruin a budget.
 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. “I will ride on the LRT instead
of a taxi” and “I will bring lunch everyday” are examples of short-term goals. Medium-term goals can be accomplished within
one to six months. These goals provide opportunity for reflection and feedback and require discipline and consistency. Long-
term financial goals can take years to achieve. These include saving money for a down payment on a home, a child’s college
education and retirement. They may also include paying off a car, student’s loans or credit card debt.
Developing Spending Plan
Time and effort are necessary to build a sustainable spending plan. Three easy steps are proposed below w2hen
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 certainty, we need to save money for anything that might happen. Here are some reasons why
saving money is important:
 Emergency Bolster – You should save money to avoid going to debt just to pay emergency situations, like unexpected medical expense 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 form social security should only serve as supplementary and not the primary source of 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 the savings habit, you should:
1. Commit to a month;
2. Find an accountability partner;
3. Find a savings role model who is successful with his/her money, through tried and true savings;
4. Write you goal down and track it; and
5. Avoid tempting situations (don’t go to the mall to “hang out”).