Financial Literacy
Concept Digest
The National Education 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
sources, discuss money and financial issues without(or despite)
discomfort, plan for the future and respond competently to life
events that affect financial decisions, including events in the
general economy” (Incharge Education Foundation, 2017). To out if
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
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 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
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skills
•government programs that affect income
•types of income and taxes
•labor market
Buying goods and •scarcity, choice, and opportunity cost
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 markets 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
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reports and scores
•impact of credit reports and scores on
consumers
•consumer protection laws
Financial •Concept of financial investment
Investing •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 react to changes in
market conditions and information
Protecting and •concepts of financial risk and loss
Insuring •insurance (transfer of risk through risk
pooling)
•managing risk
•identity theft
•life 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 provide basic
needs, attitude toward money and investment, 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 faking responsibility
for one’s financial life cultivates proper decision-making skills
and discipline. Most of the responsibility for managing financial
matters rests with the individual. That responsibility is easier
for adults to bear when they have learned the basics of personal
finance in their youth.
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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
means that about 75 million Filipinos have no idea about
inflation, risk diversification, insurance.
• 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 1,000 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 the vision of a 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 & 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.
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It is also aligned? with the objectives of the Philippine
National Strategy for Financial Inclusion. particularly the
pillar on Financial Education and Consumer Protection.
The Expo supports Republic Act No. 10922 which designates of
November as Economic and Financial Literacy Week. It is O with
the objectives of the Philippine National Strategy for Financial
In 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
their 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 than 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.
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Spending Patterns
Are you prudent or have you been accused of spending money
lavishly? Or are you somewhere 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 water, rice, and cup of coffee.
Week 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-round. 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 cell phone model. You want
them but do not necessarily need them. Too many wants can ruin a
budget.
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
taxi" and “I will bring lunch every day” are examples of short-
term goals. Medium-term goals should 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,
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and retirement. They may also include paying off a car, student
loans, or credit card debt.
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 certainty, 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 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;
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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”).
