Financial Literacy Topics and Concepts

FINANCIAL LITERACY FINANCIAL LITERACY - core life skill in an increasingly complex world where people need to take charge of their own finances, budget, financial choices, managing risks, saving, credit, and financial transactions. - the ability to understand and effectively use various f...

FINANCIAL LITERACY FINANCIAL LITERACY - core life skill in an increasingly complex world where people need to take charge of their own finances, budget, financial choices, managing risks, saving, credit, and financial transactions. - the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. - the ability to read, analyze, manage and communicate about the personal financial conditions that affect material well – being. - includes the ability to discern financial choices, discuss money and financial issues without discomfort, plan for the future and respond competently to life events that affect everyday financial decisions. - ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security (Mandell, 2009) Financial literacy according to Hastings et. al. (2013) refers to the following: a. knowledge of financial products – like stock vs a bond, fixed vs adjustable mortgage b. knowledge of financial concepts – like inflation, compounding, diversification, credit scores c. having the mathematical skills or numeracy necessary for effective financial decision making d. being engaged in certain activities such as financial planning Fix vs Variable Expenses Fixed Expenses – remains the same year – round. Example: Car payment Variable expenses – occur regularly but the amount you pay 6 Standards gearing towards deepening students’ understanding of personal finance through an economic perspective STANDARD S KEY CONCEPTS Earning Income earned or received by people Income Different types of jobs as well as different forms of income earned or received Benefits and costs of increasing income through acquisition of education and skills Government programs that affect income Types of income and taxes Labor market Buying Scarcity, choice and opportunity cost goods and Factors affecting influence spending choices such as advertising , pressure services and spending choices of others in providing information for consumers Comparing the cost and benefits of spending decisions Basics of budgeting and planning Making a spending decision Payment methods, cost and benefits of each Budgeting and classification of expenses Satisfaction, determinants of demand, cost of information search, choice of STANDARD S KEY CONCEPTS Saving Concept of saving and interest Where, how and why people save money? The role that financial institutions play as intermediaries between savers and borrowers The role government agencies such as 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 vs nominal interest rates Present vs 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  STANDARDS KEY CONCEPTS Financial Concept of financial investment investing Variety of financial investments Calculate rates of returns Relevance and calculation of real and after – tax rate 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 Concepts of financial risk and loss and Insurance (transfer of risk through risk pooling) insuring Managing risk Identify theft Life insurance products How to protect oneself against identity theft 6 Major Characteristic Types on How People View Money 1. Frugal – People seek financial security by living below their means and saving money. They rarely by luxurious items, they save money instead. They save money because they believe that money will offer them protection from unprecedented events and expenses. 2. Pleasure – People 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. 3. Status – People use money to express their social status. They like to purchase and “show off” their branded items. 4. Indifference – People place very little importance on having money and would rather grow their own food and craft their own clothes. 5. Powerful – People use money to express power over others. 6. 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. Financial Plan - Kagan (2019) defines a financial plan as a comprehensive statement of an individual’s long- term objectives for security and well-being and detailed savings and investing strategy for achieving the objectives. It begins with a throughout evaluation of the individual’s current financial state and future expectations.  Steps in Creating financial plan 1. Calculating the net worth. Net worth is the amount by which assets exceed liabilities. (1)assets the entail one’s cash, property, investments, savings, jewelry and wealth; and (2) liabilities that include credit card debt, loans, and mortgage. Formula: total assets minus total liabilities = current net worth. (1) Determining cash flow. A financial plan is knowing where money goes every month. Documenting it will help to see how much is needed every month for necessities, and the amount for savings and investment. (2) Considering the priorities. The core of a financial plan is the person’s clearly defined goals that may include: (1) Retirement strategy for accumulating retirement income ; (2) Comprehensive risk management plan including a review of life and disability insurance, personal liability coverage, and catastrophic coverage; (3) Long-term investment plan based on specific investment objectives and a personal risk tolerance profile; and (4) Tax reduction strategy for minimizing taxes on a personal income allowed by the tax code.  Five Financial Improvement Strategy 1. Identify your starting point. Calculating the net worth is the best way to determine both current financial status and progress over time to avoid financial trouble by spending too much on wants and nothing enough for the needs. 2. Set your priorities. Making a list of rated needs and wants can help set financial priorities. Needs are things one must have in order to survive (i.e. food, shelter, clothing, healthcare and transportation): while wants are things one would like to have but are not necessary for survival. 3. Document your spending. One of the best ways to figure out cash flow or what comes in and what goes out is to create a budget or a personal spending plan. A budget lists down all income and expenses to help meet financial obligations. 4. Lay down your debt. Living with debt is costly not just because of interest and fees, but it can also prevent people from getting ahead with their financial goals. 5. Secure your financial future. Retirement is an uncontrollable stage in a workers life, of which counterpart are losing the job, suffering from an illness or injury, or be forced to care for a loved one that may lead to an unplanned retirement. Therefore, knowing more about retirement options is an essential part of securing financial future.  Financial Goal Planning and Setting - Setting goals is a very important part of life, especially in financial planning. Before investing the money, consider setting personal financial goals. - Financial goals are targets, usually driven by specific future financial needs, such as saving for a comfortable retirement, sending children to college, or enabling a home purchase. Three key areas in setting investment goals for consideration. A. Time horizon. It indicates the time when the money will be needed. To note, the longer the time horizon, the more risky (and potentially more lucrative) investments can be made. B. Risk tolerance. Investors may let go of the possibility of a large gain if they know there was also a possibility of a large loss (they are called risk averse); while others are more willing to take the chance of a large loss if there were also a possibility of a large gain (they are called risk seekers). The time horizon can affect risk tolerance. C. Liquidity needs. Liquidity refers to how quickly an investment can be converted into cash (or the equivalent of cash). The liquidity needs usually affect the type of chosen investment to meet the goals.  D. Investment goals: Growth, income and stability. Once determined the financial goals and how time horizon, risk tolerance, and liquidity needs affect them, it is time to think about how investments may help achieve those goals. When considering any investment, think about what it offers in terms of three key investment goals: (1) Growth (also known as capital appreciation) is an increase in the value of an investment; (2) Income, of which some investments make periodic payments of interest or dividends that represent investment income and can be spent or reinvested; and (3) Stability, or known as capital preservation or protection of principal. Budget and Budgeting Budget - an estimation of revenue and expenses over a specified future period of time and is usually compiled and re- evaluated on a periodic basis - can be made for a variety of individual or business needs or just about anything else that makes and spends money.  Budgeting - the process of creating a plan to spend money. Creating this spending plan allows one to determine in advance whether he/she will have enough money to do the things he/she needs or likes to do. - budgeting ensures to have enough money for the things needed and those important ones and will keep one out of debt.  Seven Steps to Good Budgeting Step 1: Set realistic goals. Goals for the money will help make smart spending choices upon deciding on what is important. Step 2: Identify income and expenses. Upon knowing how much is earned each month and where it all goes, start tracking the expenses by recording every single cent. Step 3: Separate needs from wants. Set clear priorities and the decisions become easier to make by identifying wisely those that are really needed or just wanted. Step 4: Design your budget. Make sure to avoid spending more than what is earned. Balance budget to accommodate everything needed to be paid for.  Step 5: Put your plan into action. Match spending with income time. Decide ahead of time what you will use each payday. Non-reliance to credit for the living expenses will protect one from debt. Step 6: Plan for seasonal expenses. Set money aside to pay for unplanned expenses so to avoid going into debt. Step 7: Look ahead. Having a stable budget can take a month or two so, ask for help if things are not getting well. Spending - Spending plan is a way to make those wishes a reality. Turn them into an action plan - Practical Strategies In Setting And Prioritizing Budget Goals And Spending Plan: - 1. Start by listing your goals. Setting budget goals requires forecasting and discussing future needs and dreams with the family.  2. Divide your goals according to how long it will take to meet each goal. Classify your budget goals into three categories: short-term goals (less than a year), medium-term goals (one to five years), and long-term goals (more than five years). -Short-term goals - are usually the immediate needs and wants. -Medium Term Goals - are things that you and your family want to achieve during the next five years -Long-term Goals- extend well into the future, such as planning for retirement.  3. Estimate the cost of each goal and find out how much it costs. Before assigning priority to goals, it is important to determine the cost of each goal. The greater the cost of a goal, the more alternative goals must be sacrificed in order to achieve it. 4. Project future cost. For short-term goals, inflation is not a big factor, but for medium and long-term goals, it is a big factor. To calculate the future cost of the goals, there is a need to determine the rate of inflation applied to each particular goal. 5. Calculate how much you need to set aside each period. Upon knowing the future cost of the goals, next is to determine how much to put aside each period to meet all the goals.  6. Prioritize your goals. Upon listing down all the goals and the estimated amount needed for each goal, prioritize them. This serves as guide in decision-making. 7. Create a schedule for meeting your goals. It is important to lay down all the goals according to priority with the corresponding amount of money needed, the time it will be needed, and the installments needed to meet the goals.  Investment and Investing Investment- the action or process of investing money for profit or material result. Investing- is the act of allocating resources, usually money, with the expectation of generating an income or profit. 4 things to consider in investing: 1. How long will you invest the money? (Time Horizon) 2. How much money do you expect your investment to earn each year? (Expectation of Return) 3. How much of your investment are you willing to lose in the short-term in order to earn more in the long-term? (Risk Tolerance) 4. What types of investment interest you? (Investment Type) Savings - the amount of money left over after spending and other obligations are deducted from earnings. Emergency Savings Fund. Start as early, setting aside a little money for emergency savings fund. If you receive a bonus from work, an income tax refund or earnings from additional or side jobs, use them as an emergency fund.  10 Reasons Why Save Money 1. To become financially independent. Financial independence is not having to depend on receiving a certain pay but setting aside an amount to have savings that can be relied on. 2. To save on everything you buy. With savings, you can buy things when they are on sale and can make better spending choices without being compromised on credit card interest charges. 3. To buy a home or a car. Savings can be used in buying a home in full or down payment, especially in times of promo deals, bids and inevitable sale and at a reasonable interest rate. 4. To prepare for the future. Through savings, you can be confident to face the future without worrying on how you will survive. 5. To get out of debt. If you want to get out of debt, you have to save money.  6. To augment annual expenses. In order to attain a good, stress-free financial life, there is a need to save for annual expenses in advance. 7. To settle unforeseen expenses. Savings can respond to unforeseen expenses in times of need. 8. To respond to emergencies. Emergencies may happen anytime and these can be expensive so, there is a need to get prepared rather than potentially become another victim of an emergency. 9. To mitigate losing your job or getting hurt. Bad things can happen to anyone, such as losing a job, business bankruptcy or crisis, being injured or becoming too sick to work. 10. To have a good life. Putting aside some money spend when needed can bring about quality and worry-free life at all times.  Common Financial Scams to Avoid A. Phishing. Using this common tactic, scammers send an email that appears to come from a financial institution, such as a bank and asks you to click on a link to update your account information. B. Social Media Scams. Scammers are adept at using social media to gather information about the traveling habits of potential victims. They also have phishing tactics, including posts seeking charity donations with bogus links that allow them to keep your money. C. Phone Scams. Another prevalent tactic is scamming phone calls. The scammers pose as a government agency, such as the Bureau of Internal. Revenue or local law enforcement agencies, and use scare tactics to acquire your personal information and account numbers.  D. Stolen Credit Card Numbers. There are numerous ways that scammers can obtain your credit card information, including hacking, phishing, and the use of skimming devices, such as small card readers attached to unmanned credit card readers (i.e. ATMs, gas pumps, and more). These small devices pull data from your card when you swipe it. E. Identity Theft. Depending on the amount of information a scammer is able to obtain, identity theft may extend beyond unauthorized charges on a debit or credit card  10 Tips to Avoid Common Financial Scams 1. Never wire money to a stranger. Although it is one of the oldest Internet scams, there are still consumers who fall for this rip-off or some variations of it. 2. Don't give out financial information. Never reveal sensitive personal financial information to a person or business you don't know, thru phone, text or email. 3. Never click on hyperlinks in emails. If you receive an email from a stranger or company asking you to click on a hyperlink or open an attachment and then, enter your financial information, delete the email immediately. 4. Use difficult passwords. Hackers can easily find passwords that are simple number combinations, Create passwords that are at least eight characters long and that include some lower and upper case letters, numbers and special characters. You should also use a different password for every website you visit. 5. Never give your social security number. If you receive an email or visit a website that asks for your Social Security number, ignore it.  6. Install Antivirus and Spyware protection. Protect the sensitive information stored on your computer by installing antivirus, firewall and spyware protection. Once you install the program, turn on the auto-updating feature to make sure the software is always up-to-date. 7. Don't shop with 'unfamiliar online retailers. When it comes to online shopping, only do business with familiar companies. When purchasing a product from an unfamiliar retailer, do some research to ensure the business is legit and reputable. 8. Don't download software from pop-up windows. When you are online, do not trust pop-up windows that appear and claim your computer is unsafe. If you click on the link in the pop-up start the "system scan” or some other programs, malicious software known as "malware" could damage your operating system. 9. Make sure the websites you visit are safe. Before your financial information on any website, double-check the website's privacy rules. Also, make sure the website encryption, which is usually symbolized by a lock to the left u the web address which means it is sale and protected against hackers. 10. Donate to known charities only. If you receive a call or an email for solicitation of charity donations, critically examine in some scammers create bogus charities to steal credit card information.  Financial Scams among Students A. Fake scholarships. While it is beneficial for students to apply for as many scholarships, it is important to become aware of related scams and frauds. Students should thoroughly check scholarship sources before applying to verify legitimacy. Never apply for a scholarship that asks for money in return. B. Diploma mills. There are schools that offer fake degrees and diplomas in exchange for a fee. Check from government education agencies the prospective school to enroll in if it is government-recognized, legitimate or accredited.  C. Online book scams. While students often go for the best deals on textbooks online, scammers can use this opportunity to get students' credit card information. When buying anything online, be sure to do it on a credible site. D. Credit card scams. Oftentimes, credit card companies go to school campuses to convince students to fill out card applications. Scammers may also grab this chance to steal students' information: It is important to visit a local credit union or bank for credit card application.  Insurance and Taxes Insurance- is a contract (in the form of a policy) between the policyholder and the insurance company, whereby the company agrees to compensate for any financial loss from specific insured events. - Insurance is the best form of risk management against uncertain loss. - the financial protection derived from insurance entails tax benefit claim on the paid premiums  Employer-Sponsored Insurance. If working in a company with 50 or more full-time employees, the employer is required to provide employee-only insurance that meets minimum guidelines. Marketplace Plans. Marketplace plans are available based on an area of residence and income upon meeting minimum coverage requirements. Life insurance. Life insurance is a type of insurance that compensates beneficiaries upon the death of the policyholder. The company will guarantee a payout for the beneficiaries in exchange of premiums. This compensation is called “death benefit."  Risks categories 1. Preferred Plus -The policyholder is in excellent health, with normal weight, no history of smoking, chronic illnesses, or family history of any life-threatening disease. 2. Preferred – The policyholder is in excellent health but may have minor issues on cholesterol or blood pressure but under control. 3. Standard Plus – The policyholder is in very good health but some factors, like high blood pressure or being overweight impede a better rating. 4. Standard - Most policyholders belong to this category, as they are deemed to be healthy and have a normal life expectancy although, they may have a family history of life-threatening diseases or few minor health issues. 5. Substandard - Those with serious health issues, like diabetes or heart disease are placed on a table rating system, ranked from highest to lowest. On average, the premiums will be similar to Standard with an additional 25% lower claim on table ratings. 6. Smokers - Due to an added risk of smoking, the policyholders in this category are guaranteed to pay more. Aside from health class, age is also a critical factor in determining premiums. Therefore, older people pay more expensive premiums.  Benefits of Life Insurance 1. It pays for medical and funeral costs. Life insurance helps solve the incurred expenses for medical and funeral services to lessen the grief among family and relatives for being unprepared. 2.For financial support. Life insurance can become a source of temporary income during the difficult period of adjusting and coping with the loss of a loved one, especially if he/she is the breadwinner. 3.For funding various financial goals. Life insurance offers additional benefits through the form of fund accumulation for specific future financial goals.  4. Acts as a retirement secured conform. Modern life insurance also serves as a tool that principal holders can use to get in a better financial position in the future. 5. It covers costs incurred from taxes and debt. Life insurance serve as protection since the premium can be use unsettled debts and taxes  Types of Life Insurance Type Characteristics Advantage Disadvantage Endowment It grants a lump sum after a It allows for saving up It requires higher specified amount of time or for specific purposes. premiums than other upon death. The policy owner types of life insurance. is required to pay the premium It guarantees returns for a predetermined number of upon maturity. It is not the best option years or until a specific age is for those looking at full reached. life protection. It offers some form of insurance coverage. Term It is the simplest form of life It entails low premium It has no benefit if insurance to obtain, of which requirements. policyholder outlives the upon death, the beneficiaries term period set. are paid with the benefit. It is a strong option for policyholders who need Premium usually gets insurance but cannot higher upon renewal of afford whole life or terms. endowment. It is easy to understand. Whole Life It provides coverage for the It offers permanent It requires higher policyholder’s entire life or protection for full life premiums. until they reach 100 years or 100 years. old. It acts both as It is difficult to protection and savings It is flexible in terms understand due to mechanisms since a portion of payments of complexity. of the premium is allocated premiums. to build up cash values. It entails fixed premiums. It usually comes with additional features and “living” benefits. Variable Universal It serves as both life protection It takes dual purpose: Cash values and Life (VUL) and investment vehicle in one Life insurance plus dividends are not package. A portion of the investment tool. guaranteed. premium is allocated into various investment vehicles for It has no maturity age. Face amount and death the purposes of wealth creation. benefit are dependent on The contract’s earnings are The cash value is investment performance. based on the performance of payable along with the selected investments. assured sum. It includes various investment fees. The death component is not limited to face values. Financial Stability - means confidence with the financial situation, worriless paying the bills because of available funds, debt-free, money savings for future goals and enough emergency funds. - is not about being rich but rather more of a mindset. It is living a life without worrying about how to pay the next bill, and becoming stress-free about money while focusing energy on other parts of life (Silva, 2019). 10 Stages in Reaching Financial Stability 1. Make savings automagical. Savings should be made a top priority, especially as an emergency fund and a bill payment from the amount are automatically transferred from the checking account, like an online savings account. 2. Control your impulsive spending. Control yourself from impulsive spending on eating out, shopping and online purchases that may ruin your finances and budget. 3. Evaluate your expenses and live frugally. Analyze how you spend your money, see what you can reduce and determine expenses that are necessary and eliminate the unnecessary. 4. Invest in your future. Start preparing and investing for your future retirement while still young in your career field.  Keep your family secure. Save for an emergency fund, so that you have something to spend if anything happens with the family emergently. Eliminate and avoid debt. Eliminate credit cards, personal loans, or other debt form as it will not work on you but even pull you down and make you drowned with obligations that may even resort to surrendering your properties, jewelry and investments as payment. Use envelope system. Set aside three amounts in your budget each payday, withdraw those amounts and put them in three separate envelopes. In that way, you can easily track how much remains for each of the expenses or if you already run out of money.  Pay bills immediately. One good habit is to pay bill as soon as they come in and try to get your bills to be paid through automatic deduction. Read about personal finances. The more you educate yourself, the better your finances will be. Look to grow your net worth. Do whatever you can to improve your net worth, either by reducing your debt, increasing your savings, or increasing your income, or all of the above.  Signs of Being Financially Stable You can afford to buy the things you Rose (2019) presents some signs of a financially stable person. really want. You never overdraw your checking account. Recreational spending doesn’t appeal You don’t lose sleep over finances. to you. You use credit cards for convenience and You’re a natural saver. rewards but never out of necessity. You’re generous with money when it You don’t worry about losing your job. comes to charities or helping others. You pay your bills ahead of time. You’re confident about your future. People ask your opinion about financial Your net worth grows significantly matters and you inspire them. from year to year. You’re generally happy with your financial You have substantial equity in your situation. home. You finance your cars over five years or less You consistently live beneath your if you take loans at all. means. You contribute more to your retirement. You could survive for months without You don’t feel guilty when you’re out of a paycheck. Integrating Financial Literacy into the Curriculum Financial education in schools should be part of a collaborative national strategy to ensure relevance and long-term sustainability. The education system and profession should be involved in the development of the strategy. Barry (2013) underscored that financial literacy has a wide repercussion outside the family circle and more precisely, the school. Hence, administrators and professors need to develop a curriculum that would provide students insights on having the value of financial literacy including the effect it can bring them.  Financial education should ideally be a core part of the school curriculum. It can be integrated into other subjects like mathematics, economics, social studies, technology and home economics, values education and others. Financial education can give a range of “real- life” contexts across a range of a subjects.