Financial Literacy PDF

# Chapter 4: Financial Literacy ## Objectives At the end of this chapter, you should be able to: - define financial literacy - assess level of personal financial literacy using set of standards and questions - characterize financial literacy in the Philippines - start practical steps to develop pe...

# Chapter 4: Financial Literacy ## Objectives At the end of this chapter, you should be able to: - define financial literacy - assess level of personal financial literacy using set of standards and questions - characterize financial literacy in the Philippines - start practical steps to develop personal 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 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 4. being engaged in certain activities such as financial planning ## Public and private institutions 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 for Economic Education developed six standards for financial education 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 cost - 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 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 react to changes in market conditions and information | | Protecting and Insuring | - concepts of financial risk and loss - 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 taking 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. ## 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, 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 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 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 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. Which characteristic closely resembles your attitude about money? Explain your answer. ## Spending Patterns Are you prudent or have you 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 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. 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 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; 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"). ## Wrap Up - 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 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. ## Questions to Ponder 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 ## References - Council for Economic Education. (2013). National standards for financial literacy. Retrieved from https://www.councilforeconed.org - Go, V. (2017, August 21). State of financial education in the Philippines. Retrieved from https://www.philstar.com/the-freeman/cebu-business/2017/08/21/1731331/state-financial-education-philippines - Hastings, J.S., Madrian, B.C., & Skimmyhorn, W.L. (2013). Financial literacy, financial education, and economic outcomes. Annual Review of Economics, 5, 347-373. - Incharge Education Foundation. (2017). Incharge debt solutions. Retrieved from https://www.incharge.org - Mandell, L. (2009). The financial literacy of young American Adults: Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students. Washington D.C.: The Jump$tart Coalition for Personal Financial Literacy. - Maur, M. (2018, December). Financial literacy for Filipinos: Understanding for better living. Retrieved from http://caraga.neda.gov.ph/financial-literacy-for-filipinos-understanding-for-better-living/ ## Photo/Image Attributions: - https://pixabay.com/photos/silver-money-philippines-rich-money-2262689/, p. 47 - https://pixabay.com/photos/peso-money-currency-philippines-2169915/, p 47 - https://pixabay.com/photos/financial-analytics-blur-business-2860753/, p 47 - https://pixabay.com/photos/calculator-budget-math-pen-913162/, p 47 - https://pixabay.com/photos/calculator-calculation-insurance-385506/, p 51 - https://www.publicdomainpictures.net/en/view-image.php?image=32920&picture=peso-bills, p 51