Practical approach on Financial Literacy

Financial education should be the best tool to effectively come up with better financial
outcomes. Previous studies have shown that lower levels of financial literacy is associated with
lower rates for planning for retirement, lower rates of asset accumulation, using higher-cost
financials services, lower participation in the stock market, and higher levels of debt4.

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It is defined by Mandell as cited in NEDA (National Economic and Development Authority), the
ability to use knowledge and skills to manage one’s financial resources effectively for lifetime
financial security.
Financial literacy, financial knowledge and financial education are used interchangeably in
formal literature and popular media. Various sources provide various definitions to financial
literacy, but have one thing in common— everything revolves around money, knowledge and
use.

Expert perspectives on why financial literacy is important

-article uploaded on August 2021
“For college students, financial literacy is important because the formula for college success
today only has two factors: grades and money. Professors and instructors thoroughly educate
students on academic requirements and grading policies. It’s often new financial responsibilities
and realities that campuses are not adequately educating or preparing students for success.
Research has even shown that students are more likely to drop out of school because of “outside
pressures” than poor grades. Student success is no longer constrained to classrooms or defined
by academic performance alone. The future success of our students relies on providing
opportunities for them to learn, develop, and strengthen core life skills they need today and more
importantly tomorrow as successful graduates.
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Components of financial literacy

Financial literacy breaks down into two parts: knowledge and skills.
For knowledge, financial literacy is defined by an understanding of the core concepts of personal
finance—interest rates, credit scores, and the purpose of an emergency fund, for instance. When
put into practice, this knowledge provides the foundation needed to make informed decisions that
contribute to long-term financial health.
For skills, knowledge needs to be complemented by the ability to perform tasks that support
robust personal finance. For instance, someone who is financially literate will know how to use
online banking apps, request a credit report, and do something as simple as write a check.
The particular knowledge and skills that define financial literacy can be divided into six
categories:
1. Spending and saving
2. Credit and debt
3. Employment
4. Investing
5. Risk management
6. Decision-making

Financial literacy: Knowledge

Spending and saving
 Understand different payment methods. There are important differences between credit cards and
debit cards and other forms of payment. Credit cards are essentially a form of borrowing, but
debit cards draw directly from your bank account. Checks also draw directly from your bank
account, so make sure there’s enough to cover the expense.

 Understand how banking works. Banks provide a secure way to store money. Funds can be
deposited or withdrawn in person, at ATMs, or by using the bank’s website or apps. Banks also
offer useful services. A checking account is designed for everyday transactions. A savings
account is better for accruing interest.

 Saving provides money for future purchases. Saving means choosing to set aside money now for
future needs, goals, and emergencies. This might include short- or long-term financial goals,
recreational activities and purchases, or an emergency fund. An emergency fund is money that is
saved for unexpected costs such as job loss, medical bills, or car repair.

 Needs vs. wants. Expenses can be divided into two categories: needs and wants. “Needs” are
essentials—food, housing, etc. “Wants” are luxuries—things that would be nice to have but can
be done without. Some items can be both needs and wants. For instance, food is certainly a need.
However, an expensive meal at a restaurant is a want.

Investing
 Understand investing. Investing means using money to earn more money. Many people invest in
order to achieve future financial goals by building wealth. There are risks to some types of
investing, however, such as selling stock investments for a loss.

 Time value of money. The time value of money is an important concept for investors. It refers to
the potential for money to grow in value over time. Because of interest earned, money that’s
invested today has greater value than the same amount of money if it were to be acquired and
invested at a later date. Thus, the sooner money is received, the greater benefit it offers.

 Consequences of delaying investment. Because of the time value of money, delaying investment
wastes the potential of money to earn interest and grow. Think of a retirement fund. Younger
workers have the greatest potential for higher return on investments simply because they have a
longer amount of time for their earnings to accrue interest before retirement.

 Economic conditions affect the stock market and investments . There are many factors that affect
the stock market. A low inflation rate may result in a surge of selling in the stock market, whereas
deflation is caused by a decrease in spending and revenue. Rising interest rates mean higher
borrowing costs causing consumer spending and business investments to slow and reduce
economic growth. Conversely, falling interest rates can stimulate economic growth. Even
economic trends in foreign markets may impact the U.S. stock market.

Financial literacy: Skills

Spending and saving
 Create a budget. Create a budget to balance your income and expenses. Use it to plan how to
allocate income to meet financial obligations and work toward future goals. If your financial
circumstances change, your budget, and how much you spend or save, will change too.

 Schedule and manage bill payments. Know how and when to schedule bill payments. Will you
pay online, via automatic payments, through an app, or by sending a check in the mail? The
important thing isn’t which you choose but rather that you have a method that ensures your
payments are consistently on time. Keep track of when bill payments are due each month and opt
to receive payment reminders either by email, phone, or mail.

 Comparison shop. Know how to research the best price for a product before making a purchase.
This allows you to avoid overspending. When researching, find comparable alternatives. For
example, when at the grocery store, compare the price per ounce (the total dollar amount divided
by the number of ounces) of similar food products to get the most value for your money.
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Meanwhile, Hastings, et al (2013) refers to financial literacy as:

1. Knowledge of financial products (e.g., what is a stock vs. a bond; the difference
between a fixed vs. an adjustable rate mortgage);
2. Knowledge of financial concepts (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.

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there are 4 major types of financial products bought and sold on
markets:

1. Securities,
2. Derivatives,
3. Commodities
4. Currencies.

Securities
A security is a type of instrument that is used to directly finance
companies, banks, public entities, or governments. Essentially,
securities represent an entitlement to something, like an asset or a
contract.

Stocks are probably the most common kind of security and represent a
portion of ownership in a company. When you buy a stock, you are
buying a piece of ownership in a company.
Mutual funds are a special kind of financial vehicle that is made up of
several people pooling their money to purchase securities.
The benefit of mutual funds is that it lets investors combine their money
to buy more than they would be able to by themselves. Individuals are
entitled to a portion of the fund proportional to how much they invest. 

Derivatives
A derivative is a type of security whose value is derived from an
individual or group of individual securities.  Derivatives represent a
contract between the buyer and seller, and the price of derivatives
changes depending on price movements of the underlying asset (known
as the benchmark).

Commodities
A commodity is a type of financial product that represents
ownership or a share of some physical good or raw material.

In general, commodities trading involves things like precious metals

(gold, silver, platinum) or natural resources (coal, oil, natural gas, etc)
but can also include so-called ‘soft’ commodities which include
agricultural products or livestock.

Currencies
Currencies are generally not considered a distinct asset class or
financial product, but we are including them here, simply because
currencies can be traded on a market.

Currencies are traded on foreign exchanges (or crypto exchanges), and

let people convert one type of currency into another. 

Currency trading is practically a necessity as different countries and

entities from different nations need to trade with one another.

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Hedge funds require a high minimum investment or net worth, excluding all but
wealthy clients.

Hedge funds are actively managed investment pools whose managers use a
wide range of strategies, often including buying with borrowed money and trading
esoteric assets, in an effort to beat average investment returns for their clients.
They are considered risky alternative investment choices.

Bonds – also known as fixed income instruments – are used by governments or

companies to raise money by borrowing from investors. Bonds are typically issued
to raise funds for specific projects. In return, the bond issuer promises to pay back the
investment, with interest, over a certain period of time.

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anybody knows these financial concepts?

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 A financial system can be perceived on a company, regional, or global scale, which facilitates
the practice of exchanging funds between one entity to another.
 It involves various players such as insurance companies, stock exchanges, investment banks,
and more.
 Financial systems are regulated, as their processes influence and contribute to the growth of
many assets.

Capital market is a market where buyers and sellers engage in trade of financial
securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as
individuals and institutions. ... Generally, this market trades mostly in long-term securities.

The money market is an organized exchange market where participants can lend and borrow
short-term, high-quality debt securities with average maturities of one year or less. It enables
governments, banks, and other large institutions to sell short-term securities to fund their short-
term cash flow needs. Money markets also allow individual investors to invest small amounts of
money in a low-risk setting. 

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Its about budgeting, saving and spending

Decision-making

 Identify sources of sound financial information. Search for sources of information that
are objective, accurate, and up-to-date. Financial advice is available from libraries,
online, professional financial advisors, and friends and family members, but make sure to
vet your sources. Understand the most important factors to consider before hiring a
professional financial advisor, attorney, tax advisor, or financial planner.
 Prepare a contingency plan. Use sound financial decision-making to prepare a
contingency plan for an unexpected change in financial circumstances. A comprehensive
financial plan includes financial goals, a budget, cash-flow management plan, investment
plan, insurance plan, net worth statement, a will, and estate plan. Discuss financial plans
or contractual obligations with any dependents or beneficiaries you may have.

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Learning how to budget and setting financial goals as a college student is important.

A college budget is a very powerful tool in personal finance. When you create a budget and track
your spending habits you have insight into where your monthly allowance is going and where
you need to cut back. Living on a budget doesn't mean you can never have any fun, it means the
fun you do have won't prevent you from spending.

Investing
 Implement a diversified investment strategy. Consider starting a diversified investment portfolio.
Typically, diversified portfolios have stocks, fixed income, and commodities. Keep a watchful
eye on the market to know when to divest.

 Identify warning signs of investment fraud. Investment fraud is the illegal sale of deceptive
financial information. The government and independent agencies combat fraud and oversee the
financial services industry. Be skeptical of unsolicited communications from strangers. Don’t
trust anyone who promises a high return in a short period of time or no- or low-risk investments.
Beware of a broker giving “inside” information.

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The Filipino mindset upon receipt of salaries, as commonly-known, is that upon receipt
of salaries, spending comes in before saving. What is left, is saved. If there’s none left,
then, there’s nothing saved.

According to a study conducted by Philam Life, 96 percent of Filipinos are concerned

about their own and their family’s health, however, only 16 percent of them are prepared
to pay for medical costs in case they are diagnosed with a critical illness. 9

There is a rising number of senior-dependents or those retirees who depend on their

children for financial help, due to lack of financial education.

Financial planning teaches individuals to be responsible when it comes to their finances,

and instills the discipline needed in order to keep track of their financial goals. 9

Financial planning involves educating Filipinos on the different types of goals that they
should set: short-term, medium-term, and long-term. Short-term goals involve monthly
living expenses that need to be paid, or the person’s basic needs, including the setting-
up of an emergency fund.  In contrast, medium term goals are those you want to
achieve in one to five years like buying a house or a car, while long term goals are
those that take longer than five years to achieve.

To address the growing demand for more investments in the country, the financial
industry advises that Filipinos should save first and spend whatever is left after putting
their savings aside.

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tips in managing money – make a list of expenses; create a budget and be mindful of
your spending habits

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Build savings through the “pay yourself first” method. The “pay yourself first” method, also known as
reverse budgeting, is building a spending plan around your savings goals. First, list your short- or long-
term savings goals. Then, decide how much to contribute each month. Finally, put that money toward
your savings account before allocating the rest of your budget to expenses.

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Financial freedom has to be personal. Dream big and get specific about your
goal.
What does financial freedom look like for you? Maybe it looks something like
this:

 Freedom to choose a career you love without worrying about money

 Freedom to take an international trip every year without it straining your
budget
 Freedom to pay cash for a new ski boat
 Freedom to respond to the needs of others with outrageous generosity
 Freedom to retire a whole decade early

Financial freedom means that you get to make life decisions without being
overly stressed about the financial impact because you are prepared. You
control your finances instead of being controlled by them.
The path to financial freedom isn’t a get-rich-quick strategy. And financial
freedom doesn’t mean that you’re “free” of the responsibility of handling your
money well. Quite the opposite. Having complete control over your finances is
the fruit of hard work, sacrifice and time. 

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Financial security refers to the peace of mind you feel when you aren't worried about your
allowance or income being enough to cover your expenses. It also means that you have enough
money saved to cover emergencies and your future financial goals.
College is a great time to learn how to manage your finances and build habits that will help set
the stage for financial success for the rest of your life. With more clarity on your spending and
saving habits, you can work toward bigger goals, such as paying off loan debt, traveling, and
saving money for future milestones like taking further studies in the graduate school or having
business of your own.

You should start making smart choices about your money now in order to set up a solid financial
foundation for the future.