TOPIC 3: Financial Literacy (Week 10)

INTRODUCTION:

Objectives:
At the end of the lesson, students are expected to:

1. Define financial literacy 2. Assess level of personal financial literacy using set of standards and questions 3. Characterize financial
literacy in the Philippines; and 4. Start practical steps to develop personal financial literacy

To be financially literate is to know how to manage your money. This means learning how to pay your bills, how to borrow and save
money responsibly, and how and why to invest and plan for retirement.
Take the initiative to self-educate and grow your financial knowledge, by beginning with the basics of money management and
maturing into a smart spender. Putting time into your financial development improves saving and investing decisions. By leveraging
resources—like age, talent, money and the ability to establish good habits—you can build a long-lasting nest egg.
Managing your money is a personal skill that benefits you throughout your life – and not one that everybody learns. With money
coming in and going out, with due dates and finance charges and fees attached to invoices and bills and with the overall responsibility of
making the right decisions about major purchases and investments consistently – it‘s daunting.

You would think that because the stakes are so high that this would be a skill that gets taught in high school (or even before), but
that‘s not the case. Managing your own money requires a fundamental understanding of personal credit and a willingness to embrace personal
responsibility. That is, you pay your bills in a timely manner and you don‘t drown yourself in debt. You accept the fact that sometimes you
have to sacrifice immediate demands and desires for long-term gain.

PRE-COMPETENCY CHECK-LIST:

1. Differentiate WANTS from NEEDS.

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2. List down your WANTS and NEEDS using the table below.
Needs Wants
EXPLORE THE LEARNING MATERIAL: Please read.

FINANCIAL LITERACY

What Is Financial Literacy?

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management,
budgeting, and investing.
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
decision, including events in the general economy.
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, Hastlings 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 The lack of these skills is called financial
illiteracy.

Financial literacy is important because it equips us with the knowledge and skills we need to manage money effectively. Without it,
our financial decisions and the actions we take—or don't take—lack a solid foundation for success. Tt equips people with an understanding of
basic financial concepts to inform their real-world financial decisions. With this knowledge in hand, they‘re better able to manage their
money, make sound decisions, and maintain healthy spending and budgeting habits, which over time can lead to financial wellness.

The importance of financial literacy becomes especially clear when considering the financial challenges that many people face:

KEY TAKEAWAYS
 • Financial literacy refers to a variety of important financial skills and concepts.
• People who are financially literate are generally less vulnerable to financial fraud.
• A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt
responsibly, and running a business.

Understanding Financial Literacy

In recent decades, financial products and services have become increasingly widespread throughout society. Whereas earlier
generations of Americans may have purchased goods primarily in cash, today various credit products are popular, such as credit cards,
mortgages, and student loans. Other products, such as health insurance and self-directed investment accounts, have also grown in importance.
This has made it even more imperative for individuals to understand how to use them responsibly.
The lack of financial literacy can lead to a number of pitfalls. Financially illiterate individuals may be more likely to accumulate
unsustainable debt burdens, for example, either through poor spending decisions or through a lack of long-term preparation. This in turn can
lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.
Financial literacy can also help protect individuals from becoming victims of financial fraud, which is a type of crime that is, unfortunately,
becoming more commonplace.

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, determinations 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 for savers and borrowers
• the role of 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 vs future value
• financial regulators
• the factors determining the value of a person‘s savings over time
• automatic savings plan, ―rainy day‖ funds
• saving for retirement
Using credit • concept of credit and the cost using credit
• why people use credit and the sources of credit
• why interest rates vary across borrowers
• basic calculations related to borrowing
• credit reports and credit scores
• behaviors that contribute to strong credit reports and scores
• impact of credit reports and scores in consumers
• consumer protection laws
Financial Investing • concept of financial investment
• variety of possible financial investment
• 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 in maturity

Protecting and Insuring
• how financial markets react to changes in market conditions and information
• 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 identify theft

The Benefits of Financial Literacy

The main benefit of financial literacy is that it empowers us to make smart financial decisions. It provides the knowledge and skills we
need to manage money effectively—budgeting, saving, borrowing, and investing. This means that we‘re better equipped to reach our
financial goals and achieve financial stability.
The particular benefits of financial literacy will differ depending on a person‘s circumstances, but some common situations in which
financial literacy can help include:

• Saving for retirement.

• Creating and sticking to a balanced budget.
• Purchasing a home.
• Selecting insurance.
• Reducing expenses.
• Investing.
• Buying a car.
• Saving for college.  Managing debt.
• Using credit cards.

What it means to be financially literate?

Put simply, to be financial literate means someone has an understanding of essential financial concepts. These include:

• Budgeting.
 • Saving.
• Credit.
• Debt.
• Insurance.
• Financial decision-making.

The second part of financial literacy is using financial knowledge to inform financial decisions and establish healthy
moneymanagement habits. Financial literacy skills include:

• Creating a budget.
• Calculating interest.  Lowering costs by reducing ―want‖ purchases.  Evaluating loan terms.  Comparison
shopping.
• Doing taxes.
• Saving money.

Financial literacy knowledge and skills contribute to smart financial decision-making and the ability to carry out the decisions that are
made.

Developing Personal Financial Literacy

Financial literacy is acquired by learning financial concepts and practicing them. Many people receive informal financial education
from family members or role models—parents who teach their children how to write a check, for instance. However, formal financial
instruction from a trusted provider offers a more comprehensive and reliable education. Schools, banks, and nonprofit organizations are just a
few of the sources that offer financial education.

There are six (6) major characteristic types in how people view money (Incharge, 2017)

1. Frugal
 Frugal people seek financial security by living below their means and saving money. They barely buy luxurious items;
they save money instead. They save money because they believe that money will offer protection from unprecedented
events and expenses.
2. Pleasure
Pleasure seekers use money to bring pleasure to themselves and others. They are more likely to spend than to save. They
often lived beyond their means and spend more than they earn. If they not careful and do not change, they may fall into
deep debt.
3. Status
Some people use to money to express their social status. They like to purchase and show off their branded items.
4. 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.
5. Powerful
They use money to express power and control 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.

How to Improve Your Financial Literacy Skills

Developing financial literacy to improve your personal finances involves learning and practicing a variety of skills related to
budgeting, managing and paying off debts, and understanding credit and investment products. Here are several practical strategies to
consider:

• Create a budget—Track how much money you receive each month against how much you spend in an excel sheet, on paper, or in
a budgeting app. Your budget should include income (e.g., paychecks, investments, alimony), fixed expenses (like rent/mortgage
payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, travel), and savings.
• Pay yourself first—To build savings, this "reverse budgeting" strategy involves choosing a savings goal—say, a down payment
for a home—deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up
the rest of your expenses.
• Manage your bill-paying—Stay on top of monthly bills so that payments consistently arrive on time. Consider taking advantage
of automatic debits from a checking account or bill-pay apps, and sign up for email, phone, or mail payment reminders.
• Get your credit report—Once a year, consumers can request a free credit report from the three major credit bureaus— Experian,
Equifax, and TransUnion. Review it and dispute any errors by informing the credit bureau of inaccuracies.
• Check your credit score—Having a good credit score helps you obtain the best interest rates on loans and credit cards, among
other benefits. Monitor your score via a free credit monitoring service and be aware of the financial decisions that can raise or
lower your score, such as credit inquiries and utilization rates.
• Manage debt—Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debtreduction
plan, such as paying down the loan with highest interest rate first. If your debt is excessive, contact lenders to renegotiate
repayment, consolidate loans, or find a debt-counseling program.
• Invest in your future—If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the
maximum to receive the employer match. Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed
income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money
you will need to retire comfortably and to develop strategies to reach your goal.

Developing a Spending Plan

Time and effort are necessary to build a sustainable spending loan. 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.

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 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)

List of Online Financial Resources

• EconEdLink: Classroom-tested online finance lessons designed for K-12 students but great for learners of all ages.

• InCharge: A nonprofit dedicated to empowering consumers through personal finance education and educational partnerships.
Online resources include ebooks, calculators, and games.

• MoneyWi$e: A partnership between Consumer Action and Capital One, this program combines free, multilingual financial
education curricula with regional meetings and roundtables to train community-based organization staff.

• Better Money Habits: A collaboration between Bank of America and Khan Academy, this site includes animated videos to cover
financial literacy basics as well as more in-depth topics.

• Money Smart: The FDIC‘s program provides free tools for people of all ages to increase their financial literacy. Resources
include lesson plans, videos, podcasts, and games.

• OppU: Standards-aligned online courses that teach the fundamentals of personal finance: spending, budgeting and saving, credit,
and debt and loans.
DISCUSSION BOARD:

QUESTION: 1. From the list of How People View Money, which type are you? Support your answer.
2. In your personal view, how are you going to improve your financial literacy as college student?

YOUR ANSWERS:
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2.__________________________________________________________________________________________________________________
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POST-COMPETENCY CHECKLIST:

SELF-ASSESSMENT: Please tick the box that corresponds to your level of attainment of every criterion below.
(1) VERY POOR
(2) SATISFACTORY
(3) GOOD
(4)OUTSTANDING
CRITERIA 1 2 3 4
32. I have understood the entire reading material.
33. I have learned the needed concepts that I have to.
34. I can define and explain what financial literacy is in my own words.
35. I can apply the financial literacy skills I have learned in real life.
36. I can create a budget plan for myself and my family in the future.

ACTIVITY:
Create a 2-week budget plan. Suppose that this is a normal school year and you have your everyday allowance. How would you
handle your money now that you have learned about financial literacy?
 Follow the format below.

Example:
DATE ALLOWANCE EXPENDITURES SAVINGS
11/01/2020 150.00 Fare (back and 20.00 57.00
(MONDAY) forth)
Morning 20.00
Snacks
Lunch 35.00

Afternoon 10.00
Snacks
Photocopying 8.00

TOTAL 97.00

TOTAL TOTAL ALLOWANCE IN 12 TOTAL EXPENDITURES IN 12 TOTAL SAVINGS IN 12 DAYS

DAYS (SATURDAYS and DAYS (SATURDAYS and (SATURDAYS and SUNDAYS
SUNDAYS COUNTED) SUNDAYS COUNTED) COUNTED)