21st Century Literacies: Financial literacy for Filipinos: Understand

for better living

What is financial literacy?

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.

Mandell (2009) defines financial literacy as “the ability to use knowledge and skills to
manage one’s financial resources effectively for lifetime financial security.” Huston (2010)
explains that financial literacy is made up of two elements: understanding and use.
Understanding financial literacy implies that a person is knowledgeable about personal finance,
and applies such knowledge in dealing with one’s finances.

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.

Determinants of financially-literate persons:

1. Plans, saves, invests in stocks, accumulate more wealth (Lusardi and Mitchell, 2014)
2. Less credit card debt
3. When they borrow, they manage their loans better, paying off the full amount each month
rather than just the minimum due.
4. They refinance their mortgages when it makes sense to do so
5. Less likely to use high-cost borrowing methods

More knowledgeable individuals “invest in more sophisticated assets, generating higher expected
returns on retirement saving along with lower nonsystematic risks,” according to Mitchell
(2014).

Is financial education an antidote to poor financial decision making?

Bernheim, et al (2001) believe that although financial literacy is a somewhat new, policy
initiatives in financial literacy is not. In 1950s, the United States began recommending policies to
improve the quality of personal financial decision making through financial education thru the
“inclusion of personal finance, economics, and other consumer education topics” to children
enrolled in the K-12 educational curriculum.

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 debt 4.

Saving is imperative to improve individual and societal welfare. At the personal level,
savings help households achieve smooth consumption patterns. Savings also help finance
productive investments in human and business capital. At the macroeconomic level, savings rates
are strongly predictive of future economic growth.

However, access to financial education does not guarantee that poor financial practices
are provided with solutions. In saving, learners should be taught the best way to save and
safeguard their money. Although saving is now taught in schools and various conferences,
policymakers need to look into teaching people the possibility of saving more by paying down
existing debt. In the Philippines, the current administration has been taking small steps to pin
down the problem on debts and encourage saving more by offering lower loan rates to micro and
small business enterprises.

Financial literacy among Filipinos

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.

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.

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.

What can the government and financial institutions do to make Filipinos financially-
literate?

1. Develop financial education policies and set up robust financial products available to the
financial intermediaries and their customers.
2. Develop financial education policies and set up robust financial consumer protection
frameworks to ensure that consumers are informed and understand the financial products
available to them.
3. Involve financial service providers and other key stakeholders to build the financial
capabilities of the youth and adults through a variety of delivery channels.
4. Empower teenagers to deliver financial education on issues such as savings to younger
children. This peer-to-peer approach is useful because young people tend to listen to their
peers more than adults, and the participative approach helps foster youth as agents of
change in their own communities.

Financial literacy programs can reduce economic inequalities as well as empowering citizens and
decreasing information asymmetries between financial intermediaries and their customers.