Financial Literacy

FINANCIAL LITERCY

LESSON 1

In this lesson, you 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.

Direction: Read and analyze the following research abstract

Title: Financial literacy and financial planning among teachers of higher education: A study on
critical factors of select variables

Author: Surender and Subramanya Sarma (2018)

Abstract:

Teachers are the most influential people in our society. Apart from academic, they have the
ability to positively affect many aspects of people’s lives. By having financial literacy and managing
personal finance properly, they can become role models to the studnets and help to develop fiscally
and socially responsible citizens. An individual with good financial sense may plan better his/her
personal finance, particularly teachers who are they key contributors to the development of the
society. In this background, this study has been conducted to know the critical factors using factors
analysis in enhancing the financial planning among teachers of higher education. The study found
that the level of financial literacy among higher education teachers is satisfactory. It demonstrates
the importance of contextual variables that may influence financial literacy and personal financial
planning. It also explored the relationships among the selected variables of financial literacy and
personal financial planning using a methodology that is free from the influence of the attribute of
the respondents. The study found that the majority of high education teachers have a high level of
financial literacy, are aware of various aspects of personal financial planning and are able to plan on
their own irrespective of their subject. It also revealed that retirement planning, tax planning and
control, financial planning, financial capacity and inflation are critical factors in personal financial
planning among them.
Analysis Question 1: What are the critical factors in personal financial planning among
higher education teachers?
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Analysis Question 2: What is the impact of each of the factors on financial literacy and
planning among teachers?
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 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.e., 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.

Public and private institutions alike 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, the leading organization in the United State that
focusses 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, cost, and benefits of each
 Budgeting and classification of expenses
 Satisfaction, determinants of demand, cost 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 insititutions 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 saving polans, “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 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 works, 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, banko 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% 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 time 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
payment 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 parent’s attribute 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 I 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 that 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.

Spending Patters

Are you a 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 remain the same year-round. Car payments is an example. Variable expense occurs
regularly but the amount you pay varies. Electric and gas bills are examples of these.

Needs vs. Wants

Financial discipline starts with an ability to recognize whether expenses are needs or wants,
and followed by ability to prioritize needs over wants. Needs are essential to our own survival.
Wants are things that you would like to have but you can live without, such as a new clothes or a
new cellphone model. You want them but do not necessarily need them. Too many want can ruin
your budget.

Here are practical steps you can undertake to enhance your financial literacy.

Setting Financial Goals

Setting financial goals is the first step to managing one’s financial life. Goals may be short,
medium, and long-terms. Short-terms goals can be measure in weeks and can provide instant
gratification and feedback. “I will ride on the LRT instead of “taxi” and “I will bring lunch everyday”
are examples of short-term goals. Medium-term goals should be accomplished within one to six
months. These goals provide opportunity for reflection and feedback and require discipline and
consistency. Long-term financial goals can take years to achieve. 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, students loan, 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 as 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 migh 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 accountable 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”)

Task 1

Read the questions and instructions carefully. Follow what s asked and write down your answers in
the space provided.

1. How well do you understand personal finance concepts? Rate your knowledge below

4: Above average 3: Average 2: Limited 1: No Knowledge

2. Financial Literacy requires skills to aid you in making responsible and ethical financial
decision. There skills include being able to set goals, create and keep currently a budget,
formulate a spending plan, and keep organized record. Think about your overall skills in
those mentioned and mark where you feel your overall skills level is.

4: Above average 3: Average 2: Limited 1: No Skill

3. Behavior is applying what you learn to bring positive impact. Positive financial behavior
brings numerous benefits. Paying bills and debts on time and making regular depostis on
savings account are positive financial behaviors. Rate your ability to practice positive
financial behavior.

4: Above average 3: Average 2: Limited 1: No Ability

4. How does your current budget pie chart look like? Using the following categories, amp your
ideal budget plan using a pie chart. You may use more categories as needed.

a. Housing e. Debt
b. Electric Bills f. Education
c. Internet g. Transportation
d. Food

Ideal Current
Budget Budget
 How does your current budget pie chart compare with your ideal budget pie chart?

Task:

A. Differentiate among the following financial goals: short-term, medium term, and long term
financial goals. Give examples for each

Goals Definition Examples

Short-term

Medium-Term

Long-Term

B. How would the different characteristic type react towards a SALE Advertisement? Write
down what each type pf person would likely to say about the advertisement.
a. Frugal:
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b. Pleasure:
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c. Status:
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d. Indifference:
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e. Powerful:
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f. Self-worth
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References:

Alata, E. P., & Ignacio, E. T. (2019). Building and Enhancing New Literacies Across Curriculum.
Manila, Philippines: Rex Bookstore.

De Leon, E.B. (2020). Building and Enhancing New Literacies Across Curriculum. Quezon City,
Philippines: Lorimar Publishing