CHAPTER 4:

FINANCIAL LITERACY FOR

FILIPINOS: UNDERSTANDING
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.
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.

More knowledgeable individuals “invest in more sophisticated assets, generating

higher expected returns on retirement saving along with lower nonsystematic risks,”
according to Mitchell (2014).
Determinants of financially-literate
persons:
1. Plans, saves, invests in stocks, accumulate more wealth (Lusardi and Mitchell,
2014)
2. Less credit card debt
3. Whenthey 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
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.
• 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.