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What Is Financial Literacy?

1) Financial literacy refers to having knowledge and skills to manage personal finances effectively for lifetime financial security, including understanding financial products, concepts, and engaging in activities like financial planning. 2) Financially literate individuals are more likely to plan, save, invest wisely and accumulate wealth, manage debt better by paying balances in full each month, and make advantageous financial decisions. 3) While financial education has been recommended since the 1950s, access to education does not guarantee improved financial practices on its own; policymakers must also address barriers like existing debt that discourage saving.

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83 views4 pages

What Is Financial Literacy?

1) Financial literacy refers to having knowledge and skills to manage personal finances effectively for lifetime financial security, including understanding financial products, concepts, and engaging in activities like financial planning. 2) Financially literate individuals are more likely to plan, save, invest wisely and accumulate wealth, manage debt better by paying balances in full each month, and make advantageous financial decisions. 3) While financial education has been recommended since the 1950s, access to education does not guarantee improved financial practices on its own; policymakers must also address barriers like existing debt that discourage saving.

Uploaded by

ANGELINE LABBUTAN
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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 debt4.
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.6

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.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.

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. 7
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. 7
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. 8
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.8

Financial literacy programs can reduce economic inequalities as well as


empowering citizens and decreasing information asymmetries between financial
intermediaries and their customers. 8

Sources:

Mandell, Lewis. The Financial Literacy of Young American Adults. Results of the
2008 National Jump$tart Coalition Survey of High School Seniors and College
Students. Jumpstart Coalition; Washington D.C.: 2009.

Bernheim BD, Garrett DM, Maki DM. Education and saving: the long-term effect
of high school financial curriculum mandates. J. Public Econ. 2001;80:435–465.

Hastings, JS, Madrian, BC, Skimmyhorn, WL. Financial Literacy, financial


education and economic outcomes. Annual Review of Economics. Vol 5:347-
373. August 2013.

https://www.stlouisfed.org/on-the-economy/2015/march/the-impact-of-financial-
education

Mitchell, Olivia. Financial Literacy and Economic Outcomes: Evidence and Policy
Implications

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4358152/pdf/roiw0060-0036.pdf

Huston, Sandra. Measuring Financial Literacy. The Journal of Consumer Affairs,


Vol.44, No. 2. 2010

Bel, Sarah. Why financial literacy matters for development. UNCDF Better Than
Cash Alliance. OECD Development Centre, page 4

www.philstar.com/business-usual/2017/05/29/1704453/financial-literacy-crucial-
tapping-millennials

www.stockmarketforpinoys.com/advocacy/

Ms. Melanie A. Maur, NEDA-Caraga

Matthew Bosrock, executive managing director and head of Asia-


Pacific for Standard & Poor’s Ra tings Services, said: “Understanding
concepts like interest, inflation and the importance of savings are at
the core of economic development.”
“A lack of basic financial understanding is one of the factors
obstructing faster growth in Asia. This survey gives policymakers the
tools to identify the gaps in education and also a chance to improve
access to financial products,” he added.

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