LESSON 4: FINANCIAL LITERACY

Learning Objective

At the end of the lesson, the students will be able 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.

INTRODUCTION

Questions to ponder:

How do you manage your finances or your money?

Do you have wise decisions in spending your money?

INSTRUCTION

FINANCIAL LITERACY
- defined as “the ability to read, analyze, manage, and communicate about the personal financial
conditions that affect material well-being (National Endowment for Financial Education)
- 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)

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.g. inflation, compounding, diversification, credit scores);
3. having the mathematical skills or numeracy necessary for effective financial decisions 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 identified as key areas 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.”

SIX STANDARDS GEARING TOWARDS DEEPENING STUDENT’S UNDERSTANDING OF PERSONAL

FINANCE THROUGH AN ECONOMIC PERSPECTIVE (COUNCIL FOR ECONOMIC EDUCATION)

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 determinants of demand, costs of
information search, choice of product durability
- the role of government and other institutions
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 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
- real versus nominal interest rates
- present versus future value
- financial regulators
- the factors determining the value of a person’s
savings over time
- 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 rate
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 financial 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.
- Financial literacy does not totally eliminate the need for a social safety net because even the most prudent
individual can encounter financial difficulties.
- Taking responsibility for one’s financial life cultivates proper decision-making skills and discipline.

FINANCIAL LITERACY IN THE PHILIPPINES

In his article “State of Financial education in the Philippines,” Go (2017) indicated several findings of
researchers 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, Bangko 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 inabilities.
 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 percent 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.
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 parents’ attitude and behavior about money. The
attitudes formed early in life probably affect how you save, spend, and invest today.
There are six major characteristic types in how people view money (Incharge, 2017).
 1. Frugal : Frugal people seek financial security by living below their means ans saving money. Thy rarely
buy luxury 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 to others. They are more
likely to spend than to save. They often live beyond their means and spend more than they earn. If they are
not careful and do not change, they may fall into deep debt.
3. Status: Some people use money to express their social status. They like to purchase ad “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: Powerful people use money to express power or control over others.
6. Self-worth: People who spend money for self-worth value how much they accumulated and tend to
judge others based on the amount of money they have.

Spending Patterns
There are two common spending patterns:
1. Habitual spending; and
2. Impulsive spending.

-Habitual spending occurs when one spends out of 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 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 expenses remain the same year-round. Car payment is an example.
- Variable expenses occur regularly but the amount you pay varies. Electric and gas bills are examples
of those.

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 survival, Wants are things that you would like to have but you can live
without, such as new clothes or a new cell phone model. You want them but do not necessarily need them.
Too many wants can ruin a budget.

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

Setting Financial Goal

-Goals may be short, medium and long-term.
- Short-term goals can be measured in weeks and can provide instant gratification and feedback.
- 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, student loans, 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 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:

1. Emergency Bolster- You should save money to avoid going debt just to pay emergency situations like
unexpected medical expenses and damages caused by calamities or accidents.
2. Retirement- You will need savings/investments to take the place of income you will no longer receive
when you retire.
3. Future Events- You need to save for future events like weddings, birthdays, anniversaries, and travels
so as not to sacrifice your fixed expenses.
4. Instability of Social Security- Pensions from social security should only serve as supplementary and not
the primary source of income after retirement.
5. A Little Goes a Long Way- Small consistent savings go along way.

There are two ways to save:

- save before you spend; and
- save after you spend wisely.
 ACTIVITY 1: BUDGET PIE CHART

Instructions: Make a current budget pie chart of your current budget and your ideal budget plan.

ACTIVITY 2: INTERVIEW

Instructions: Interview one person (not your classmate) and explore his/her financial behavior
or spending and saving behavior and present the data using any of the following forms:
infographic, meme, cartoon.

ENRICHMENT: ESSAY
Instructions: Answer the following questions: The same criteria for the previous lesson will be
used.

1. Which characteristic of how people view money closely resembles your attitude about money?

2. Do you consider yourself financially literate? Why or Why not?