We \ CHAPTER 4 Financial Literacy OBJECTIVES At the end of this chapter, you should be able fo: { * define financial literacy; * assess level of personal financial literacy using set of standards and questions; * characterize financial iteracy in the Philippines; and + _ start practical steps to develop personal financial literacy.RY SB The National Endowment fe ‘ial Educatior literacy as “the ability to read, anaivan menage! and ihe personal financial conditions that affect material wel ve cbllity to discern financial choices, discuss money On without (or despite) discomfort, pion for ihe future, and respond eam {olife events that affect every day financial decisions, including events inthe “general economy" (Incharge Education Foundation, 2017). To put it simply, it 5 ine abiity to use knowledge and sils to manage one's fancicl resources effectively for lifetime fnaricial security" (Mandel, 2009). Meanwhile, Hastings, et al. (2013) refers to financial literacy as: 1. knowledge of financial products (e.g., a stock vs. @ bond, fixed vs, adjustable rate morigage}; a defines financio| lommunicate about il-being. It includes d financial issues 2. knowledge. of financial concepts (e.g.. 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 curiculum, 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 States that focuses on the economic and financial education of students from Kindergarten through high school developed six standords 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 earned or received by people income + different types of jobs as well as dif . ferent forms of income eamed or received * benefits and Costs of increasing ing, ome thr. acquisition of education and skils Ough the * government programs that affect income + types of income and taxes fd * labor market he Currlelum rales Across 48. | Building and Enhancing New Literacies (ee I ET EY POSBuying goods and services scarcity, cholco, and opportunity cost factors that influence spending choices, ae advertising, peer pressure, and spending cholic 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 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 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 the power of compound interest teal versus nominal interest rates present versus future value financial regulators the factors determining the value of a person's savings over time automatic savings plans, “rainy-day" funds saving for retirement | CHAPTER 4 Financial Literacy | 49TT Using Credit i it Concept of credit and ihe cost of usin cre redit why people use credit and the sources of cl why interest rates vary across borrowers _ it incipal, basic calculations related to borowind (princips interest, compound interest) credit reports and credit scores behaviors that contribute to strong credit re} scores ports and 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 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 50 {Building and Enhancin 1g New Literacies Across the Curriculum ee; 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 work, spend, save, borrow, invest, and manage risk wisely are less likely to require a government rescue. Financial iteracy does not totally eliminate the need for asocial safety net. because even the most prudent individual can encounter financial difficulties. But taking responsibility for one’s financial life cultivates proper decision-making skils and discipline. Most of the responsibility for managing financial matters rests with the individual. That responsibilty is easier for adults to bear when they have learned the basics of personal finance in their youth. Financial Literacy in the Philippines (CHAPTER A Financial Uteracy | 52~ a a pee _— | tippines,” GO (2017) In his article “State of Financial Education in the a ae of financial indicated several findings of researches with regards to the 5! literacy in the country including ine following: * World Bank study in 2014 estimated 20 milion Flipinos saved money but only half had bank accounts. Asian Development Bank (ADB) study in 2015 reve0ed ae. iad not have a national strategy for financial education ani " 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 initiatives, . As per Standard & Poor's (S&P) Ratings services survey last year, only 25% of Filipinos are financially iterate. This means that about 75 million Filipinos have no idea’ about inflation, rik 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. 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 ever Financial Education Stakeholders Expo organized by BSP. The Expois designed to build an organized network of players that share the vision of @ financially iterate citizenry and cohesively implement a variety of initiatives to Achieve this vision. Thisisin ine with the BSP advocacy for inancialeducation and supports the BSP mandates of maintaining price stabilly, nancial stability, and ent payments system. It's the BSP's conviction that a financially educated ino is an empowered Filipino who is able to make wise financial decisions that postively impact personal financial citcumsionces, and, consequently, contribute to inclusive and sustained economic development, The Expo supports Republic Act No. 10922 which desi of November as Economic and Financial literacy We: with the objectives of the Philippine National Strategy f particularly the pillar on Financial Education and Consu; ignates second week ek. It is also aligned OF Financial Inclusion, Mer Protection. Developing Personal Financial Literacy One's attitude about money is heavily infuenced by ¥ the Parents’ atti and behavior about money. The attitudes you forme. ie ete ‘d early in lite Probably oss the Curriculum 52 _ | Building and Enhancing New Literacies Across the aaffect how You save. spend, and invest today, Do you behave sinlatly oF differently from your parents about handling money? There are six major characteiistic types in how people view Money {incharge: 2017). Frugal: Frugal people seek financial secutity by living below their mean’ ond saving money. They rarely buy luxurious items; they save money instead. They save Money because they believe that monoy'will offer protection from unprecedented events and expenses. Pleasure: Pleasure seekers use money to bing pleasure fo 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 debl. Status: Some people use money to express their social status. They like 10 purchase and “show off” their branded items. Indifference: Some people place very little importance on having money ond would rather grow their own food and craft theit own clothes. It is as if naving 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. Which characteristic closely resembles your attitude about money? Explain your answer. Spending Patterns ‘Are you 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 dally, 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 intemet 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. Voriable expenses occur regularly but the amount you pay vaties, Electric andl 905 bills are examples of these. CHAPTER A Financial titeracy | 53; lhe monthly Which expenses are fixed and which are variable? Indicate # total Puta check mark on the comesponding type. Monthly total Fixed Variable Food | Clothing Tr | Gas Medicine’ Intemet 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 ore 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. Use the table below to list down all the expenses that belong to the needs and those that belong to the wants. mess Wants Here are practical steps you can undertake to enhance your financial literacy. Setting Financial Goals Setting financial goalsis the fist step to managing one's nancial tf Goa may be short, medium, and long-term. Short-term) goals can be means in weeks and can provide instant gratification and feedback, « panier the LRT instead of taxi" and “I will bring lunch every day" gr oer short-term goals. Medium-term goals should be occomplisheg within one to six months. These goals provide Coe for reflection and feedback and require discipline and consistency. Long-term financial goals cor take yeos ye Curriculum 54 | Building and Enhancing New Uteraces Across the C —<$—$—$—to octieve, These include saving money for a down payment on a home, o 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: + 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/investmenits 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. + Alittle 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 accountability 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"). CHAPTER 4 Financial Literacy | 55Wrap Up Financial literacy fs the ability 1o use knowledge and skills to Manage one's financial resources effectively for lifetime financial secumty. ply knowledge + Financial titerac ; : ind ap} “ leracy enables people to understand a PY sustainable, nd skills 10 achieve a lifestyle that is financially balance ethical, and responsible, * One's atfilude about money Is heavily influenced by the parents! attitude and behavior about money, * Standards for developing understanding of financial fteracy include earning income, buying goods and services, saving, using credit, financial investing, protecting, and insuring. Questions to Ponder Read the questions and instructions carefully. Follow what is asked and write your answers in the space provided. 1, How well do you understand personal finance concepts? Rate your knowledge below. : 4; Above Average Knowledge 3: Average Knowledge 2: Limited Knowledge 1: No Knowledge 2. Financial literacy requires skills to aid you in making responsible and ethical financial decisions. These skils include being able to set goals, create and keep current a budgel, formulate a spending plan, and keep organized records, Think abou! your overal skils in those mentioned and mark where you feel your overall skills level is. 4: Above Average Skill 3: Average Skill 2: Limited Skill 1;No Skill $86 [ui and Enhance New Literate cosy tive Cuiculam3, Behavior is applying what you lear to bring positive ae roe financial behavior brings numerous benefis. Paying bis and debls ot time and making regular deposits in savings account are positive fin behaviors. Rate your abllity to practice positive financial behavior. 4; Above Average Ability 3: Average Ability 2: Limited Ability 1:No Ability 4, How does your current budget pie chart look like? using ine oe categories, map your ideal budget plan using a pie chart. Yo more categories as needed. 4 Housing Electric bills Internet Food Debt Education ame angaa Transportation How does your current budget pie chart compare with your ideal budget pie chart? CHAPTER 4 Financial Uteracy | S7cielo Read the followin the space and ta 1 3. 5g | Building and Enha ite your answer on 9 questions and instructions carefully. write ¥‘ ible provided. ‘ . -term, medium. Differentiate among the following financial goals: non term, and long-term financial goals. Give examples for amples Goals Definition Ex Short-term, Medium-term Long-term i their financial Interview atleast 10 friends, classmates, and relatives. Explore ing any of behavior or spending and saving behavior and present data using any the following forms: + infographic + meme * cartoon teristic types react toward this SALE How would the different charac! adverisement® Wile below what each type of person wo uld likely say about the advertisement. acing New Literacies Across the Curriculum-_ — frugal: Pleasure: status: Indifference: Powerful: Self-worth: CHAPTER Financial Literacy | 59Reem is for financial Council for Economic Education. (2013). National stondord literacy. Retrieved from https:// www.councilforecones: ‘on in th Go, V. (2017. August 21). State of financial eaucation in he Retrieved from _https://www.philstar.com/the-freeman 2017/08/21 /1731331 /state-fnancial-education-philippines 7 jal literacy, Hastings, J.S., Madrian, B.C., & Skimmyhom, W.L. (2013). SS raven) or financial education, and economic outcomes. ANNU Economics, 5, 347-373. Incharge Education Foundation. (2017). Incharge de! from https://www.incharge.org Mandell, L. (2009). The financial literacy of young American Adults: Results of the 2008 National JumpStart Coalition Survey of High Schoo! Seniors and College Students, Washington D.C.: The Jump§tart Coalition for Personal Financial Literacy. Maur, M. (2018, December). Financial literacy for Filipinos: Understanding for betterliving. Retrieved from hitp://caraga.neda.gov.ph/financialiteracy- for-filipinos-understanding-for-better-living/ e Philippines. pu-business/ pt solutions. Retrieved Photo/Image Attributions: https://pixabay.com/photos/siiver-money-philippines-tich-money-2262689/, p 47 https://pixabay.com/photos/peso-money-currency-philippines-2169915/, p 47 hitps://pixabay.com/photos/financial-analytics-blur-business-2860753/, p 47 https://pixabay.com/photos/calculator-budget-math-pen-913162/, p 47 https://pixabay.com/photos/calculator-calculation-insurance-385506/, p 51 hitps://www.publicdomainpictures.net/en/view-image. phpimage=329208picture=peso-bills, p 51 lancing New Literacies Across the Curriculum uilding and Ent 60 | Build ———