Financial Literacy Chapter 4

CHAPTER 4 Financial Literacy OBJECTIVES At the end of this chapter, you should be able to: define financial literacy; assess level of personal financial literacy using set of standards and questions; characterize financial literacy in the Philippines; and start practical steps to develop personal financial literacy. Explove 0001 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.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 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 States that focuses 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 Earning income Key Concepts 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 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 real 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 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 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