6 Financial Literacy

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FINANCIAL LITERACY

Learning Outcome

• Demonstrate financial literacy for one’s personal and professional life through class activities and
attendance to the CPU accredited activities to anticipate personal and professional challenges

Defining Financial Literacy

Financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a
lifetime of financial well-being. The first part of being financially literate, or financially free is the
understanding of your relationship with money. Our thoughts become our actions. This is true with money
and managing it. How one spends and uses money reflects a person’s perspective and feelings about it.

Imagine if you have all the money in the world, how would you spend it? Will you go on a shopping spree,
buy a new house, or a car or save up and invest? Will you think of helping others or pursuing a passion
you have always wanted? Whatever actions you take, it only reflects your perception and value of money.
Financial literacy starts not with assets, and liabilities but should start with an individual’s personal
thoughts and beliefs about money. Finding out your relationship with money and how it came about will
help you understand actions taken relating to spending or saving money.

3 Money Exercises

Here are three suggested money exercises to understand your personal thoughts and beliefs on financial
literacy:

1. The blame-mom-and-dad approach. This exercise uses a retrospective approach where the
earliest experiences with money are traced. Most of the time the practices and habits of our
parents have a lot to do with our present money behaviors. What kinds of money habits or ways
of thinking about financial matters did you get from your parents, or maybe influenced by your
financial status and how it was compared to others?
2. The money-as-a-person approach. To understand one’s beliefs about money, one should treat
money as a person and reflect on how one relates to and interact with it. How do you spend your
money, or as simple as how you organize your money in your wallet?
3. The language of the poverty approach. In the words of Robert Kiyosaki, author of the Rich Dad,
Poor Dad book, “Don’t say I CANNOT afford it,” rather say “HOW can I afford it.” He says that
oftentimes people are stuck in poverty because of their poor mindset which reflects and transfers
to their money behavior. The words we use when talking about money are important because
just as your destiny begins with your thoughts, your words bring you closer to your destiny. This
is the wealthy mindset and poverty mindset.

Therefore, knowing and understanding your finances starts with recognizing the potential money can do
for you and especially for others. Although money has its potential, it cannot be fulfilled unless you hold
it, manages it, and understands its possibilities. This is where the components of financial literacy—which
you need to be knowledgeable of—come in.

Financial Management

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Financial Management is defined as developing and implementing a plan to allocate resources within the
composite income to achieve needs and wants as defined in the desired quality of life. Composite income
is the different sources where an individual gets their income. Income may be in the form of wage and/or
salary, productive income which is money received from using one’s skills and/or talents, and hidden
income which includes the community or people around us who usually help us in case of need, employee
benefits, and consumer savings.

Components of Financial Management (Goldsmith, 2005)

To understand one’s income better, it is important to be familiar with key terms significant to a successful
financial management:

• Discretionary income is the income regulated by one’s own discretion or judgment. It's your
income after paying for essential expenses.
• Gross income is the total income before deductions.
• Disposable income is the amount of take-home pay left after all deductions are withheld.
• Real income is the income measured in prices at a certain time, reflecting buying power of the
money.

Financial Management Process (Chua, 2016)

Note. Reprinted from Chua, 2016.

Financial planning is an ongoing process to help you make sensible decisions about money that can help
you achieve your goals in life. Here is the financial management process. It starts with determining your
current financial situation, developing your financial goals, identifying possible courses of action,

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evaluating alternatives, creating, and implementing an action plan, and reevaluating and revising your
action. Let's go through each step.

Step 1: Determine current financial situation. Where are you now? Whether you are financially stable or
in debt, the first step into financial literacy is understanding where you are in your situation. This means
knowing your net worth—it is determined by subtracting what you owe (liabilities) from what you own
(assets). Assets include stocks and bonds, business, insurance policies, jewelry, cash, retirement savings,
among many others. Liabilities, on the other hand, are credit card debt, student loans, mortgage, home
equity loans, among others.

Step 2: Identify financial goals. It is of utmost importance to have a clear goal about one’s finances. Having
a financial goal will create a vision of your future and will affect your behavior in terms of spending and
saving. Financials goals may be:

Immediate/short-range goals like your goals for the next month or year. This may include an emergency
fund, which is equivalent to three months expenses, which you set aside for unforeseen events.

Middle/Long Range Goals like those you hope to reach for the next two to five years from now, long range
include plans beyond five years, like own a three-bedroom house in Quezon City five years from now.

Step 3: Identify alternative courses of action. Upon seeing your current situation and goals, decide
whether to continue in the same course of action or change. Depending on your financial situation in line
with your financial goals, there are improvements or directions needed to be taken to make your financial
goals more achievable.

Step 4: Evaluate alternatives. It is necessary as well that while doing the financial planning, you are aware
of the current financial planning environment which includes life situation (i.e. age, employment, marital
status, number of household members), personal values, and economic factors both local and
international.

It is important to recognize that in choosing financial alternatives, you must understand the following
risks:

• Inflation risk: rising prices can cause loss of buying power


• Interest rate risk: changing interest-rates affect your cost (when you borrow) and your benefits
(when you save or invest)
• Income risk: you can lose your job because of such things as changes in consumer spending
• Personal risk: may involve inconvenience, health risks, or additional costs associated with certain
financial decisions
• Liquidity risk: some savings and investments have potential for higher earnings may be difficult
to convert to cash.

Investment Alternatives

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This table shows different types of investments and the level of risks in five different categories, safety,
risk, income, growth, and liquidity. Learning about these would give you an idea on where your money
would grow more and/or where it can be riskier. The type of investments that you choose also reflects
the type of risk taker that you are. You may pause this video and/or study each type of investment more
to determine the most appropriate for you.

Aside from the risks, it is also important to assess the time value of money. Time Value is based on the
belief that a peso today is worth more than a peso that will be received at some future date because the
money now can be invested and earn positive returns. Here are important terms to understand about
Time Value of Money.

• Compound interest. This is the interest earned on a given deposit and has become part of the
principal at the end of a specific period.
• Principal is the amount of money in which interest is paid.
• Future value is the value of a present amount at a future date. It is found by applying compound
interest over a specified period of time.
• Present value is the current peso value of a future amount or the amount of money that would
have to be invested today at a given interest rate over a specified period to equal the future
amount.

Step 5: Create and implement an action plan. Write a clear and workable action plan for each goal.
Prepare a budget plan and use budgeting tools.

Budgeting forces you to consider what is important in your life, the things you want to own, how you want
to live, and what you must do to achieve the life that you want. Budget is a paper or electronic document
used to record both planned and actual income and expenditures over a period of time. It helps pay bills
on time and cover any unexpected expenses. Budgeting is a continuous process where you learn about
your spending and saving habits. It becomes easier as you repeatedly do it eventually making it part of
your life.

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Here are some simple steps in budgeting:

1. Establish your goals and “wishes”.


2. Determine income.
3. Determine your expenditure.
4. Determine amount of savings desired. The ideal is to determine the amount of desired savings
first before determining your expenditure.
5. Prepare a budget for spending income.
6. Balance spending, savings, and income.
7. Implement budget.
8. Review and revise budget, as necessary.

Here are five tips to remember when creating, adjusting, and adhering to a budget:

1. Keep it simple. Budgets do not need to be complicated. You can use simple pencil and paper, a
spreadsheet, or any sort of online budget worksheet or budget calculator tool. Use whatever
technique works best and one that you will continue to use because of its comfort and
convenience. The important thing is that you take the time to sit down and create a budget as a
starting point. One can always (and should, on an as-needed basis) adjust one’s budget as one’s
financial circumstances change.
2. Make it personal. Your financial goals are a direct outcome of your personal values. You cannot
meet a financial goal if you do not have a significant meaning and value to it as an individual.
3. Keep it flexible. A budget is not set in stone. It is a working document that may need tweaks from
time to time as one’s financial situation changes. That does not mean, however, that you should
change the budget monthly to accommodate the wants versus the needs. Be realistic in setting
up a budget but also flexible, if necessary.
4. Be positive. Do not think of a budget as a punishment because it’s not. It’s a proven, sound tool
designed to help you start financially ahead of the game, achieve financial goals, and help towards
financial literacy.

Savings are a portion of your income not spent on current expenditures. This is done to prepare yourself
for unexpected and known expenses. They say that savings mean paying for your future.

Some of the most important accounts to save up for are:

• Reserve account or also called as the known expenses. These savings are for major non-monthly
expenses through the year like car insurance, tuition, gifts, among others.
• Emergency account or also called as the unknown expense. We must set aside three to six months’
worth of expenses for unforeseen events. This is to make sure that we still have an income while
we are trying to get back on our feet again during those challenging or emergency situations.
• Goals account or your dream account. This is intended for your set goals which could be short-
term, medium-term, or long-term.
• Retirement fund is for your future account when you permanently withdraw from gainful
employment.

Credit use is a huge part of financial management as we are confronted with the use of debts. However,
it is significant that you are aware of the positive financial behaviors versus risky credit behaviors. This is

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important as decisions made in the present with regards to managing finances and borrowing money will
affect the future for better or worse. Credit reflects the financial trustworthiness of a person.

Good credit means that your history of payments, employment, and salary make you a good candidate
for loans.

Bad credit usually results from making payments late or borrowing too much money, and it means that
you might have trouble getting a car, a credit card, a place to live and sometimes a job.

Here are some risky credit behaviors:

1. Maxing out your credit card(s). All credit cards come with spending (credit) limits. If you charge
up to your limit amount, or worse, go over it, you are subjecting yourself to two problems. One,
your card issuer will charge you a penalty, which is expensive. Two, if you exceed your credit limit,
you may damage your credit score, which may translate into higher interest rates both now and
in the future.
2. Making late payments. Don’t wait until the last minute to pay your monthly bills. Paying your bills
on time helps you maintain a good credit record and allows you to qualify for low interest rates.
3. Neglecting to pay off your credit card balance each month. It may not be easy, but, if possible,
pay your bill in full each month. Paying only the minimum due each month means you’ll be paying
a lot of interest for many years, and those costs could far exceed the amount of your original
purchase.

Step 6: Reevaluate and revise your action plan. It is advisable to revisit your action plan annually for
reevaluation and review. Then, revise it accordingly. This is to make sure that your financial plan is up-to-
date and still serves its purpose for you.

Synthesis

The key to an abundant life starts with educating yourself with financial literacy. Financial literacy
empowers us to use our knowledge and skills to manage our financial resources effectively to achieve our
desired quality of life. It is important for you to realize that financial literacy should start early on in life.
Doing so, would help you break away from the usual negative mindset people have regarding money and
acquiring wealth. Getting more educated in financial management and planning would help you avoid
personal and professional challenges such as getting into debts, lack of savings and debt, bankruptcy,
increased expenses, and worse, health and relationship problems. Financial literacy and having an
abundance mindset, however, is a life-long process of understanding and learning, it is of utmost
importance that early on you should consciously move towards financial literacy and wellbeing.

References

• Boyett, J. (2003). The guru guide to money management: The best advice from top financial
thinkers managing their money. USA: John Wiley & Sons, Inc.
• Chua, C. (2015, March 7). Financial Management [PowerPoint presentation].
• H&R Block Dollars and Sense. (n.d). Check yourself before you wreck yourself: How and why
budgeting is important, how to budget your daily life. Retrieved from
https://pennypinchinmom.com/wp-content/uploads/2013/04/Check-Yourself-Before-You-
Wreck-Yourself-Mind-on-my-Money.pdf

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• Kapoor, J. R., Diabay, Les R., & Hughes, R.J. (1996). Personal Finance. Irwin Publishing. USA.
• Kiyosaki, R. & Lechter, S. (1998). Rich dad, poor dad: What the rich teach their kids about
money—that the poor and middle class do not! USA: Print Book.
• Kiyosaki, R. (2000). The cash flow quadrant: Rich dad’s guide to financial freedom. USA: First
Warner Books Printing.
• Mastercard Financial Literacy Index Report (2014). Retrieved from
http://www.masterintelligence.com/content/intelligence/en/research/reports/2015/mastercar
d-financial-literacy-index-report-2014h1.html
• Mesiti, P. (2013). Pathway to prosperity: The 12 steps to financial freedom. China: Printplus
Limited.
• McKnight, S. (2013). From 0 to financial freedom: How to do it today. Australia: Ligare Book
Printer.
• Orman, S. (2002). Suzie Orman’s financial guidebook: Putting the 9 steps to work. New York:
Three Rivers Press.
• Wilson, G. (2014). 100% financial literacy success. USA: Cengage Learning.

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