BUILDING AND ENHANCING NEW LITERACIES ACROSS THE CURRICULUM: Financial Literacy

Niño D. Estolas, M.Ed., LPT

Money plays a significant role in shaping people's everyday choices, impacting everything from their housing choices to their dietary preferences. However, despite its influence, a considerable number of individuals still lack the necessary financial literacy skills to make well-informed decisions about their finances and lifestyles.

What is Financial Literacy? Why Financial Education is important? by Mr. Smart (2018).

Financial literacy enables individuals to enhance their financial decision-making by providing them with the knowledge and understanding needed to make improved choices regarding areas such as savings, investments, and retirement planning. As a result, these informed decisions play a crucial role in enhancing the overall well-being of individuals and their households (BSP, 2023).

Additionally, financial literacy encompasses skillful handling of income, assets, and debts. It entails the upkeep of a budget, timely fulfillment of financial obligations, and strategic utilization of savings. Crucially, achieving financial well-being involves protecting against unexpected financial adversities.

The Five Pillars of Financial Literacy

Source: US Financial Literacy and Education Commission / BSP (2023).

1. Earning

It is the process of acquiring money or income through various means, such as employment, business activities, investments, or other sources. It involves receiving compensation in exchange for providing goods, services, or labor.

Earning can be attained through several methods:

Employment: Working for an employer or a company in exchange for a salary, wages, or commissions is a common way to earn money. This can include full-time, part-time, contract, or freelance work.
Business: Starting and running a business can generate income through sales of products or services. Entrepreneurs may earn profits from their business ventures after covering expenses and overhead costs.
Investments: Investing in assets such as stocks, bonds, real estate, or mutual funds can generate income through dividends, interest, rental income, or capital appreciation over time.
Side Hustles: Engaging in part-time or freelance work outside of regular employment, commonly referred to as "side hustles," can provide additional income streams. This may include gig economy jobs, freelance projects, or selling goods or services online.
Passive Income: Passive income sources, such as royalties from intellectual property, rental income from properties, or affiliate marketing earnings, generate income with minimal ongoing effort or active involvement.
Education and Skills Development: Investing in education, training, or skill development can increase earning potential by improving qualifications, expertise, and marketability in the job market or business world.

Attaining earning potential often requires a combination of factors such as education, skills, experience, networking, and opportunity identification. Individuals may pursue various strategies to maximize their earning potential based on their goals, interests, and circumstances.

2. Spending

It is the act of using money to purchase goods or services. It is attained through various means, including earning income through employment, investments, or other sources, receiving gifts or allowances, or obtaining credit through loans or credit cards.

Controlling spending involves managing and regulating the outflow of money to ensure that it aligns with one's financial goals and priorities.

This can be achieved through several strategies:

Budgeting: Creating a budget allows individuals to plan and allocate their income towards different expenses, savings, and debt payments. By setting spending limits for various categories and tracking expenses, individuals can better control their spending habits.
Prioritizing Needs vs. Wants: Distinguishing between essential needs and discretionary wants helps individuals prioritize their spending and avoid unnecessary expenses. By focusing on fulfilling needs first, individuals can allocate their resources more effectively.
Setting Financial Goals: Establishing clear financial goals provides motivation and direction for controlling spending. Whether it's saving for a vacation, paying off debt, or building an emergency fund, having specific goals helps individuals make more conscious spending decisions.
Avoiding Impulse Purchases: Resisting the temptation to make impulse purchases can prevent unnecessary spending. Taking time to evaluate purchases, comparing prices, and considering alternatives can help individuals make more deliberate spending choices.
Tracking Expenses: Keeping track of expenses allows individuals to monitor their spending habits and identify areas where they can cut back or make adjustments. Using tools such as expense tracking apps or spreadsheets can facilitate this process.
Using Cash or Debit Cards: Using cash or debit cards instead of credit cards can help limit spending by preventing individuals from accumulating debt and overspending beyond their means.
Practicing Self-Discipline: Developing self-discipline and exercising restraint in spending decisions is essential for controlling spending in the long term. This may involve delaying gratification, sticking to a budget, and avoiding peer pressure to overspend.

By employing these strategies and practicing prudent financial habits, individuals can effectively control their spending and manage their finances more responsibly.

3. Saving and Investing

Saving involves setting aside a portion of your income for future use. This could be for short-term goals like buying a car or going on vacation, or long-term goals like building an emergency fund or saving for retirement. Saving typically involves putting money into low-risk accounts or assets that are easily accessible, such as savings accounts, certificates of deposit (CDs), or money market accounts.

Investing involves putting money into assets with the expectation of earning a return over time. Unlike saving, investing usually carries more risk but also offers the potential for higher returns. Common investment options include stocks, bonds, mutual funds, real estate, and exchange-traded funds (ETFs). The goal of investing is to grow your wealth over the long term by taking advantage of compound returns.

Here's how you can attain saving and investing:

Set Financial Goals: Determine your financial goals, both short-term and long-term. These could include building an emergency fund, saving for a down payment on a house, or planning for retirement.
Create a Budget: Establish a budget to track your income and expenses. This will help you identify areas where you can cut back on spending and allocate more money towards saving and investing.
Start Saving: Begin by setting aside a portion of your income for saving. Aim to save at least 10-20% of your income, if possible. Start with small, achievable goals and gradually increase your savings rate over time.
Build an Emergency Fund: Prioritize building an emergency fund to cover unexpected expenses, such as medical bills or car repairs. Aim to save enough to cover 3-6 months' worth of living expenses.
Invest Wisely: Educate yourself about different investment options and choose investments that align with your financial goals, risk tolerance, and time horizon. Consider seeking advice from a financial advisor if needed.
Diversify Your Portfolio: Spread your investments across different asset classes to reduce risk. Diversification helps protect your portfolio from market volatility and increases the likelihood of achieving consistent returns over time.
Monitor and Adjust: Regularly review your saving and investment strategy to ensure it remains aligned with your financial goals and risk tolerance. Make adjustments as needed based on changes in your circumstances or market conditions.

By following these steps and staying disciplined with your saving and investing efforts, you can work towards achieving your financial objectives and building long-term wealth.

4. Borrowing

Borrowing refers to obtaining funds or assets from a lender with the agreement to repay the borrowed amount along with any applicable interest or fees within a specified period. Borrowing can take various forms, including loans, credit cards, mortgages, or lines of credit.

To attain borrowing, individuals typically need to follow these steps:

Assessing Needs: Determine the purpose and amount of funds needed for borrowing. This may involve evaluating personal financial goals, budgeting, and considering various borrowing options.
Researching Lenders: Research and compare lenders, financial institutions, or credit providers to find the most suitable borrowing options based on interest rates, terms, and conditions.
Applying for Credit: Submit a formal application for credit to the chosen lender, providing necessary information such as personal details, income, employment status, and credit history.
Undergoing Approval Process: The lender evaluates the borrower's application, creditworthiness, and ability to repay the borrowed amount based on factors such as credit score, income, debt-to-income ratio, and employment history.
Receiving Funds: If approved, the borrower receives the borrowed funds either as a lump sum or as a line of credit, depending on the type of credit arrangement.

To control borrowing and manage debt effectively, individuals can take several measures, including:

Budgeting: Create and maintain a budget to track income, expenses, and debt payments. Budgeting helps prioritize spending, identify areas for saving, and avoid overspending.
Understanding Terms: Read and understand the terms and conditions of borrowing agreements, including interest rates, repayment schedules, fees, and penalties. Be aware of any potential risks and obligations associated with borrowing.
Borrowing Responsibly: Borrow only what is necessary and within your means to repay. Avoid taking on excessive debt or borrowing for non-essential expenses.
Making Timely Payments: Make timely payments on borrowed funds to avoid late fees, penalties, and negative impacts on credit score. Consider setting up automatic payments or reminders to ensure payments are made on time.
Monitoring Credit: Regularly review credit reports and credit scores to monitor borrowing activity, identify errors or discrepancies, and track progress in managing debt.
Seeking Assistance: If experiencing difficulty managing debt, consider seeking assistance from financial counselors, debt management programs, or credit counseling services to develop a repayment plan and address financial challenges effectively.

5. Protecting

"Protecting" as one pillar of financial literacy involves safeguarding oneself and one's assets against unexpected financial risks and challenges. This includes protecting against events such as emergencies, job loss, disability, illness, or other unforeseen circumstances that could impact one's financial well-being.

Attaining and controlling financial protection involves several key steps:

Insurance Coverage: Obtain appropriate insurance coverage to protect against various risks. This may include health insurance, life insurance, disability insurance, homeowners or renters insurance, auto insurance, and umbrella liability insurance.
Emergency Fund: Build an emergency fund to cover unexpected expenses or income loss. Aim to save enough to cover three to six months' worth of living expenses in a readily accessible savings account.
Estate Planning: Create or update important legal documents such as a will, trust, and powers of attorney to ensure your assets are distributed according to your wishes and to protect your loved ones in case of incapacity or death.
Risk Management: Assess and mitigate financial risks by diversifying investments, avoiding high-risk investments that could jeopardize financial security, and seeking professional advice when necessary.
Fraud Prevention: Educate yourself about common financial scams and fraud schemes to avoid falling victim to identity theft, phishing scams, investment fraud, or other fraudulent activities.
Financial Education: Continuously educate yourself about personal finance topics, including risk management strategies, insurance options, and legal protections, to make informed decisions and protect your financial well-being effectively.

By proactively implementing these measures, individuals can enhance their financial protection and mitigate the impact of unexpected financial challenges.

Significance of Financial Literacy

Understanding financial literacy is of significant practical importance for individuals and society as a whole due to several reasons:

Personal Financial Stability: Financial literacy equips individuals with the knowledge and skills needed to effectively manage their finances, including budgeting, saving, investing, and managing debt. This leads to greater personal financial stability, reducing the likelihood of financial distress, bankruptcy, or dependence on social welfare programs.
Wealth Accumulation and Economic Growth: Financially literate individuals are more likely to make informed decisions about saving and investing, leading to the accumulation of wealth over time. This not only improves their own financial well-being but also contributes to overall economic growth by increasing capital formation and investment in productive assets.
Reduced Economic Inequality: Financial literacy helps individuals from all socioeconomic backgrounds access and navigate financial products and services effectively. This can help reduce economic inequality by empowering individuals to build wealth, access credit on favorable terms, and take advantage of opportunities for economic advancement.
Consumer Protection: Financially literate consumers are better equipped to recognize and avoid financial scams, predatory lending practices, and other forms of exploitation. This promotes consumer protection and reduces the risk of individuals falling victim to fraudulent schemes or unethical financial practices.
Retirement Planning and Security: Understanding financial concepts such as retirement planning, pension schemes, and investment vehicles empowers individuals to plan effectively for their retirement years. Financially literate individuals are more likely to save adequately for retirement, make informed decisions about retirement accounts, and ensure long-term financial security during their later years.
Entrepreneurship and Innovation: Financial literacy fosters an entrepreneurial mindset by providing individuals with the knowledge and skills needed to start and manage their own businesses. This encourages entrepreneurship, innovation, and job creation, driving economic development and prosperity.
Resilience to Financial Shocks: Financially literate individuals are better prepared to cope with unexpected financial shocks such as job loss, medical emergencies, or natural disasters. They are more likely to have emergency savings, insurance coverage, and contingency plans in place, enhancing their resilience in the face of adversity.

In summary, understanding financial literacy is crucial for promoting individual financial well-being, economic growth, consumer protection, and social stability.

By empowering individuals with the knowledge and skills needed to make informed financial decisions, society can foster greater economic resilience, reduce inequality, and promote long-term prosperity for all.

References: