MODULE 9: FINANCIAL LITERACY

Objectives:
 Define financial Literacy
 Demonstrate understanding of the importance of financial literacy while still young.
 Acquire essential knowledge about proper budgeting and spending.

Financial Literacy
Financial Literacy is a core life skill in an increasingly complex world where people need
to take charge of their own finances, budget, financial choices, managing risks, saving, credit,
and financial transactions.
Financial Literacy is the ability to make informed judgments and make effective
decisions regarding the use and management of money. Hence, teaching financial literacy yields
better financial management skills.
Financial Literacy is the capability of a person to handle his/her assets, especially cash
more efficiently while understanding how money works in the real world.

The Importance of starting Financial Literacy while still Young

*National surveys show that young adults have the lowest levels of financial literacy as
reflected in their ability to choose the right financial products and lack of interest in undertaking
sound financial planning. Therefore, financial education should begin as early as possible and be
taught in schools.
Akdag (2013) stressed that in the recent financial crisis, financial literacy is very crucial
and tends to be advantageous if introduced in the very years as preschool years.
Financial education is a long-term process and incorporating it into the curricula from an
early age allows children to acquire the knowledge and skills while building responsible
financial behavior throughout each stage of their education (OECD, 2005).

Financial Plan
Kagan (2019) defines a financial plan as a comprehensive statement of an individual’s
long-term objectives for security and well-being and detailed savings and investing strategy for
achieving the objectives. It begins with a thorough evaluation of the individual’s current
financial state and future expectations.

Steps in creating Financial Plan

1. Calculating Net Worth
Net worth is the amount by which assets exceed liabilities. In so doing, consider
(a) assets that entail one’s cash, property, investments, savings, jewelry, and wealth;
 (b) liabilities that include credit card debt, loans, and mortrage.
Formula: total assets minus total liabilities equals current net worth.

2. Determining cash flow

A financial plan is knowing where money goes every month. Documenting it will help to
see how much is needed every month for necessities, and the amount of savings and
investments.

3. Considering the priorities.

The core of a financial plan is the person’s clearly defined goals that may include:
(a) Retirement strategy for accumulating retirement income
(b) Comprehensive risk management plan including review of life and disability
insurance, personal liability coverage, property and casualty coverage, and
catastrophic coverage;
(c) Long-term investment plan based on specific investment objectives and a personal
risk tolerance profile; and
(d) Tax reduction strategy for minimizing taxes on personal income allowed by the tax
code.

Five Financial Improvement Strategies

Financial literacy shapes the way people view and handle money. The following are
financial improvements suggested by Investopedia as a journey to financial literacy.

1. Identify your starting point.

Calculating the net worth is the best way to determine both current financial status and
progress over time to avoid financial trouble by spending too much on wants and nothing
enough for the needs.

2. Set your priorities.

Making a list of rated needs and wants can help set financial priorities. Needs are things
one must have in order to survive (i.e. food, shelter, clothing, healthcare, and
transportation.); while wants are things one would like to have but are not necessary for
survival.

3. Document your spending.

One of the best ways to figure out cash flow or what comes in and what comes out is to
create a budget or a personal spending plan. A budget lists down all income and expenses
to help meet financial obligations.
 4. Lay down your debt.
Living with debt is costly not just because of interest and fees, but it can also prevent
people from getting ahead with their financial goals.

5. Secure your financial future.

Retirement is an uncontrollable stage in a worker’s life, of which counterpart are losing
the job, suffering from an illness or injury, or be forced to care for a loved one that may
lead to an unplanned retirement. Therefore, knowing more about retirement options is an
essential part of securing financial future.

Financial Goal planning and setting

Setting goals is a very important part of life, especially in financial planning. Before,
investing the money, consider setting personal financial goals. Financial goals are target, usually
driven by specific future financial needs, such as saving a comfortable retirement, sending
children to college, or enabling a home purchase.

Key Areas in setting Investment Goals for consideration.

A. Time horizon.
It indicates the time when the money will be needed. To note, the longer the time
horizon, the more risky (and potentially more lucrative) investments can be made.

B. Risk tolerance.
Investors may let go of the possibility of a large gain if they knew there was also a
possibility of a large loss (they are called risk averse); while others are more willing
to take the chance of a large loss if there were also a possibility of a large gain (they
are called risk seekers).

C. Liquidity needs.
Liquidity refers to how quickly an investment can be converted into cash (or the
equivalent of cash). The liquidity needs usually affect the type of chosen investment
to meet the goals.

D. Investment goals: Growth, income and stability.

When considering any investment, think about what it offers in terms of three key
investment goals
(1) Growth (also known as capital appreciation) is an increase in the value of an
investment.
(2) Income, of which some investments make periodic payments of interest or
dividends that represent investment income and can be spent or reinvested; and
 (3) Stability, or known as capital preservation or protection of principal.

Budget or Budgeting
A budget is an estimation of revenue and expenses over a specified future period of time
and is usually compiled and reevaluated on a periodic basis.
Budgeting is the process of creating a plan to spend money.

Seven Steps to Good Budgeting

Step 1: Set realistic Goals

Goals for the money will help make smart spending choices upon deciding on what is
important.

Step 2: Identify Income and Expenses.

Upon knowing how much is earned each month and where it all goes, start tracking the
expenses by recording every single cent.

Step 3: Separate needs from wants.

Set clear priorities and the decisions become easier to make by identifying wisely those
that are really needed or just wanted.

Step 4: Design your budget.

Make sure to avoid spending more than what is earned. Balance budget to accommodate
everything needed to pay for.

Step 5: Put your plan into action.

Match spending with income time. Decide ahead of time what you will use each payday.
Non-reliance to credit for the living expenses will protect one from debt.

Step 6: Plan for seasonal expenses.

Set money aside to pay for unplanned expenses so to avoid going into debt.

Step 6: Look ahead.

Having a stable budget can take a month or two so, ask for help if things are not getting
well.

Spending
If budget goals serve as a financial wish list, a spending plan is a way to make those
wishes a reality. Turn them into an action plan. The following are practical strategies in setting
and prioritizing budget goals and spending plan.
 1. Start by listing your goals.
Setting budget goals requires forecasting and discussing future needs and dreams with the
family.

2. Divide your goals according to how long it will take to meet each goal.
(short-term, medium-term, long-term)

3. Estimate the cost of each goal and find out how much it costs.
The greater the cost of the goal, the more alternative goals must be sacrificed in order to
achieve it.

4. Project future cost.

To calculate the future cost of the goals, there is a need to determine the rate of inflation
applied to each particular goal.

5. Calculate how much you need to set aside each period.

6. Prioritize your goals.

7. Create a schedule for meeting your goals.

Investment and Investing

As teachers, when you have saved more money than what you expect at a time of need,
consider investing this money to earn more interest than what your savings account is paying
you.

Here are the four aspects you must consider in investing your money:
1. How long will you invest the money? (Time horizon)
2. How much money do you expect your investment to earn each year? (Expectation of
return)
3. How much of your investment are you willing to lose in the short-term in order to
earn more in the long-term? (Risk tolerance)
4. What types of investment interest you? (Investment type)