Module 8: Financial Literacy

Introduction
                Financial literacy is an essential life skill that involves understanding and applying financial principles to make informed and effective decisions about money. In a world driven by consumerism and credit, being financially literate means having the capability to manage personal finances, understand financial products, and avoid financial pitfalls. According to De Leon (2020), financial literacy empowers individuals to develop discipline, confidence, and foresight in handling their financial affairs, which are critical to personal and societal development.

Objectives
At the end of this module, students should be able to:

1. Define financial literacy and explain its significance.
2. Understand and apply steps in financial planning.
3. Identify strategies for financial improvement.
4. Create and manage a personal budget.
5. Plan financial goals and prioritize spending.
6. Explain the basics of saving and investing.
7. Recognize and avoid financial scams.
8. Understand basic insurance and tax responsibilities.
9. Integrate financial literacy concepts into practical life and career planning.

Financial Literacy Definitions

                Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. It is defined by De Leon (2020) as “a comprehensive understanding and practical application of concepts that lead to sound financial behavior.” This includes knowledge of financial instruments, services, and how to make informed decisions about saving, borrowing, and investing.

The Importance of Financial Literacy While Young

Learning financial literacy at a young age equips individuals with the tools to make informed decisions, avoid debt traps, and achieve financial independence. Young people who develop financial skills early are more likely to budget wisely, save consistently, and invest for the future (Lusardi & Mitchell, 2014). De Leon (2020) emphasized that “the younger the individual begins financial education, the more embedded the habits of discipline, savings, and prudence become.”

Why Financial Plan Matters

A financial plan acts as a roadmap for achieving personal and financial goals. It helps individuals track income and expenses, identify areas for savings or investment, and prepare for emergencies. Without a financial plan, individuals are more likely to overspend, accumulate debt, and miss long-term opportunities.

Steps in Creating a Financial Plan

1. Calculating Net Worth – Net worth is determined by subtracting total liabilities from total assets. It provides a snapshot of one’s financial health and helps in setting realistic goals (De Leon, 2020).
2. Determining Cash Flow – Cash flow analysis helps identify income sources and spending patterns. Positive cash flow means one is living within their means, while negative cash flow signals the need to cut expenses or increase income.
3. Considering the Priorities – Financial planning requires individuals to distinguish between needs and wants. Prioritizing essential expenses and financial goals ensures that resources are allocated effectively.

Five Financial Improvement Strategies

1. Identify Your Starting Point – Understanding your current financial status, including debts, savings, and income, is the first step toward improvement.
2. Set Your Priorities – Determine what matters most financially – whether it’s debt repayment, savings, or investments.
3. Document Your Spending – Track expenses regularly to identify wasteful spending and areas for adjustment (De Leon, 2020).
4. Lay Down Your Debt – Develop a structured plan to pay off debts, starting with high-interest loans.
5. Secure Your Financial Future – Save consistently, invest wisely, and purchase insurance for long-term financial security.

Financial Goal Planning and Setting

1. Time Horizon – Goals can be short-term, medium-term, or long-term. Timeframes influence the type of savings or investment strategy.
2. Risk Tolerance – Each individual has a different risk appetite. Understanding this helps in choosing appropriate investment vehicles.
3. Liquidity Needs – Assess how quickly assets can be converted to cash without losing value.
4. Investment Goals: Growth, Income, and Stability – Identify whether the focus is on capital growth, generating income, or preserving capital.

Budget and Budgeting

A budget is a financial plan that outlines expected income and expenditures over a specific period. It helps ensure that spending aligns with financial goals and prevents overspending.

Seven Steps to Good Budgeting

1. Set Realistic Goals
2. Identify Income and Expenses
3. Separate Needs from Wants
4. Design Your Budget
5. Put Your Plan into Action
6. Plan for Seasonal Expenses
7. Look Ahead

Spending

Spending should align with one’s financial goals. Conscious spending involves being aware of where money goes and making adjustments to support savings and investments.

Practical Strategies in Setting and Prioritizing Budget Goals and Spending Plan

1. Start by listing your goals.
2. Divide your goals based on the timeline.
3. Estimate and find out the cost of each goal.
4. Project future costs.
5. Calculate how much to set aside each period.
6. Prioritize goals.
7. Create a schedule for meeting your goals.

Investment and Investing

Investment involves committing money to assets with the expectation of generating income or profit. According to De Leon (2020), investing is a disciplined way to build wealth over time.

Four Aspects to Consider in Investing

1. Investment duration.
2. Expected annual earnings.
3. Willingness to accept short-term losses.
4. Type of investment of interest.

Savings

Savings is the act of setting aside money for future use. It builds a safety net and provides capital for investment or emergencies.

Emergency Savings Fund

An emergency fund covers unexpected expenses like medical emergencies or job loss. Experts recommend saving 3–6 months’ worth of living expenses.

10 Reasons Why Save Money

1. To become financially independent.
2. To save on purchases.
3. To buy a home or car.
4. To prepare for the future.
5. To get out of debt.
6. To augment annual expenses.
7. To settle unforeseen expenses.
8. To respond to emergencies.
9. To mitigate job loss.
10. To have a good life.

Common Financial Scams to Avoid

1. Phishing
2. Social Media Scams
3. Phone Scams
4. Stolen Credit Card Numbers
5. Identity Theft

10 Tips to Avoid Financial Scams

1. Never wire money to strangers.
2. Don’t give out financial information.
3. Avoid clicking hyperlinks in emails.
4. Use complex passwords.
5. Protect your social security number.
6. Install antivirus software.
7. Avoid unfamiliar online retailers.
8. Don’t download from pop-ups.
9. Check website safety.
10. Donate only to known charities.

Financial Scams Among Students

1. Fake Scholarships
2. Diploma Mills
3. Online Book Scams
4. Credit Card Scams

Insurance and Taxes

Insurance protects against financial loss, while taxes are mandatory contributions to government revenue. Teachers should be aware of both for financial planning.

Insurance and Taxes Every Teacher Should Know

1. Employer-Sponsored Insurance
2. Marketplace Plans

Life Insurance

Life insurance provides financial support to beneficiaries after the policyholder’s death.

Common Risk Categories

1. Preferred Plus
2. Preferred
3. Standard Plus
4. Standard
5. Substandard
6. Smokers

Benefits of Life Insurance

1. Pays for medical and funeral costs.
2. Provides financial support to dependents.
3. Helps fund financial goals.
4. Acts as retirement security.
5. Covers tax and debt obligations.

Financial Stability

Financial stability means consistently meeting financial obligations while preparing for future needs.

10 Strategies in Reaching Financial Stability (Babauta, 2007)

1. Create a budget
2. Build an emergency fund
3. Pay off debt
4. Save regularly
5. Avoid unnecessary expenses
6. Invest wisely
7. Set financial goals
8. Monitor progress
9. Insure adequately
10. Maintain discipline

Signs of Being Financially Stable (Rose, 2019)

1. You live within your means.
2. You have no debt.
3. You save consistently.
4. You can handle emergencies.
5. You plan for the future.

Integrating Financial Literacy into the Curriculum

Financial literacy should be embedded across subjects and levels. As De Leon (2020) emphasized, integration promotes responsible citizenship, economic awareness, and career readiness. Teachers can use real-life examples, simulations, and collaborative projects to develop financial skills.

For you reflection, please watch this video

References

Babauta, L. (2007). 10 Steps to Financial Stability. Zen Habits.
De Leon, E. B. (2020). Principles of Financial Literacy. Manila: Education Press.
Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44.
Rose, K. (2019). Financial Stability Indicators. Financial Times Press.