What is financial literacy?

Financial literacy, financial knowledge and financial education are used interchangeably in formal literature and popular media. Various sources provide various definitions to financial literacy, but have one thing in common— everything revolves around money, knowledge and use.

Mandell (2009) defines financial literacy as “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security.” Huston (2010) explains that financial literacy is made up of two elements: understanding and use. Understanding financial literacy implies that a person is knowledgeable about personal finance, and applies such knowledge in dealing with one’s finances.

Meanwhile, Hastings, et al (2013) refers to financial literacy as:

  1. Knowledge of financial products (e.g., what is a stock vs. a bond; the difference between a fixed vs. an adjustable rate mortgage);
  2. Knowledge of financial concepts (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.


Determinants of financially-literate persons:

  1. Plans, saves, invests in stocks, accumulate more wealth (Lusardi and Mitchell, 2014)
  2. Less credit card debt
  3. When they borrow, they manage their loans better, paying off the full amount each month rather than just the minimum due.
  4. They refinance their mortgages when it makes sense to do so
  5. Less likely to use high-cost borrowing methods

More knowledgeable individuals “invest in more sophisticated assets, generating higher expected returns on retirement saving along with lower nonsystematic risks,” according to Mitchell (2014).

Is financial education an antidote to poor financial decision making?


Bernheim, et al (2001) believe that although financial literacy is a somewhat new, policy initiatives in financial literacy is not. In 1950s, the United States began recommending policies to improve the quality of personal financial decision making through financial education thru the “inclusion of personal finance, economics, and other consumer education topics” to children enrolled in the K-12 educational curriculum.

Financial education should be the best tool to effectively come up with better financial outcomes. Previous studies have shown that lower levels of financial literacy is associated with lower rates for planning for retirement, lower rates of asset accumulation, using higher-cost financials services, lower participation in the stock market, and higher levels of debt4.

Saving is imperative to improve individual and societal welfare. At the personal level, savings help households achieve smooth consumption patterns. Savings also help finance productive investments in human and business capital. At the macroeconomic level, savings rates are strongly predictive of future economic growth.6

However, access to financial education does not guarantee that poor financial practices are provided with solutions. In saving, learners should be taught the best way to save and safeguard their money. Although saving is now taught in schools and various conferences, policymakers need to look into teaching people the possibility of saving more by paying down existing debt. In the Philippines, the current administration has been taking small steps to pin down the problem on debts and encourage saving more by offering lower loan rates to micro and small business enterprises.


Financial literacy among Filipinos

The Filipino mindset upon receipt of salaries, as commonly-known, is that upon receipt of salaries, spending comes in before saving. What is left, is saved. If there’s none left, then, there’s nothing saved.

According to a study conducted by Philam Life, 96 percent of Filipinos are concerned about their own and their family’s health, however, only 16 percent of them are prepared to pay for medical costs in case they are diagnosed with a critical illness.9

There is a rising number of senior-dependents or those retirees who depend on their children for financial help, due to lack of financial education.

Financial planning teaches individuals to be responsible when it comes to their finances, and instills the discipline needed in order to keep track of their financial goals.9

Financial planning involves educating Filipinos on the different types of goals that they should set: short-term, medium-term, and long-term. Short-term goals involve monthly living expenses that need to be paid, or the person’s basic needs, including the setting-up of an emergency fund.  In contrast, medium term goals are those you want to achieve in one to five years like buying a house or a car, while long term goals are those that take longer than five years to achieve.

To address the growing demand for more investments in the country, the financial industry advises that Filipinos should save first and spend whatever is left after putting their savings aside.


What can the government and financial institutions do to make Filipinos financially-literate?

  1. Develop financial education policies and set up robust financial products available to the financial intermediaries and their customers.7
  2. Develop financial education policies and set up robust financial consumer protection frameworks to ensure that consumers are informed and understand the financial products available to them.7
  3. Involve financial service providers and other key stakeholders to build the financial capabilities of the youth and adults through a variety of delivery channels. 8
  4. Empower teenagers to deliver financial education on issues such as savings to younger children. This peer-to-peer approach is useful because young people tend to listen to their peers more than adults, and the participative approach helps foster youth as agents of change in their own communities.8

Financial literacy programs can reduce economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers. 8



Mandell, Lewis. The Financial Literacy of Young American Adults. Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students. Jumpstart Coalition; Washington D.C.: 2009.

Bernheim BD, Garrett DM, Maki DM. Education and saving: the long-term effect of high school financial curriculum mandates. J. Public Econ. 2001;80:435–465.

Hastings, JS, Madrian, BC, Skimmyhorn, WL. Financial Literacy, financial education and economic outcomes. Annual Review of Economics. Vol 5:347-373. August 2013.


Mitchell, Olivia. Financial Literacy and Economic Outcomes: Evidence and Policy Implications


Huston, Sandra. Measuring Financial Literacy. The Journal of Consumer Affairs, Vol.44, No. 2. 2010

Bel, Sarah. Why financial literacy matters for development. UNCDF Better Than Cash Alliance. OECD Development Centre, page 4



Ms. Melanie A. Maur, NEDA-Caraga


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