Financial literacy — it’s a seemingly overimposed yet commonly shrugged off term we hear and read from financial advisors and bloggers, even vloggers these days, who sometimes sound like, if not our moms who know best, our strict sixth-grade teachers in their let-me-educate-you approach to conversations and discussions on personal finance.
I, too, sound one, maybe sometimes out of excitement to share knowledge. Well, such an assertive personality is no doubt the reason for their growing fan base, and for hitting the monthly sales quotas, clearly except for me.
In my strong belief though, nobody has a zero knowledge about financial and resource management, hence the much better approach all deserve. Even the so-called ‘illiterate’ have an indigenous knowledge about it. Elders, who haven’t been to a formal school, are good at saving.
In Filipino culture, it’s taboo to talk about money. We are not comfortable discussing it as, for instance, we often attribute career success to high salary, more savings, and tangible investments, and we don’t want either us or others be perceived as a failure, or maybe, we are simply taking measures against being taken advantage of.
It is thus wrong to advocate financial literacy and at the same time, say that it’s as easy as learning to read and write, though I don’t say these aren’t a challenge particularly on the part of the teachers.
We must pull into the rhetoric all the cultural, social, economic, and personal factors. And it’s never easy.
Read on as I share a semi-comprehensive review of financial literacy in the Philippines which I focused on the following points:
- Filipinos’ Financial Literacy in Recent Numbers
- Financial Literacy and Its Extreme Importance
- Core Components of Financial Literacy
- Key Indicators of Financial Literacy
- General Financial Literacy Levels
- Barriers to Financial Literacy
- Ways to Increase Financial Literacy (on the Personal Level)
- Overall Advantage of High Financial Literacy
If you have additional thoughts about Filipinos’ financial literacy, feel free to share them in the comments below.
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Filipinos’ Financial Literacy in Recent Numbers
While we’re getting more serious already about the topic, let’s first look into some recent and interesting statistics about Filipinos’ financial literacy:
On Financial Literacy
- In a Standard & Poor’s (S&P Global Ratings) global study, Philippines ranked in the bottom 30 out of 144 countries surveyed, scoring only 25 percent in terms of financial literacy.
- Other neighboring countries such as Singapore and Malaysia scored higher, with 59 percent and 36 percent, respectively.
- With basic financial literacy questions, only 2 in 10 Filipinos got a perfect score while 7 in 10 at least half of the questions.
- Only 42 percent of adults correctly identified inflation’s effect on purchasing power and 30 percent on simple and compound interest [BSP].
On Banking and Saving
- In 2021, 56 percent of the Filipino adult population was already banked (from 29 percent in 2019). This number was still lower than Malaysia’s 88 percent, Thailand’s 96 percent, and Singapore’s 98 percent based on the 2021 World Bank Global Index. From an 8 percent, being banked with e-wallets in 2019 also soared to 36 percent last year. [2021 BSP Financial Inclusion Survey].
- The percentage of households with savings during the first quarter of 2022 increased marginally to 31.1 percent from 30.2 percent in the fourth quarter of 2021 [2022 BSP Consumer Expectations Survey Report].
- Cost concerns and lack of documents were the primary reasons for not owning an account [2021 BSP Financial Inclusion Survey].
- Less than half, or 46 percent, of adults had a working budget [2021 BSP Financial Inclusion Survey].
On Borrowing
- Monthly billings of banks and credit card issuers jumped by 34 percent to PHP100.6 billion in 2021, according to BSP [Philstar].
- Almost half (45 percent) of Filipino adults had an outstanding loan, with family and friends, and MF NGOs as the top two sources in 2021 [2021 BSP Financial Inclusion Survey].
- Borrowing was the main coping mechanism of Filipinos across all financial needs, followed by use of savings and income [2021 BSP Financial Inclusion Survey].
On Making Investments
- Filipino investors among adults rose to 36 percent from 25 percent in 2019 [2021 BSP Financial Inclusion Survey].
- Only 1 percent of investors though owned stocks, bonds, Unit Investment Trust Funds (UITF), mutual funds, and other managed investment schemes [2021 BSP Financial Inclusion Survey].
On Insurance
- Philippines’ insurance penetration rate has yet to exceed 2%, despite the IC reporting PHP2 trillion worth of assets for the insurance industry, as well as a 50% growth in premium income over the past six years – from PHP253 billion in 2016 to PHP379 billion in the first half of 2022 [Insurance Business Asia]
- The insurance density or the average amount spent by every Filipino for insurance is PHP2,528 as of the third quarter of 2021, up from PHP1,768 in 2017 [Philippine News Agency].
On Fraud and Scams
- According to the TransUnion Consumer Pulse Survey in early 2022, out of 1,000 Filipino adults surveyed, 53 percent said they were targeted by fraudsters in the previous 3 months [TransUnion Philippines].
- Phishing scams led the way by 42 percent followed by money and gift card scams by 38 percent, and third-party seller scams on legitimate platforms by 30 percent [TransUnion Philippines].
- Overall, the suspected fraud rate originating from the Philippines fell by 16.4 percent, consistent with the global trend drop of 22.6 percent in the same quarter year-over-year [TransUnion Philippines].
Financial Literacy and Its Extreme Importance
Literacy, per se, is the capacity to communicate effectively or use language and its symbols to make sense and even perform certain tasks.
Financial literacy is similar, dealing with the language of finance so one can perform the economic roles and achieve financial goals.
Financial literacy is the ability to understand various financial concepts, skills, and products, and effectively use them in navigating through the economic aspect of life and in achieving both short-term and long-term financial goals.
It is obtained through reading books, listening to podcasts, watching videos, subscribing to financial content and blogs, and consulting with a professional.
Its extreme importance lies, not just in the theoretical dimension, rather more in its practical application which translates to making and actualizing informed decisions about budgeting, saving, and investing.
It also means avoiding bad decisions such as living beyond means, accumulating bad debts, and falling victims to investment frauds, among others.
3 Key Indicators of Financial Literacy
Atkinson and Messy (2012) suggested that financial literacy should be taken as a combination of awareness, knowledge, skills, attitude, and behavior which are all necessary in making sound financial decisions and achieve individual financial well-being.
In most publications though, financial literacy is based on three (3) fundamental, hence broad, factors which include — financial knowledge, financial behavior, and financial attitude towards money.
[1] Financial Knowledge. A financially literate individual should have basic knowledge about key financial concepts and issues and the ability to apply certain skills in financial situations.
Basically, you should be able to answer questions about concepts such as compound interest, investment risks, and impact of inflation.
[2] Financial Behavior. It concerns human actions in relation to money management, and drives positive and negative outcomes.
For example, the positive outcomes of financial literacy are driven by behavior such as cost planning and creation of a financial safety net, whereas, negative outcomes may include falling into over-indebtedness and lack of understanding of financial products and services.
[3] Financial Attitude. Especially towards money, financial attitude is best seen by whether an individual gives more priority to short-term needs and preferences than long-term financial plans for a more secure financial future.
Luburić and Fabris (2018), in their explanation of financial literacy in terms of quality of life, attempted to expand these indicators and came up with seven (7) which then include financial awareness, financial knowledge and skills, attitude towards finance and money, financial behavior, managing financial risks, financial culture, and the use of e-finance.
Given the purpose of the study though, it has been found that these indicators of financial literacy undoubtedly coincide with the indicators of the quality of life (e.g., employment and economic security, education and training, financial and material living conditions, etc.), hence mutually interdependent.
As can be concluded, financial literacy has a direct impact on the quality of life.
6 Core Components of Financial Literacy
While the core components of financial literacy vary from one source to another, I strongly believe that these six (6) comprise a good list — earning, spending (budgeting), saving, borrowing, investing, and protecting.
[1] Earning. Before you spend, save, and make investments, you should know how much money you make, both gross and net income.
You should understand the reasons for and the purposes of deductions such as taxes, state-run insurance premiums, tardiness and absences deductions, and others.
Your net income, in particular, provides you some clarity whether you’re earning enough, or you need additional sources of income on the side. Once everything is clear, you’re then ready to spend responsibly with a working personal budget.
[2] Spending. Your personal budget is your plan on how to distribute your income across your bills, expenses, and other short-term and long-term financial goals, e.g., saving for something, big or small.
Your conscious spending on priorities and avoidance of splurging are indispensable subconcepts of budgeting.
Budgeting is a skill developed by trial and error. As new or emergency expenses arise, there comes the need to retool the budget and maybe allocate some contingency fund in anticipation of such in the future.
It is also needed if there is an adjustment or change in the income, whether an increase or decrease.
[3] Saving. It comes in different purposes such as short-term saving for a purchase beyond the regular budget, medium to long-term saving for big purchases such as a car or a house, saving for an emergency fund, saving for retirement, or just saving for debt pay off.
Whatever the purpose of saving is, it should be clear so to make a disciplined approach to it. Part also of this, you should understand how maintaining a savings account and banking really work.
You might realize, along the way, that keeping a big savings in a bank, except for the emergency fund which should be accessible enough, is not ideal given the extremely low interest rate and the effects of inflation.
[4] Borrowing. It isn’t necessarily a bad thing to get into debts, hence the difference between good debts and bad debts.
Making loans for bigger financial goals that you think will provide good returns in the future is a good example. Getting a credit card and using it responsibly while building a credit score is another.
In terms of borrowing, you should know some technicalities and even the maths of different financial instruments such as personal loans, car loans, and credit card cash advances. You don’t want to end up struggling to them off or your money ending up to pay off the interest.
[5] Investing. You, as a big financial machine, will never work forever. You need to make good investments as early as possible so that they will work for you and give you income in the future, during your retirement or when you’re no longer capable to work.
You should develop a deep understanding of compounding interest that by consistent investing and reinvesting, your money will grow in a snowball effect. Your original investments and the income earned from the interest grow together over time.
[6] Protecting. In this digital and information age when everything is accessible in just a few clicks and taps, fraud and scams are prevalent, with these criminals lurking in the dark and waiting for a chance to steal your hard-earned money.
As a digital citizen who is financially literate, you should have a wide knowledge about these risks and the countermeasures for your protection.
Equally, understanding the various types of insurance and how they work and purchasing policies will give you a peace of mind while the welfare of your family, your investments and properties, and even yourself are protected.
4 General Financial Literacy Levels
BFI Finance website mentions four (4) levels of financial literacy as based on the Financial Services Authority (OJK) which are particularly focused on knowledge and confidence about existing financial products and services.
While these maybe on a limited view of financial literacy, these can still be a good starting point that even individuals on their own can roughly assess their levels of financial literacy.
[1] Not Literate. Individuals lack even basic knowledge and confidence about products, services, and financial institutions, hence can be further described as not having sufficient skills in effectively managing personal finances.
[2] Less Literate. At this level, individuals have knowledge about such financial products, services, and institutions, however still lacking the skills to manage them properly.
[3] Sufficiently Literate. At this level, individuals possess sufficient knowledge and confidence about financial products, services, and institutions, as well as the obligations, benefits, and risks that come with them.
[4] Well Literate. Individuals have a wide knowledge and strong confidence in financial products, services, and institutions. They have also developed and been continuously developing the necessary skills to use such knowledge and confidence in benefiting from the financial products and services.
5 Barriers to Financial Literacy
What causes the low financial literacy rate among Filipinos? Globally, financial literacy levels range roughly between 13 percent to 71 percent, with a loose correlation between higher economic development and higher literacy rates.
The low financial literacy rate of 25 percent among Filipinos can be attributed to the following:
[1] Inadequate School Integration. Although attempts have been made and are continuously made for this, particularly after the overhaul of the Philippine educational system and for instance, the inclusion of entrepreneurship and business mathematics in the senior high school program and the illustrative examples embedded in textbooks, still universities and schools fail to emphasize the knowledge and skillsets needed to make wise financial decisions.
This can further be traced to the teachers’ lack of necessary trainings to teach financial literacy as there are limited professional development programs initiated by the education department for these, or as equally important to note, teachers themselves do not have the interest in it nor that level of financial literacy.
[2] Stringent Bank Requirements and Processes. Apart from lack of information and awareness about financial products offered by financial institutions, particularly banks, there are other equally serious challenges that ordinary Filipinos encounter such as — limited funds to maintain an account, transaction costs, limited banking presence in rural areas, and even lack of documents that banks usually require.
Many who cannot open and maintain regular bank accounts rather resort to digital solutions, e.g., GCash and Maya which even offer short-term loans and investments other than digital wallets, thus proving that there is an interest in convenient and more inclusive financial products and services however prevented by the challenges and restrictions.
[3] Economic Inequality and Poverty. Philippines is among the fastest-growing economies in the region, and yet poverty remains to be a pressing issue. In a family without any formal and stable source of income, it is more of surviving than living, and decisions are usually based on immediate needs.
In many studies, it’s been found that financial literacy increases as income (and also educational attainment) increases. Maslow’s hierarchy of needs provides a self-explanatory support to this. Personal security, health, and property lie secondary to the basic physiological needs.
[4] Disinterest and Faulty Mindsets. Many are just not interested in financial literacy as it is a boring and quite complicated thing, and rather just focus on work and recreation.
Living paycheck to paycheck is also common among Filipino young professionals, hence the typical ‘petsa de peligro‘ joke, as there is no concrete budget plan.
Additionally, many of them still do not have investment goals because of the faulty fixed mindsets that need to be seriously addressed (see complete article here):
- Investments are just for the rich. I don’t earn much. I can’t even make decent savings, and so investments.
- Life is short. We should keep on working, earning, and spending. Thinking about the future but brings worries and fears.
- It’s way better to just save my money in the bank. At least, it’s safe, and I can have it withdrawn anytime I need it.
- I’ve got SSS, PhilHealth, and all other government benefits. I think these are enough for my retirement.
[5] Sociocultural Factors. In a paper published by Mitchell and Abusheva (2016), it has been underscored that the challenge of inequality is spread throughout societies, and financial literacy challenge is no doubt part of it.
In Filipino patriarchal society for example, women have more reasonable stance to life and family while men usually focus on career and socio-economic status and make more informed decisions about financial products, and particularly investments.
Also, I have already mentioned in the introduction of this article, conversations about money remain a taboo in the family, in the professional circles, and even among close friends. This is somewhat deeply rooted in the Filipino culture.
The negative perceptions surrounding anything insurance-related such as death and accidents, for example, make insurance products less appealing to many Filipinos. The concept of ‘bahala na’ also contributes to this.
7 Ways to Increase Financial Literacy
The Philippine government and the private sector have been initiating programs and making serious efforts to improve Filipinos’ financial literacy.
On the personal level, these are seven (7) ways a simple and humble economic Filipino can do so to increase his financial literacy and contribute to the bigger picture of it:
[1] Read Books and Subscribe to Financial Blogs. Financial literacy is a complicated thing so are the many financial concepts, but personal finance bloggers and vloggers try their best to make them less complicated and thus, comprehensible.
It’s just that most of the current resources, online and offline, are in English that makes it still a disadvantage to some social groups.
[2] Attend Financial Literacy Seminars. Financial literacy advocates go around the country and conduct seminars and talks. These can be worth attending if registration is entirely free, and if you have the luxury of time.
Series of financial literacy seminars, and even workshops, provide opportunities to meet in person the experts in the financial industry, gain motivations to actualize newly learned ideas, and enhance analytical skills.
[3] Listen to Podcasts and Watch Videos. Podcasts can be a great way to learn about personal finance while on a less busy hour such as doing light housework, running errands, or on a travel home from work.
Short yet educational videos are also now available on many platforms such as YouTube, Facebook, and TikTok. Simply subscribe to your favorite financial experts’ channels.
[4] Talk to a Financial Professional. If you have the means, you may hire a financial advisor who can walk you through the intricacies of financial planning, from setting financial goals to purchasing insurance policies and estate planning.
Or you may just get in touch with people in your professional and social circles who happen to have such wide knowledge and solid experiences in various aspects of financial planning, but take time to do your own homework on the side.
[5] Get Curious and Do Your Research. Promotions of financial products are almost everywhere, from traditional flyers available at the bank lobbies to video commercials on social media. You don’t have to jump straight into availing these though, just get curious about them first.
As you do your research and reading out of such curiosity, you keep yourself abreast of the latest financial trends, and you develop an informed decision whether they are worth your money and savings or not.
[6] Apply New Knowledge and Make Progress. Whether it’s a simple budgeting or saving hack, it can be worth a try. Sometimes, it’s the small things that make big results. You saved a hundred last week. Now, try to break that record.
Financial literacy is a life-long learning process. Your budgeting and saving strategies for now may no longer be applicable ten years from now because of inflation. Financial products also evolve. Don’t be afraid to welcome change.
[7] Improve Your Math Skills. Financial literacy also requires numeric skills such as for interest computations, discounts, ratios, and other basic day-to-day practical maths. But it doesn’t mean that it’s going to be such a headache like those maths in your Algebra or Trigonometry classes.
It normally takes just a pen and a piece of paper or a calculator app, and a little Google search for the right formula if ever still necessary, for us to decide wisely whether purchasing something in bulk at the grocery really makes sense.
Overall Advantage of High Financial Literacy
Financial literacy and economic development go hand in hand. Financially resilient individuals can be more self-sufficient, productive, and thus, can contribute more to the economy.
While income inequality and poverty constitute the barriers to financial literacy as I have identified, the relationship can be reciprocal. Financial literacy can also be a solution to these.
Take note that managing finances effectively is a critical part of financial security regardless of how much money you make or have.
It also empowers people to make informed decisions and choices; otherwise, concepts such as credit, interest rates, and investments will remain intimidating and leave Filipinos at a disadvantage.
In developing economies such as that of the Philippines where fraud and scams are widespread, financial literacy provides awareness of the red flags and gets into scrutiny of details before getting into financial transactions.
In the end, financial literacy is a road that leads to financial stability and financial freedom.
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