Financial Literacy & importance

of Financial Education
4 April 2016

Presented By
Dr Ravindra Narayanan
Department of Accounting & Finance
School of Business
Monash University, Malaysia

Introduction to Personal
Financial Planning
Process
Session 1

1-2

Presentation Outline
Financial crisis and concerns greater emphasis on
financial literacy
The rising global household debt scenario
What is financial literacy and financial education?
Importance of Financial Education and its potential
providers
Financial Planning process
Analyzing personal financial statements
Does financial education works?
Strategies to improve youth financial literacy
What does financial education provide to youths?
Videos on financial literacy!

Financial Education & Financial Literacy

Financial education & financial

literacy in recent years has
assumed greater importance.
Why?
Financial products increasingly
have become more complex
Existence of information
asymmetry grossly favoring
the suppliers.
These challenges has led to
making informed financial
choices more and more
difficult for consumers.

Financial Education Financial Literacy

Financial
literacy
Financial Well-Being
loop

t prospects, income stability, and the ability to preserve and build assets is plummeting; meanwhile, high fuel and food prices a

Financial crisis and

concerns

Consumers are more concerned about their personal finances

than ever before. Why?
1. Reducing confidence in job security, future employment
prospects, income stability, and the ability to preserve and
build assets
2. High food prices, tightening credit conditions, low real
income are placing more pressure on households to optimize
their financial decisions.
3. Individuals and families struggling with mounting financial
stress due to
- declining savings to meet their financial goals,
- rising indebtedness,
- diminished incomes and negligible savings, especially for
the young adults & retirees

Alarming global trends for

households debt

Currently there exists the highest ever rate

of borrowing in the developed world (Rao &
Barber, 2005) the developing world is
catching up (with China & India).

American scenario: Total Household Debt as

a Percentage of Disposable Income
1975: $.734/$1.187 = 61%
1980. $1.396/$2.009 = 69%
1985. $2.270/$3.109 = 73%
1990. $3.589/$4.285 = 83%
1995. $4.855/$5.408 = 89%
2000. $6.999/$7.194 = 97%
2005. $11.803/$9.036= 130%
2006. $12.815/$9.522 = 134%
>2006 ?
The pattern is clear worldwide. Malaysians are using more
and more debt to finance their lifestyle (near 160% in
2014).

Alarming Trends for US

households debt

The Australian Scenario

During

the 1980s, the ratio of debt to

disposable income for Australian
households was fairly stable at around
45%. But since 1990, this ratio has
risen rapidly, reaching 157% in
December 2007 (Davies, 2009).
Latest figures - ?

The Canadian Scenario

Canada v US

Malaysian Scenario

Malaysian Scenario

Malaysias high HH/DI %

(2002-2014)

Asian HH/DI % dilemma

Soaring household debt in Asia is one of the starkest

legacies of the post-2008 low rates world order.
10 years ago US household debt stood out as one of
the most leveraged in the world. But now, Asia is
home to this dilemma.
But some Asian countries, are fairing better than
other. Countries where debt has grown gradually &
where regulators implemented pre-emptive macro
prudential policies are more likely to minimize blows
to economic growth.
But, those with reactive regulatory bodies & where
household debt surged in just a few years are more
at risk. Malaysia & Thailand are at the top of this list.
For solutions refer to:

What is Financial Literacy?

Financial Literacy can be defined as

the ability to grow, monitor, and effectively use financial resources to
enhance the well-being and economic security of oneself, one's family, and
one's business.

Put in another way financial literacy is the ability to make informed

judgments and to take effective decisions regarding the use and
management of money. It covers budgeting, spending, saving and
peoples use of financial products and services.

Financial literacy has become an increasingly important requirement

for functioning in modern society, thus many countries, both developed
and
developing, have launched financial education or
financial
literacy programs for their people.
http://www.youtube.com/watch?v=eWVuypnXTSY - Importance of financial literacy

Financial literacy an
important life skill
In todays modern complex financial world, being
financially literate is a critical life skill as important as
reading, writing and arithmetic
Past research in US has shown that Americans are
borrowing more and saving less; havent planned well
enough for retirement; and few are prepared for financial
emergencies.
Past research tells us that financial education can, and
does, make a positive difference in peoples financial wellbeing (Varcoe, 2005)

4 Categories of Financial
Literacy
Mathematical and standard literacy
Reading, comprehension & basic arithmetic skills

Financial understanding
What is money?
How is it exchanged?
Where does it come from and go?

Financial competence
- Understanding the key features of financial services and risk
trade-offs.
- Attitudes to money, saving and investing

Financial responsibility
The ability to make personal life choices.

--- Understanding rights and responsibilities

return

Potential financial literacy education

providers include:

Government organizations (e.g. Bank Negara, Public financial

education)
Employers (workplace financial education)
Faith-based organizations and community centers (benevolent
financial education for adults focus more on parents)
Schools and higher education institutions young adult
financial education)
Professional Associations offering CFP & RFP programs (e.g.
Professional financial education FPAM, MFPC)
Non-government organizations (e.g. WIM Financial education
for single mothers & women)

Financial Education
Definition
Financial Education can broadly be defined as
providing the basics to enhance familiarity with and
understanding of financial market products,
especially, rewards and risks, in order to make
informed choices.
- Financial education enable individuals to take
effective actions to improve overall wellbeing and
avoid distress in matters that are financial.
(Das, 2007)

Consumer Education Program

In Malaysia, government and non-government agencies

have launched numerous Consumer Education Programs
to
provide consumers with greater understanding and to make
more informed decisions of financial products and services.

The approach comprised

(i) school programs targeting primary and secondary
school children
(ii) education programs targeting rural folks, women,
single mothers and university students, and
(iii) provision of information to general public.

Credit Counseling & Debt Management

Agency

Further, a Credit Counseling & Debt Management

Agency [Agensi Kaunseling Dan Pengurusan Kredit (AKPK)] has been
started as a subsidiary of Bank Negara Malaysia in
April 2006 to provide financial counseling, advises on
personal financial management, and conducts debt
management and financial education programs.

Personal Financial
Planning
According

to the International Certified

Financial Planning Council (CFPC),
financial planning from a financial
planners perspective is defined as:

process to provide a client with

impartial assistance in analyzing
and organizing personal financial
affairs in order to achieve financial
and lifestyle goals.

DIY Personal Financial

Planning
When

looking from the perspective DIY

financial planning:
Financial planning is the process of
developing strategies to help you
manage your financial affairs so you can
build wealth, enjoy life and achieve
financial security

Personal Financial Plan

Is a written document which:
describes a persons current financial
position;
establishes goals for the future
(financial and non-financial);
provides strategies for on how these
goals might be achieved
determines appropriate asset
allocations
Given the dynamics of the financial

6 Step Financial planning process

(DIY perspective)

Gather relevant personal financial data

Establish your financial objectives and goals

Analyze and evaluate your financial status

Prepare your financial plan

Implement the recommendations based on

your financial plan

Periodic review and maintenance of the plan

at regular intervals, or when circumstances
change.

Describing a persons
financial position
Real
Lifestyle and Inflation
Increasing Life span & Ageing
population
Financial obligations and expenses
Emergencies
Uncertainty in economic and
investment conditions

Is there something wrong with

Malaysian personal finance?

Malaysians have a high savings rate (29%) and

yet we cannot see through our retirement years
comfortably. Why?
https://www.quandl.com/data/ODA/MYS_NGSD_NGDP-Malaysia-Gross-National-Savings
-of-GDP

What can you surmise from this?

We

are ignorant and weak in investment

knowledge & financial literacy
the financial managers of our economy are
messing it up allowing our inflation to go
unabated.
The investment returns offered to the lay public
is unfairly low

Is there something wrong with

Malaysian personal finance? (continued)
Financial institutions are squeezing too much

margin from the savers and investors

Our fiscal and monetary management is
horrendous
Wages have not kept up with inflation and cost
of living
Corporate retirement schemes should move
beyond EPF for e.g. Individual Retirement
Accounts
Corporate pensions to be given approved
status as government pensions

Let us start by showing a major

target, using timeline:?

This is you today

(age 23 25)

You at your
retirement (age 60)

At the end
(age 7580)

Financial Assets generating income (passive income)

You working for your income (active income)

29

Basic Financial
Statement
INCOME
What you earn
EXPENSES
What you spend

Assets
What you own

Liabilities
What you owe

Putting theory into practice and practice into theory

30

Cash Flow
-definition of asset and liability
Income

Assets

Liabilities

Assets put money in your pockets

Shares

Expenses
Liabilities takes money out of your pocket

Putting theory into practice and practice into theory

31

Cash Flow Pattern of a Poor

person
JOB

Income

Assets

Liabilities

Expenses
Taxes
Food, clothing
Shelter/Rent
Transport
Fun/entertainment

Putting theory into practice and practice into theory

32

JOB

Cash Flow Pattern

of a Middle-class person
Income

Expenses
Taxes
Mortgage
Food, clothing
Fixed expenses
Shelter/Rent
Transport
Fun/entertainment

Assets

Liabilities

Mortgage
Consumer
Loans
Credit cards

Cash Flow Pattern of a Rich

Person
Income
Dividends
Interest
Rental income
Royalties

Assets

Liabilities

Stocks
Bonds
Notes
Real Estate
Intellectual
property

Expenses
Taxes
Food, clothing
Shelter/Rent
Transport
Fun/entertainment

Putting theory into practice and practice into theory

34

Financial Statements
Analysis
Financial Ratios
1. Basic Liquidity ratio number of
months a household can continue to
meet expenses from existing cash and
cash equivalents (may include liquid
investments) after a total loss of income
[ 3 to 6 months]
2. Liquid Assets-to-Net Worth ratio an
indication of the proportion of net worth
in cash or cash equivalents [15% ]
Putting theory into practice and practice into theory

35

Financial Ratios
3. Savings ratio savings set aside for future
consumption savings/gross income [10% or more]
4. Debt to Asset ratio measures solvency or
ability to pay debts total debts/total assets [ 50%
or less] must also consider current income level,
stability of income, fluctuation levels
5. Debt Service ratio annual debt
repayments/annual take-home pay [35% or lower]
6. Net investment assets to net worth ratio
capital accumulation goals [50% or more] Should
be higher as retirement approaches.

Putting theory into practice and practice into theory

36

Financial Statements tell a story

What we are today is the sum total of all the decisions that
we have made.
Similarly, your financial position is the result of all the financial
decisions that you have made in your lifetime.
How solid your balance sheet looks is a result of your
financial decisions in the past.
You will discover a history, a trend, an ability or lack of ability
and even competence or non-competence to manage your
finances.
Your risk profile will also be reflected by your financial
statement.
37

7 steps to
Financial Freedom

Create an emergency fund of

3 to 6 months income.
1st Step

Protect your family with adequate

coverage, buying term if necessary,
to insure family income against
death, disability and illness.
2nd step

Buy that first house.

3rd step

4th step

Find ways and means

to increase income and
savings.

5th step

Build a capital base, a

strong, and diversified
portfolio of financial
and physical assets.

Continuously increase
financial knowledge
6th step

7th step

Enjoy your dream and the

game. Without the dream and
the wanting, theres no joy in
the pursuit of financial
freedom.

Principles and Good Practices for

Financial
Education and Awareness
The OECD has brought out "Recommendations on Principles
and Good Practices for Financial Education and Awareness",
key aspects of some are furnished below:
i) Governments and all stakeholders concerned should
promote unbiased, fair and coordinated financial education.
ii) Financial education should start at school, for people to
be educated as early as possible.
iii) Financial education programs should focus particularly on
important life-planning aspects, such as, basic savings, debt,
insurance and pensions.

The importance of Financial

Education (OECD, 2006)

Increasingly important, and not just for

investors.

Essential for the average family trying to

decide how to balance its budget, buy a
home, fund the childrens education and
retirement needs.

Growing sophistication of the financial

markets have made making financial
decisions more difficult without adequate
financial education

At the same time, the responsibility and risk

The importance of Financial

Education (continued)

Low financial literacy potentially increases

the chance of not be able to choose the right
savings or investments - risk of financial loss
or fraud and possibly resulting in bankruptcy.

Being financially literate will more likely

encourage savings and challenge financial
service providers to develop products that
truly respond to their needs, and that should
have positive
effects on both investment
http://www.youtube.com/watch?v=Mv6iMKkFrLU
levels and economic growth.

Youth Financial Literacy

1. While individuals and businesses bear the majority of the
economic strain, children and youth are also impacted by
household finances.
2. The current moments of financial crisis and the resultant
trouble are teachable opportunities for youth to learn
about personal finance, and to improve their own money
management skills.
3. However, comprehensive strategies for educating youth
about personal finance to help successfully navigate a
complex financial marketplace have not yet emerged in
Malaysia.

Current scenario in the youth financial literacy

scene (increasingly in Malaysia)

A culture that views shopping as entertainment, pasttime and spending as patriotic.

Too many schools/colleges/universitiesstillwith no

formal financial education initiatives.

Parents who protect or pamper kids from having to

deal with financial details and paperwork.

Advertisers that target very young children who are

cognitively and psychologically defenseless against
advertising.

Good or Bad?

Areas of Deficiency:

1. Poor Debt Management

Credit card debt
Student loan debt (PPTN loan)
Other consumer debt
2.Poor or lack of Budgeting
3.Poor Spending Habits more focused on WANTS
4.Poor Saving Habits

Does financial education work?

Or
How can we re-structure curriculum so
that they excite and inspire students to
want to learn about financial topics?

Providing financial education to youth (US Experience -

Lopez-Fernandini & Murrell (2008)

Although providing financial education to youth

seems like a logical response, the research
findings about the effectiveness of youth
financial education are not always positive
(Willis, 2008).
However, many studies such as Danes, et al.
(2002); Varcoe et al. (2005) have demonstrated
that financial education leads to significant
financial literacy gains and positive financial
behaviors.

Financial Education for

youths

http://www.youtube.com/watch?v=bnrU1xSCUXY - Teaching Financial Literacy

What does Financial Education provide?

Knowledge about credit card, debt management,

budgeting, saving, investment, and tax (terminology and
norms).

Help making rational financial decisions.

Create cost consciousness and develop positive financial

What financial educators want
management skills.
from young consumers

Help develop early saving habits and understand

compound interest.

More personal responsibility for career paths, education,

and the outcomes of their choices.

Early planning for retirement needs.

http://www.youtube.com/watch?v=ud-cTNPbEKU

- Why teach Personal Finance?

Rich Dad Poor Dad

Financial Advice from

CPAs

Does Financial
Education Work?

Credit Card & Young

https://www.youtube.com/watch?v=hPOCSJ23
bh0
https://youtu.be/FcdOXZoAVmM?t=11
THANK YOU

FOR YOUR ATTENTION