BSP DISCUSSION PAPER 2024 How does financial literacy affect financial behavior over the life cycle?

le? Evidence from Filipino households June 2024

How does financial literacy affect

financial behavior over the life cycle?
Evidence from Filipino households

Faith Christian Q. Cacnio

Marie Edelweiss G. Romarate

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No.Discussion
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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

Abstract

How does financial literacy affect financial behavior over the life cycle?
Evidence from Filipino households

Faith Christian Q. Cacnio and Marie Edelweiss G. Romarate1/

Our study looks at the effect of financial literacy on the short-term and long-term
financial decisions and behaviors of individuals who are of different ages and life
stages, i.e., 18 to 39 years old (Young adult); 40 to 59 years old (Middle-aged); and
60+ (Senior). Using the results from the 2018 Bangko Sentral ng Pilipinas Consumer
Finance Survey, we constructed a financial literacy index based on two (2)
components - financial attitude and financial aptitude. We then used ordinary least
squares regression and logistic regression to determine the factors that affect
financial literacy and to assess its impact on the financial behaviors of individuals.
We find that, among the age groups, young adults display higher financial literacy
than the middle-aged and senior cohorts. Moreover, income and education as well
as having children and receiving domestic or foreign remittances are positively
related to financial literacy. Regarding financial behavior, those with higher
financial literacy, middle-aged and seniors are less likely to spend less than or equal
to their income. Middle-aged persons are also less likely to have a loan-to-income
ratio of less than one (1) while those with higher financial attitude scores are more
likely to pay their loans on time. Individuals with higher financial aptitude and who
are middle-aged and seniors tend to have retirement or pension plans. Additionally,
they are more likely to have insurance and other plans.

JEL classification : G5, G50, G51, G52, G53, D14

Keywords : financial literacy, financial behavior, financial skills,

financial knowledge, life cycle, savings, loans, cash
management, insurance, retirement plans

Authors’ email addresses : [email protected]; [email protected]

Acknowledgment: We would like to thank our colleagues from the BSP Research Academy
and Dr. Calla Weimer for their valuable comments and suggestions.

Disclaimer: This paper presents a draft research output and is disseminated for discussion purposes.
Comments are welcome and may be sent to the authors’ email addresses. The views expressed in this
discussion paper are those of the authors and do not represent the official position of the Bangko
Sentral ng Pilipinas. Any errors and omissions are solely those of the authors.

__________________________________
1/
Principal Research and Researcher, respectively, at the BSP Research Academy.

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

I. Introduction
Financial literacy has increasingly gained attention from both public and private
entities – e.g., educators, policymakers, financial institutions, and community
groups. A key motivating factor for this awareness is the perceived benefits of
having a financially literate populace. Equipping individuals and households with
the necessary knowledge, skills, and ability to make informed financial decisions is
crucial in ensuring their financial resilience and well-being. These, in turn, would
lead to higher overall welfare. At the macro level, financial literacy can contribute
to a more efficient allocation of financial resources in the economy and to greater
financial stability. Financial literacy is also considered an essential component of
financial inclusion.

The thinking that financial literacy is beneficial for the financial health of
individuals is based on the implicit assumption that financial knowledge leads to
desirable changes in financial attitudes and behaviors. The literature that looked at
this relationship generally observed a positive association between financial literacy
and financial behavior. However, the significance of the effect varies across these
studies. Various possible reasons have been cited for the differences, including the
measurements used and target participants. Some studies have also pointed out
that certain factors (e.g., education, age, experience) influence the financial
behavior of individuals.

Age is potentially a key factor that could influence short-term financial behavior
(i.e., spending, cash management, emergency saving, insurance) and long-term
financial behavior of individuals (i.e., investment and retirement saving). This is
expected given that individuals at different ages and stages of their lives would have
different priorities, preferences, and perspectives. So, how does financial literacy
affect the short-term and long-term financial decisions and behaviors of individuals
who are of different ages and life stages?

Our study contributes to the existing literature by offering insights into the effect
of financial literacy and age on the financial behavior of individuals in a developing
country with a relatively lower level of financial literacy like the Philippines. 1
Previous studies often gave results from developed countries with higher financial
literacy levels. Perspectives from a developing country could provide a richer and
deeper understanding of financial literacy and financial behavior across different
contexts. Moreover, other similarly situated countries like the Philippines could
gain insights from our study to help them in the design and implementation of
effective financial education programs and interventions.

Using the results from the 2018 Bangko Sentral ng Pilipinas (BSP) Consumer
Finance Survey (CFS), we constructed a financial literacy index (FLI) based on two
(2) components - financial attitude and financial aptitude. We then used ordinary
least squares (OLS) regression to determine the factors that affect financial literacy.
We also conducted logistic regressions to assess the effects of financial literacy on
both the short-term and long-term financial behaviors of individuals who are at

1
According to the 2014 Standard and Poor’s Financial Literacy Survey, only 25 percent of Filipino adults
are financially literate. The Philippines ranks at the bottom 30 percent of the countries surveyed in
terms of financial literacy. In the 2021 Bangko Sentral ng Pilipinas (BSP) Financial Inclusion Survey,
results show that only two (2) percent of Filipino adults correctly answered all the six (6) basic financial
literacy questions. Majority (i.e., 69 percent) managed to correctly answer at least half of the financial
literacy questions.

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different ages and life stages – i.e., 18 to 39 years old (Young adult); 40 to 59 years old
(Middle-aged); and 60+ (Senior).

We find that, among the age groups, young adults display higher financial
literacy than the middle-aged and senior cohorts. Females tend to have slightly
lower financial aptitude and overall financial literacy compared to males. Income
and education are both positively related to financial literacy with the latter having
a higher coefficient indicating that respondents with at least high school education
have higher financial knowledge and skills. Moreover, households that have
children and receive remittances or assistance from either foreign or domestic
sources undertake more financial activities. Meanwhile, results of the logit
regressions show that those with higher financial literacy may be less likely to spend
less than or equal to their income. The same result is also observed for middle-aged
and senior age individuals. Middle-aged persons are also less likely to have a loan-
to-income ratio of less than one (1) compared to the young adult group. In terms of
loan payment, individuals with higher financial attitude scores are more likely to
pay on time. Individuals with higher financial aptitude and who are middle-aged
and seniors tend to have retirement or pension plans. Additionally, they are more
likely to have insurance and other plans.

The study proceeds as follows. The next section provides a literature review. The
third section discusses the data and methodology used. The fourth section presents
the empirical results and analysis. The fifth section offers policy implications. The
sixth section lists some of the limitations of the study. The last section concludes.

II. Literature Review

II. A. Financial Literacy and Financial Behavior
Financial literacy programs often focus on providing individuals with the
knowledge to make sound financial decisions. However, financial literacy is not
merely acquiring financial knowledge. It has the added dimension of application
which implies that an individual must have the skills and confidence to use his or
her financial knowledge to make financial decisions (Huston, 2010). Knowledge and
skills are the basic aspects of financial literacy. Beyond these, financial literacy
involves developing desirable financial attitudes and behavior. Attitude and
behavior are the facets of financial literacy that gradually develop over time.
Financial literacy is expected to result in financial well-being for individuals and
households (Figure 1).

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

Figure 1: The linkages between financial knowledge,

literacy, behavior, and well-being

Source: Adapted from Huston (2010)

Previous studies found that financial literacy is a good predictor and significant
contributor to the financial behavior of individuals (Pham et al., 2023; Gibson et al.,
2022; Lusardi and Mitchell, 2014; Hilgert and Hogart, 2003). Higher levels of financial
literacy result in better financial decisions and increase the likelihood of engaging
in asset-building and wealth accumulation activities (Asaad, 2015; Behrman et al.,
2012). Those with higher levels of financial literacy have a higher propensity to
participate in financial markets (Klapper et al., 2013), create portfolio assets or
purchase equity (Aren and Zengin, 2016), and invest in the stock market (van Rooij
et al., 2011). Financial literacy is also a key determinant of retirement planning (Clark
et al., 2017; Lusardi and Mitchell 2011a, 2007a, 2007b). Hauff et al. (2020) find that
financial literacy significantly affects different retirement activities, e.g., planning on
an income stream after retirement, decisions on retirement savings and
investments in a retirement portfolio. The most notable effect is on investment
management, including the choice of financial instruments. These financial
decisions help preserve or build wealth during retirement age for individuals
(Lusardi and Mitchell, 2007a).

Chaulagain (2015) traced the impact of financial literacy on financial behavior

with a transmission mechanism. He showed that financial literacy contributes to
improved financial behavior which consequently contributes to financial well-
being, other things remaining the same. Practicing positive financial behavior is
important but so is making sound decisions when choosing and using financial
services and products. Agarwal et al. (2009) and Calvet et al. (2007) find that
financial literacy mitigates financial mistakes. Financial knowledge aids in better
investment choices and financial decisions resulting in positive economic
outcomes. Financial literacy has also been found to lead to lower financial stress

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and anxiety and increased resilience to macroeconomic shocks (Klapper et al., 2013;
Zhang and Chatterjee, 2023; Hasler et al., 2021).

Nonetheless, some studies found a weak link between financial literacy and
financial behavior (Tisdell et al., 2013; Forte, 2012; Carpena et al., 2011; Mandell and
Klein, 2009). They observed that financial literacy, attitude, and competencies do
not necessarily lead to the expected behavior. The variations in the findings from
studies that explore the link between financial literacy and financial behavior have
been attributed to the differences in the measurement of financial literacy and the
financial behaviors considered.

Kawamura et al. (2021) offer a counterintuitive finding to the relationship

between financial literacy and financial behaviors and attitudes of households.
Using 2018 Japanese survey data, the authors find that, while financial literacy plays
a significant role in financial decision-making, its effect on actual behavior is
opposite to what is commonly observed. People with high levels of financial literacy
are inclined to take too many risks, overborrow, and hold naive financial attitudes.
Though, financially literate people are better at retirement planning and are
indifferent to gambling.

II.B. Financial Literacy and Behavior Over the Life Cycle

The conventional economic thinking about consumption and saving is that
people seek to smoothen their consumption throughout their lifetimes (Modigliani
and Brumberg, 1954; Friedman, 1957). They take on debt and run down assets
during the early and latter part of their lives when their incomes are low and save
during their earning years when income is high. People adapt their consumption
patterns to their needs at different ages, independently of their incomes at each age
(Deaton, 2005). This framework implies that people can design and formulate their
consumption and saving plans, make informed decisions about investments,
financial products, and services, evaluate economic conditions, and undertake
retirement planning. However, very few people would possess such extensive
financial knowledge and skill to make and implement such vital, and at times,
complex plans. Thus, the need to acquire financial literacy and examine how it
affects financial behavior over people’s lifetimes.

Individuals and households make important financial decisions over their lives.
Financial decisions made at any stage in life can have lifelong effects on the
consumer and household (Henager and Cude, 2016). To better shape the financial
behavior of individuals, financial literacy should start at a young age. It is said that
as early as the age of seven years, several basic concepts that are broadly related to
financial behavior will have developed in children (Whitebread and Bingham, 2013).
Moreover, financial literacy in younger years leads to better decisions and higher
quality of life in later years (James et al., 2012).

Age has been cited as one of the key determinants of financial literacy. Financial
literacy is observed to be higher for certain age groups. Middle-aged individuals
tend to have higher financial literacy levels relative to the young and elderly
(Atkinson and Messy, 2012; Agarwal et al., 2009; Hilgert et al., 2003). Lusardi and
Mitchell (2011a) find that those from the ages of 25 to 65 are more likely to correctly
answer finance-related questions compared to those under 25 years old and over
65 years old. There is also higher use of financial instruments for those who are 25
to 34 years of age (de Bassa Scheresberg, 2013).

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Moreover, age has been found to affect the financial behavior of people. Younger
age groups engage more in short-term financial behaviors such as spending,
budgeting, and saving and less in paying, borrowing, and investing which are skills
that may yet be fully developed for this cohort (Shim et al., 2013). The focus toward
more long-term behaviors, like retirement planning, occurs as individuals age and
acquire more financial knowledge and experience. Also, younger people show
positive financial behaviors when they have confidence and perceived financial
capability while older adults rely more on their objective financial knowledge in
making decisions (Henager and Cude, 2016).

Using a proprietary database, Agarwal et al. (2009) document a link between

age and the quality of financial decision-making in debt markets. They find that
middle-aged adults borrow at lower interest rates and pay less in fees than do either
younger or older adults. The main explanation for these observations is that
experience and acquired knowledge increase with age resulting in better financial
decisions.

III. Data and Methodology

In this section, we describe our main data source, how we constructed our
financial literacy index (FLI), and our methodology.

III. A. Data
We use the 2018 BSP CFS as our main source of data. The CFS is a nationwide
triennial survey that covers the financial state of households. It asks questions on
households’ financial and nonfinancial assets (e.g., savings, investment, debts, real
property, income, and expenditures). The 2018 CFS surveyed 14,860 households.
However, for our purposes, we only considered households with at least PhP10,000
annual income and at least PhP1,000 annual expenditure. Thus, our final sample is
comprised of 7,084 households.

Table 1 presents some statistics of the sample used. The average age of survey
respondents in our sample is 45 years old. There is considerable variation in the age
of respondents with the youngest at 18 years old and the oldest at 95 years old. By
age group, most of the respondents (45 percent) are middle-aged (i.e., ages 40 to
59) while 39 percent are young adults (i.e., ages 18 to 39). The remaining 16 percent
are seniors (i.e., ages 60 and above). The majority of the respondents are female
(i.e., 64 percent) while the rest is comprised of males. In terms of marital status, only
7 percent of respondents are single with 93 percent being either married, widowed,
divorced/separated/annulled, or with a partner. Around 8 out of every 10
households (i.e., 81 percent) have at least one child while 19 percent have no
children. On average, households have 2 children. Only a small percentage of
households indicated that they received remittances or assistance from abroad (i.e.,
12 percent). Meanwhile, about 16 percent of households receive remittances or
assistance from domestic sources. When considering if a household received any
form of assistance from either abroad or domestic sources, the percentage
increases to around 26 percent or, equivalently, 1 out of every 4 households.

Table 1. 2018 BSP Consumer Finance Survey: Some descriptive statistics

No. of respondents Percent to total
respondents
Age group

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Young adult (ages 18 – 39) 2,755 38.9

Middle-aged (ages 40 – 59) 3,199 45.2
Senior (ages 60 and above) 1,130 16.0
Gender
Male 2,524 35.6
Female 4,560 64.4
Marital status
Single 519 7.3
All others (married, widowed,
divorced/separate/annulled, with 6,565 92.7
partner)
With child/children
With child/children 5,733 80.9
Without child/children 1,351 19.1
Receiving remittances/assistance*
From abroad
Recipient 837 11.9
Non-recipient 6,214 88.1
From domestic sources
Recipient 1,134 16.1
Non-recipient 5,906 83.9
Any form of assistance
Recipient 1,822 25.8
Non-recipient 5,252 74.2
*Note: Excluding respondents who did not answer questions on receiving remittances/assistance
Source: 2018 BSP CFS

III.B. Construction of the Financial Literacy Index

Financial literacy is a latent variable. Thus, its definition could vary depending on
what aspect is being considered (e.g., knowledge, financial skills, good financial
behavior). Consequently, the methods used to measure financial literacy also
diverge significantly depending on the different conceptual definitions adopted.
Performance tests (e.g., multiple-choice questionnaires) and self-report methods
have been used in several studies to measure financial literacy (Bongini et al., 2018).
The performance tests assess the level of knowledge while self-reports evaluate
perceived knowledge. Recent tests appraise both objective knowledge and
perceived knowledge.

The measure for financial literacy could cover a wide scope of financial concepts,
including borrowing, spending, budgeting, inflation, investments, interest rates,
and retirement savings. Hence, the number of questions used to assess financial
literacy levels could considerably differ, ranging from three (3) (Lusardi and Mitchell,
2008, 2011a, 2014) to 28 items (Yakoboski et al., 2022). A financial literacy index is
often generated from these questionnaires by adding the scores of the respondents.

We follow the common approach of creating an index or score that captures the
latent characteristics of financial literacy to generate a measure for it. To do this, we
follow the methodology in Magante et al., (2023). In the said paper, the authors
created two indices of financial literacy and used three datasets, including the 2018
CFS. The first financial literacy index that they created aggregates the components
of financial attitude, financial behavior, and financial knowledge. Depending on the
dataset used, two or three components would be included in the index. As the 2018
CFS does not include questions on financial knowledge, the index created from said
survey had two components, financial attitude, and financial behavior.

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For this paper, we construct a similar financial literacy index with two major
components, financial attitude and financial aptitude, using data from the CFS. We
created a financial aptitude component instead of financial behavior given that our
main research objective is to assess the relationship between financial literacy and
financial behavior over the life cycle of individuals. Each component has sub-
components which are based on a set of questions. The financial attitude (FA)
component has three sub-components with questions that pertain to:

1. Attitude towards money, spending, and planning for the future;

2. Risk attitude; and
3. Time discounting.

For the questions related to attitude towards money, spending, and planning,
more positive attitudes are given a score of one (1) while more negative attitudes
are given a score of zero (0). On the risk attitude, a score from 0 to 1 is given with 1
indicating higher risk appetite. For the time discounting question, a score from 0 to
1 is given with 1 indicating higher time discounting, that is, choosing the present or
immediate time. Each question is weighted equally under each sub-component
depending on the number of questions. For example, the first sub-component on
attitude has nine (9) questions and each question has a weight of 1/9. The other two
sub-components have only one question each, with a weight of 1. We then apply
equal weights of 1/3 to the three sub-components to obtain the FA component of
the index.

Meanwhile, the financial aptitude (FAp) component has three (3) sub-
components: 1) loan score; 2) deposit score; and 3) surplus score. The loan score is
based on whether households have outstanding loans across four (4) loan
categories - real property, vehicle, credit card, and other loans. Similarly, the deposit
score is based on whether households have accounts across four (4) types of
financial accounts. These are savings, current, time deposit, and e-money or other
virtual money. The surplus score is based on answers to a question where
respondents indicate where they will spend surplus money across ten activities.
Again, questions under each sub-component have equal weights depending on the
number of questions. For example, the loan score sub-component has four (4)
questions, and each question has a weight of ¼. Similar to the FA component, we
apply equal weights of 1/3 to the three sub-components to obtain the FAp
component of the index.

The financial attitude and financial aptitude components are given equal
weights of ½, and the financial literacy index is the sum of all the products of the
weights and sub-component scores. The index is summarized in the following
equation adapted from Magante et al. (2023):
𝑛 𝑛
1 1
𝐹𝐿𝐼𝑖 = ∑ 𝑥𝑖𝑗 𝛾𝑗1 + ∑ 𝑥𝑖𝑗 𝛾𝑗2 ∈ [0,1]
2 2
𝑗 𝑗

where 𝐹𝐿𝐼𝑖 is the financial literacy index per respondent 𝑖 and 𝑥𝑖𝑗 is the score per
sub-component 𝑗. 𝛾𝑗1 = 1/𝑛 and 𝛾2 = 1/𝑛 are the weights assigned for each sub-
component and 𝑛 is the number of sub-components under a major component (FA
and FAp). Details on the components, sub-components, and weights used for the
index can be found in Appendix 1.

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Table 2 summarizes the scores for FLI and its sub-components. For FLI, the
financial aptitude component is lower relative to the financial attitude part. This
could be attributed to the composition of the two components. Responses for the
financial attitude items are more complete compared to those for financial
aptitude. Given that the two components are equally weighted, the lower score of
financial aptitude pulls down the overall FLI. Financial attitude varies more and has
a wider range than financial aptitude. This implies that the individuals’ attitudes
towards money, spending, risk as well as time discounting show more divergence
than their earning, saving, investing, and borrowing activities.

Table 2. Summary of Financial Literacy (FLI) scores

Scores/indices Mean Std. Dev. Min Max
Financial Literacy (FLI) 0.386 0.076 0.037 0.742
Financial attitude 0.673 0.129 0.074 1
Attitude towards money, spending,
and planning for the future 0.472 0.171 0 1
Risk attitude 0.753 0.265 0 1
Time discounting 0.795 0.253 0 1
Financial aptitude 0.099 0.075 0 0.617
Loan score 0.115 0.164 0 1
Deposit score 0.019 0.069 0 0.5
Surplus money score 0.163 0.126 0 1

Total no. of obs. 7,084

Source: Authors’ computation

We looked at the FLI scores for different demographic and economic factors and
categories (Table 3). Across the three age categories considered, young adults
registered the highest mean FLI score followed by the middle-aged group and the
60 years old and above bracket. This observation could be attributed to the higher
financial attitude score of young adults relative to the other two age groups.

Respondents who are either married, divorced, separated, or annulled have

higher financial literacy scores than those who are single. Moreover, households
with children registered higher average FLI scores than households that do not have
children. People who are non-single could be more conscious of their financial
obligations, budgets, consumption, and spending choices than single persons. Also,
the financial literacy of their spouses or partners could influence their financial
decisions. Having children could increase households’ propensity to save for future
expenses like college education. They may also want to invest in inter-generational
transfers.

Households that received remittances or assistance from abroad have, on

average, higher financial literacy than those who do not receive remittances from
abroad. Remittance-receiving households may be more exposed to financial
services and products given that they regularly transact with remittance channels,
including banks. By contrast, households that receive remittances from domestic
sources have lower financial literacy scores than those that do not receive such
transfers. It may be that these households receive remittances through different
channels that have limited financial services (e.g., pawnshops and money transfer
operators).

Table 3. Financial Literacy Index, by categories

Categories/indices Mean Std. Dev. Min Max

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Age Category
Young adult
Financial Literacy (FLI) 0.392 0.076 0.091 0.742
Financial attitude 0.684 0.127 0.148 1
Financial aptitude 0.1 0.076 0 0.617
Middle-aged
Financial Literacy (FLI) 0.387 0.076 0.037 0.656
Financial attitude 0.671 0.129 0.074 1
Financial aptitude 0.102 0.076 0 0.5
Senior
Financial Literacy (FLI) 0.37 0.076 0.056 0.623
Financial attitude 0.652 0.131 0.111 0.963
Financial aptitude 0.088 0.067 0 0.4
Marital Status
Single
Financial Literacy (FLI) 0.384 0.079 0.091 0.648
Financial attitude 0.674 0.135 0.148 1
Financial aptitude 0.095 0.078 0 0.5
All others (Not single)
Financial Literacy (FLI) 0.386 0.076 0.037 0.742
Financial attitude 0.673 0.128 0.074 1
Financial aptitude 0.1 0.075 0 0.617
Sex
Male
Financial Literacy (FLI) 0.387 0.079 0.037 0.742
Financial attitude 0.674 0.132 0.074 1
Financial aptitude 0.099 0.076 0 0.5
Female
Financial Literacy (FLI) 0.386 0.075 0.072 0.656
Financial attitude 0.673 0.127 0.111 1
Financial aptitude 0.099 0.074 0 0.617
Children
No children
Financial Literacy (FLI) 0.376 0.077 0.056 0.648
Financial attitude 0.665 0.135 0.111 1
Financial aptitude 0.088 0.071 0 0.567
With children
Financial Literacy (FLI) 0.389 0.076 0.037 0.742
Financial attitude 0.675 0.127 0.074 1
Financial aptitude 0.102 0.076 0 0.617
Remittances/assistance
None from Abroad
Financial Literacy (FLI) 0.386 0.076 0.037 0.742
Financial attitude 0.673 0.128 0.074 1
Financial aptitude 0.099 0.075 0 0.617
Received from Abroad
Financial Literacy (FLI) 0.39 0.078 0.072 0.628
Financial attitude 0.677 0.135 0.111 1
Financial aptitude 0.102 0.076 0 0.5
None from domestic
Financial Literacy (FLI) 0.386 0.076 0.056 0.742
Financial attitude 0.675 0.129 0.111 1
Financial aptitude 0.098 0.075 0 0.617
Received from domestic
Financial Literacy (FLI) 0.385 0.077 0.037 0.656
Financial attitude 0.665 0.129 0.074 1
Financial aptitude 0.105 0.075 0 0.45
None from any source

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Financial Literacy (FLI) 0.386 0.076 0.056 0.742

Financial attitude 0.674 0.128 0.111 1
Financial aptitude 0.098 0.075 0 0.617
Received from any source
Financial Literacy (FLI) 0.387 0.078 0.037 0.656
Financial attitude 0.67 0.132 0.074 1
Financial aptitude 0.103 0.075 0 0.5
Source: Authors’ computation

III.C. Methodology
The commonly used regression methods in the literature on this topic are 1)
ordinary least squares (OLS) and (2) logistic regression. Van Rooij et al. (2012),
Hermansson and Jonsson (2021), and Kawamura et al. (2021) use OLS to study how
financial literacy is related to net worth, risk tolerance, and financial behavior.
Meanwhile, Asaad (2015), Henager and Cude (2016), and Hastings and Mitchell
(2020) used logit regression to examine the role of financial literacy on various kinds
of financial behaviors.

We first conduct OLS regressions to look at the determinants of financial literacy

with household characteristics as the independent variables (Table 4). We then use
the two components of the financial literacy index as independent variables in logit
regression to examine how these are related to specific financial behaviors as our
dependent variable.
Table 4. Regression variables
Dependent variables
Variable Description
OLS regression only
Financial Attitude Component of FLI measuring financial attitude
Financial Aptitude Component of FLI measuring financial aptitude
Logit regression
Spending less than or equal to income 1 if expenditure is less than or equal to income
0 if expenditure is more than income
Paying loans on time 1 if they pay loans ahead or on schedule
0 if they pay loans behind schedule
Loan to income ratio 1 if the ratio of the amount of outstanding loans
to income is equal to or less than 1
0 if the ratio of the amount of outstanding loans
to income is equal to or less than 1
Having insurance or other plans 1 = has at least one insurance or other plans
(government or private)
0 = does not have any insurance or other plan
Having a pension or retirement plan 1 = has at least one pension or retirement plan
(government or private)
0 = does not have any pension or retirement plan
Independent variables
Variable Description
Logit regression only
Financial Attitude Component of FLI measuring financial attitude
Financial Aptitude Component of FLI measuring financial aptitude
OLS and logit regression
Age group: Age group of the respondent
Young adult (18-39) *Young adult group is the reference category
Middle-aged (40-59)

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Senior (60 and above)

Gender 1 if the respondent is female
0 if the respondent is male
Education 1 if the respondent’s highest educational
attainment is at least some high school
education
0 if the respondent’s highest educational
attainment is below high school education
Children 1 if the household has at least one child
0 if the household has no children
Remittances 1 if the household received
remittances/assistance from either foreign or
domestic sources
0 if the household did not receive
remittances/assistance

IV. Regressions Results and Analysis

We generated results using OLS regression and logit regression.

IV.A OLS regression

We regressed the independent variables on the two components of the financial
literacy index, financial attitude and financial aptitude. Middle-aged and senior are
significant and negative which implies that respondents in these age cohorts have
slightly lower financial literacy levels than young adults (Table 5). Gender, which
takes a value of 1 if the respondent is female, is significant and negative. This signifies
that females have a slightly lower financial aptitude and overall financial literacy
compared to males. Income is significant and positive (although the coefficient is
small) indicating that those with higher incomes have slightly higher financial
literacy levels. Education is positive and significant indicating that respondents with
at least high school education have higher financial knowledge and skills.
Households that have children and receive remittances or assistance from either
foreign or domestic sources appear to engage more in financial activities.

Table 5: Determinants of financial literacy

Financial Financial Financial
Dependent variable: Literacy Index Attitude Aptitude
Age group:
(reference group:
Young adult (18-39))
Middle-aged (40-59) -0.004** -0.013*** 0.004**
(0.002) (0.003) (0.002)
Senior (60 and above) -0.018*** -0.030*** -0.005*
(0.003) (0.005) (0.003)
Gender (1 = Female) -0.005** -0.004 -0.006***
(0.002) (0.003) (0.002)
Marital status (1 = not single) 0.000 0.002 -0.001
(0.004) (0.007) (0.004)
Income 0.002*** 0.001* 0.003***
(0.001) (0.001) (0.001)
Education (1 = at least high school) 0.015*** 0.006* 0.024***

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

(0.002) (0.003) (0.002)

Children (1 = has children) 0.009*** 0.006 0.012***
(0.003) (0.005) (0.002)
Remittances (1 = receives
0.004** -0.000 0.009***
remittances/assistance)
(0.002) (0.004) (0.002)
Constant 0.374*** 0.675*** 0.073***
(0.004) (0.007) (0.004)

Observations 7,074 7,074 7,074

R-squared 0.027 0.009 0.044
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

IV.B Logit regression

We use logit regressions to assess the effect of financial literacy on specific short-
term and long-term financial behaviors. The financial behaviors that we considered
include budgeting (i.e., spending less than or equal to income), cash-flow
management (i.e., ability to pay loans/debts on time), borrowing (loan to income
ratio), retirement planning, and insurance (i.e., protection against possible shocks).
Table 6 shows the results of the logit regressions for five (5) different financial
behaviors coded as binary variables.

Table 6: Logistic regression models for financial behavior

Spending
Paying Loan to
less than or Pension, Insurance,
Dependent variable loans on income
equal to retirement other plans
time ratio
income

Financial Attitude 0.435*** 4.011** 3.766 1.486 1.055

(0.112) (2.517) (5.803) (0.608) (0.238)
Financial Aptitude 0.051*** 0.834 0.102 85.478*** 46.808***
(0.025) (0.934) (0.257) (50.824) (19.923)
Middle-aged (40-59) 0.610*** 1.094 0.280** 1.281** 0.972
(0.045) (0.190) (0.161) (0.148) (0.061)
Senior (60 and above) 0.667*** 1.353 0.372 3.663*** 2.113***
(0.071) (0.408) (0.301) (0.624) (0.214)
Gender (1 = Female) 1.101 0.819 1.766 1.031 0.914
(0.079) (0.144) (0.783) (0.115) (0.057)
Marital status 1.677*** 1.124 2.438 0.224*** 1.475***
(1 = not single) (0.238) (0.446) (1.793) (0.059) (0.178)
Income 5.880*** 0.992 36.009*** 1.076*** 1.028
(0.300) (0.027) (41.207) (0.021) (0.018)
Education 0.757*** 1.272 0.310** 3.629*** 1.452***
(1 = at least high school) (0.054) (0.223) (0.176) (0.514) (0.091)
Children 0.509*** 0.857 1.642 0.964 1.400***
(1 = has children) (0.046) (0.234) (0.911) (0.154) (0.113)
Remittances (1 = receives 0.839** 1.097 1.629 1.109 1.272***
remittances/assistance) (0.067) (0.205) (0.915) (0.130) (0.088)
Constant 0.264*** 3.317* 10.874 0.065*** 0.693*
(0.059) (2.052) (16.436) (0.028) (0.139)

Observations 7,074 1,743 1,738 3,992 6,552

Note: Odds ratio
seEform in parentheses

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

*** p<0.01, ** p<0.05, * p<0.1

Budgeting (spending vs income)

The dependent variable is 1 when the household’s annual expenditure is less
than or equal to their annual income and 0 when they spend more than their
annual income. Financial attitude and financial aptitude are both statistically
significant and have odds ratios less than 1 signifying that those with higher
financial literacy may be less likely to spend less than or equal to their income. This
could be due to higher consumption levels. Dinkova and Alessie (2021) found a
positive association between financial literacy and non-durable consumption.
Middle-aged persons and senior people seem less likely to spend less than or equal
to their income compared to the young adult group. It is possible that the older age
groups have larger expenses, such as food, education of children, medicines, and
other consumption needs of the household. Marital status and income have
significant odds ratios that are greater than one indicating that non-singles and
those with higher incomes are more likely to spend within their income. For the
non-singles, they may have better budgeting skills as they need to consider the
expenses of their spouse/partner and family. Similarly, higher-income individuals
are more likely to have bigger spending budgets and be able to cover their
expenses. Those with at least high school education, with children, and who receive
remittances are more likely to spend more than their income as the odds ratios are
less than one. Higher-educated individuals could earn more and have higher
consumption and, in turn, spend more than their income. Respondents who
receive remittances or other assistance may be more likely to spend more than their
budget given the transfers that augment their income.

Cash-flow Management (paying loans on time)

For the dependent variable, 1 indicates that they generally pay their loans on
schedule or ahead of time, while 0 signifies that they generally pay behind schedule.
The sample used for these regressions is limited to those respondents who
answered questions on the timeliness of their loan payments. Financial attitude has
a significant odds ratio that is greater than one, implying that those with higher
financial attitude scores are more likely to pay their loans on time. The other
independent variables did not appear to be significant. This may be due to a much
smaller sample size due to data availability. In the sample used, the majority of
those who answered the questions expressed that they generally pay their loans on
schedule or ahead of time.

Borrowing (loan-to-income ratio)

The dependent variable takes a value of 1 if the ratio of the amount of
outstanding loans to the income of the household is less than or equal to 1, and 0
when the ratio is more than 1. The amount of outstanding loans and annual income
have both been divided by 12 (months). If the loan-to-income ratio is greater than 1,
this means that a household will need more than its monthly income to pay off its
outstanding loans and debts every month. The sample used covers those
respondents who reported their outstanding loan amounts. The middle-aged group
is significant with an odds ratio of less than one. This indicates those in the middle-
aged group are less likely to have a loan-to-income ratio of less than 1 compared to
the young adult group. Income is also significant and with an odds ratio of greater

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

than 1, implying that those with higher income levels are more likely to have a loan-
to-income ratio of less than 1. In the life cycle, it is during the middle age that many
people take out loans for big-ticket items like a house or real property. Thus, they
may have a higher loan-to-income ratio compared to the young adult cohort. Those
with higher incomes are also able to avail of higher loanable amounts given their
perceived ability to repay.

Retirement Planning and Saving

Using whether a household has a pension or retirement plan (i.e., government
pension contributions or private pension plans) as the dependent variable, financial
aptitude is found to be significant and with an odds ratio greater than one. This
indicates that those with higher financial aptitude scores are more likely to have a
retirement or pension plan. Middle-aged and senior-aged individuals are also more
likely to have retirement or pension plans. Marital status is significant with an odds
ratio of less than one implying that non-singles are less likely to have a retirement
or pension plan compared to those who are single. Income and education both
have a significant odds ratio that is greater than one which suggests that those with
higher income and at least a high school education tend to have pension or
retirement plans.

Insurance (protection against possible shocks)

For insurance or other plans (i.e., government or private plans), financial aptitude
appears to be significant and greater than one denoting that those with higher
financial aptitude are more likely to have insurance or similar plans. Those in the
senior age group also tend to have insurance. In addition, households, where the
respondent has at least a high school education, those with children, and those who
receive remittances or assistance, are more likely to be insured. The variable
indicating that the respondent for the household is female has an odds ratio of less
than one signifying that they are less likely to have insurance or similar plans.

Savings and cash for emergencies

We recognize that some survey respondents may have set aside savings for
retirement or cash for emergencies. These could be included in the recorded
savings of the households. Thus, we also looked at the amount of savings that
respondents have in their deposit accounts and held as cash for emergencies.
Households’ savings and holdings of cash for emergencies together with retirement
and pension plans and insurance could give a broad picture of their financial
protection.

Among the respondents in the sample, only 686 indicated that they have any
type of deposit account with banks and/or non-bank institutions 2 . Meanwhile,
2,290 indicated that they have emergency cash. When asked about the details, only
66 percent of these respondents provided information on the amount in their
deposit accounts and 79 percent on the amount of emergency cash they hold. We
combined the amount of savings in deposit accounts and emergency cash and
disaggregated this by age category. Most of those who provided information on the

2
Based on the responses of the respondent and the spouse/partner.

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amounts are in the middle-aged group (774 respondents) followed by the young
adult group (759 respondents) and the senior group (270 respondents) (Table 7).

We observed that in terms of the average amount of savings, the senior age
group has the highest average amount of savings, followed by the middle-aged and
young adult groups. The savings of the senior age cohort could include the lump-
sum payment that they received when they retired, retirement benefits, and savings
made over the years. We note that the amount of savings may not be accurately
reported by the respondents, thus, the figures may be underestimated. Moreover,
the number of respondents who provided information on the amount of their
savings in the senior group is considerably smaller than the other two age groups.

Table 7: Total household savings

Total amount of savings Total no. Average amount of
(deposit + cash) of respondents savings (PhP)
All respondents 1,803 17,982
By age group
Young adult (18 – 39) 759 13,402
Middle-aged (40-59) 774 15,935
Senior (60 and above) 270 36,722
Source: BSP 2018 CFS

IV.C Alternative methodology

Some of the studies that assessed the link between financial literacy and
financial behavior used probit regressions (e.g., Yoshino et al., 2017; Lyons et al., 2019)
for their empirical analysis. Thus, we also run probit regressions as an alternative
empirical methodology to the logit regressions.

We present the results from the probit regressions based on average

marginal effects in Appendix 2. The results are broadly similar to the logit
regressions. On spending versus income, marital status has a positive marginal
effect while the age groups middle-aged and senior and having children have
negative effects on the probability of spending within their income. Financial
attitude has a positive effect on the probability of paying loans on time while other
independent variables are not significant. Being in the middle-aged group and
having education negatively affect the loan-to-income ratio's probability of being
less than or equal to 1, while income has a positive effect. On the probability of
having pension or retirement plans, financial aptitude, middle-aged, senior, income,
and education have positive effects while marital status has a negative effect.
Finally, on the probability of having insurance and other plans, financial aptitude,
senior, marital status, education, children, and remittances have positive effects.

V. Policy Implications
Designing financial programs and interventions that aim at increasing financial
literacy is important for developing and reinforcing positive financial behaviors. In
the Philippines, significant strides have been made towards increasing and
improving financial education. For example, in 2021, the Department of Education
(DepEd) institutionalized and intensified the integration of financial education in
the K to 12 Basic Education Curriculum.3 The policy targets to enhance the financial

3
Department of Education (DepEd) Order No. 22, s 2021.

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literacy and financial capability of students, teachers, and DepEd personnel to make
sound financial decisions that result in financial health and financial inclusion.
Students and teachers have not only been the recipients of financial education
programs. Various financial education modules have also been developed for the
different sectors of society. However, the effectiveness of these programs is yet to
be assessed and quantified.
Our findings offer some possible enhancements for these financial education
programs. We found that age and the life cycle matter in people’s financial behavior.
Depending on the life stage they are in, people tend to exhibit more short-term or
long-term behaviors. Lusardi et al. (2015) find that short-term financial education
programs are not likely to significantly alter savings behavior, particularly if offered
to young people. These are more effective when they are given during the peak
saving years (i.e., post-40 years old). The same study observed that financial
education programs become more effective if they provide follow-up to sustain the
knowledge acquired by participants in the program. According to the study,
financial education provided to employees around the age of 40 can increase
retirement savings by around 10 percent if the knowledge gained can be
maintained. Thus, financial education programs must ensure that the knowledge
will be retained by their target group.
We observe that many Filipino adults engage in savings, borrowing, and
investment activities, but only a small number have pension plans and savings.
These are also mostly the mandatory retirement plans for public and private sector
employees. Given that the Philippines’ demographic is shifting toward an aging
population (Cacnio and Lomibao, 2024), there is a need to increase and intensify
financial education programs emphasizing retirement planning and saving. These
programs could help Filipino adults remain financially resilient even in their
retirement years.
The priorities, preferences, economic, and financial status of individuals change
over time, and these factors could impact their financial decisions. Such changes
in financial behaviors across age groups should be considered in the design of
financial education programs.

VI. Some Limitations and Considerations

While we observed some interesting insights on the link between financial
literacy and behavior, we would like to note some limitations and caveats of our
study. We also discuss some challenges that must be considered when doing
research in this area. We highlight four of these issues.

First, measuring financial literacy can be challenging. There have been different
metrics proposed to measure objective and subjective financial literacy. However,
no matter how encompassing these measures may be, they may still not fully
capture an individual’s true level of financial awareness and understanding.
Moreover, their level of financial literacy may not correspond to their observed
behavior. This may be due to other factors (e.g., personal circumstances, cognitive
biases, preferences, family and peer influence) that are difficult to quantify. Future
research may consider surveys that include questions that could identify such
factors.

Second, our main source of data is the 2018 BSP CFS. The focus of the survey is
on the financial status and conditions of Filipino households. While it provided us

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with enough information for our research objectives, it lacks details on some
aspects of financial literacy and behavior (e.g., numeracy indicators) and financial
knowledge. Thus, there may be a need to have a survey that focuses on obtaining
such indicators or measuring financial knowledge.

Third, implicit in our analysis is the assumption of a causal relationship that runs
from financial literacy to financial behavior – that is, financial literacy affects
financial behavior. Nonetheless, the causality may run in reverse with financial
behavior affecting financial literacy. For example, people experiencing an increase
in their income streams may want to learn more about savings and investment
products. Thus, they are, in effect, acquiring financial knowledge and literacy. There
may be a mutually reinforcing relationship between financial literacy and behavior,
where as individuals practice specific financial behavior, they increase their
financial literacy and further engage in other financial behavior This is an issue that
could be further explored in future research.

Fourth, we recognize potential endogeneity problems given our main variables

of interest (i.e., financial literacy and financial behavior). We tried to address these
in the construction of our indices and by using control variables.

Recognizing these limitations and constraints allows us to have a fuller and

more pragmatic understanding of our findings. Moreover, these points us towards
potential future research work. Addressing these issues and undertaking further
research can lead to a better understanding of the contribution of financial literacy
in shaping short- and long-term financial behaviors over the life cycle of individuals.

VII. Conclusion
Using the 2018 BSP CFS, our study examines the effects of financial literacy on
the financial behaviors of Filipinos who are at different life stages – i.e., 18 to 39 years
old (Young adult); 40 to 59 years old (Middle-aged); and 60+ (Senior). We
constructed a financial literacy index for our analysis with two (2) components -
financial attitude and financial aptitude. Looking at the FLI scores for different
demographic and economic factors and categories, we find that among the age
cohorts, the young adult group recorded the highest financial literacy. Those who
are either married, divorced, separated, or annulled also have higher financial
literacy scores than single persons. Also, households that received remittances or
assistance from abroad and those with children registered higher average financial
literacy scores.

We use logit regressions to assess the effect of financial literacy and age on
specific financial behaviors such as budgeting (i.e., spending less than or equal to
income), cash-flow management (i.e., ability to pay loans/debts on time), borrowing
(loan-to-income ratio), insurance and retirement plans. We find that people with
higher financial attitude scores are more likely to pay their loans on time. The
middle-aged group is less likely to have a loan-to-income ratio of less than 1
compared to the young adult group. Moreover, those with higher financial aptitude
scores are more likely to have a retirement or pension plan and insurance. Relative
to age groups, middle-aged and senior age individuals are more likely to have
retirement or pension plans and insurance. However, we observe that people with
higher financial literacy are less likely to spend less than or equal to their income.

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Middle-aged individuals and senior age persons likewise appear to be less likely to
spend within their income compared to young adults.

Based on our findings, we offer some possible enhancements for financial

education programs. We also note the low importance given to retirement
planning and saving. Financial programs and interventions could help address this
issue by designing and implementing modules that focus on the value of planning
for retirement.
The priorities, preferences, economic and financial status of individuals could
change as they age and go through the life cycle. Consequently, these changes
could have an impact on people’s financial decisions and financial behavior. Thus,
such factors should be considered in the design of financial education programs to
make them more effective and responsive to the needs of their target participants
and learners.

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Appendix

Appendix 1: Construction of the financial literacy index

The financial literacy index (FLI) is composed of the following items and their
corresponding weights:

Components Computation of weight Weight

1. Financial Attitude (1/2) = 0.5
1.1 Attitude towards money,
spending, and planning for
the future (1/2)* (1/3) = 0.167
9 items (1/2)* (1/3)* (1/9) = 0.019
1.2 Risk attitude 1 item (1/2)* (1/3) = 0.167
1.3 Time discounting 1 item (1/2)* (1/3) = 0.167

2. Financial Aptitude (1/2) = 0.5

2.1 Loan score (1/2)* (1/3) = 0.167
4 items (1/2)* (1/3)* (1/4) = 0.042
2.2 Deposit score (1/2)* (1/3) = 0.167
4 items (1/2)* (1/3)* (1/4) = 0.042
2.3 Surplus score (1/2)* (1/3) = 0.167
10
items (1/2)* (1/3)* (1/10) = 0.017

Items under the loan score, deposit score, surplus score, and attitude towards
money, spending, and planning for the future have a score of 0 or 1, while items
under risk attitude and time discounting have scores from 0 to 1. Financial attitude
and financial aptitude are the two major components and are equally weighted at
0.5. Under financial attitude, there are three sub-components which are equally
weighted at 1/3, and under financial aptitude, there are also three sub-components
weighted equally. The numbers in the column “weight” refer to the overall weight
relative to the entire index (including the weight of the larger component or sub-
component it falls under). For example, the overall weight of an item under loan
score is 1/24 or 0.042, which includes the weights of the loan score sub-component
(1/3) and financial aptitude component (1/2).

Under each sub-component, the items are weighted equally depending on the
number per sub-component (e.g., items under the surplus score sub-component
are weighted at 1/10 each). The sub-component score is computed as the sum of the
products of each item score multiplied by the corresponding weights. The financial
literacy index of an individual is the sum of all the products of the weights and sub-
component scores. The equation below adapted from Magante et al. (2023)
summarizes the computation of the FLI per respondent 𝑖 with two major
components of financial attitude and aptitude:

𝑛 𝑛
1 1
𝐹𝐿𝐼𝑖 = ∑ 𝑥𝑖𝑗 𝛾𝑗1 + ∑ 𝑥𝑖𝑗 𝛾𝑗2 ∈ [0,1]
2 2
𝑗 𝑗

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

where 𝑥𝑖𝑗 is the allocated score per sub-component 𝑗. 𝛾𝑗1 = 1/𝑛 and 𝛾2 = 1/𝑛 are the
weights assigned for each sub-component and 𝑛 is the number of sub-components
under a major component. An individual is considered more financially literate as
the index approaches 1 and less financially literate as it approaches 0.

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How does financial literacy affect financial behavior over the life cycle? Evidence from Filipino households June 2024

Appendix 2: Probit regression models for financial behavior

(average marginal effects)
Spending
Paying Loan to
less than or Pension, Insurance,
Dependent variable loans on income
equal to retirement other plans
time ratio
income
Financial attitude -0.024 0.127* 0.017 0.040 0.012
(0.041) (0.057) (0.021) (0.038) (0.042)
Financial aptitude 0.096 -0.016 -0.035 0.432*** 0.698***
(0.071) (0.101) (0.035) (0.057) (0.075)
Middle-aged (40-59) -0.071*** 0.008 -0.013* 0.023* -0.006
(0.012) (0.016) (0.006) (0.010) (0.012)
Senior (60 and above) -0.061*** 0.025 -0.010 0.159*** 0.122***
(0.017) (0.024) (0.010) (0.024) (0.015)
Gender 0.000 -0.018 0.010 0.002 -0.016
(1 = Female) (0.011) (0.015) (0.007) (0.010) (0.011)
Marital status 0.074*** 0.012 0.018 -0.226*** 0.080**
(1 = not single) (0.019) (0.038) (0.019) (0.052) (0.026)
Income - -0.001 0.043** 0.007*** 0.004
(0.003) (0.015) (0.002) (0.003)
Education 0.017 0.023 -0.012* 0.102*** 0.071***
(1 = at least high school) (0.011) (0.017) (0.005) (0.009) (0.012)
Children -0.071*** -0.014 0.008 -0.000 0.064***
(1 = has children) (0.016) (0.022) (0.010) (0.015) (0.016)
Remittances -0.020 0.008 0.006 0.009 0.043***
(1 = receives remittances/ (0.012) (0.016) (0.006) (0.011) (0.012)
assistance)

Observations 7074 1743 1738 3992 6552

Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

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