BASIC FINANCIAL LITERACY
Guiding Principles for You

2010 Microfinance Opportunities 2010.Used by Permission

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Microfinance Opportunities
1701 K Street NW , Suit 650
Washington, DC 2006 USA
TEL:202 -721-0050
FAX: 202 -721-0010
Email: financialed!@mfopps.org www.microfinanceopportunities.org Equity Group Foundation
P.O BOX 75104 00200
Nairobi, Kenya
Tel: 254 20 274 4000
FAX: 254 20 273 7276
Email: info@equitybank.co.ke www.equitybank.co.ke/company/foundation INTRODUCTION
While the poor share the same goals as all people – economic security for themselves, their families, and future generations – their limited resources and options often lead to a sense of hopelessness and inertia. Careful management of what little money they do have is critical to meet day- to –day needs, cope with unexpected emergencies, and take advantage of opportunities when they come along. The bad news is that the poor often lack the knowledge and experience they need to be these careful money managers
This is the purpose of this book. It teaches people about the concept of money and how to manage it wisely. It offers the opportunity to learn basic skills related to earning, spending, budgeting, saving, and borrowing. The good news is that when people do become more informed financial decision makers, they can plan for and realize their goals .Moreover, once people have acquired financial literacy skills, those skills cannot be taken away.
Financial education is relevant for anyone who makes decisions about money and finances.
The Global Financial Education Program, led by Microfinance Opportunities and Freedom for Hunger, started with a focus on micro entrepreneurs and clients of microfinance programs. For this group , Financial education is more relevant now than ever before.
The Global Financial Education Program developed five modules over three year period. Seven partners around the globe actively participated in the project. The participating partners were Teba Bank (South Africa), SEWA Bank (India), Equity Bank (Kenya), ProMujer (Bolivia), Al Amana(Morocco), CARD Bank(The Philippines) and the Microfinance centre(Poland).
The curriculum, developed specifically for Equity Group Foundation, consists of Four chapters on four distinct topics. They are as follows * Budgeting: Use money wisely * Saving: You Can D o It * Bank Services * Know your options * Debt Management * Handle with care

SESSION ONE: BUDGETING CHAPTER ONE: INTRODUCTION TO BUDGETING
When I chased after money, I never had enough, when I got my life on purpose and focused on giving of myself and everything that arrived on my life, and then I was prosperous. M.Gandhi
Objectives
i) Discover your goals for the future ii) Creating a budget iii) Comparing money management behaviors of two budgeters using stories iv)Conclusion GOALS
The entire world is concerned about the future. Attempts have been through various forms to explain what will happen in the future. For example religious organizations talk about another world that will never end. Countries also have also formed plans or strategies to predict what the future will be like. For example our country Kenya has developed visions 2030 which is supposed to project the socio economic projection of the country by 2030
Moving further as human beings we also aspire for a better future. A future with financial prosperity in which we expect our living standards will be better.
Before we start our financial education sessions, we also have to think about our future. Think about the following quote.
“Maisha Mema ya usoni huanzia sasa.”(A good future starts now.)

The question to ask yourself is when the above quote is true and when it isn’t
The quote will not be true if you are not doing anything now. On the same vain the quote will be true when you do something now. The something you should do now is having a good judgment or plan for the future. In other words in order to arrive at a good future, like the quote says , you need to start planning now, I n the present.
In summary remember that a good financial management person sets goals that will propel him/her to develop a good plan for the future.
Goals are important to successful money management. Goals guide you to use money for the things that are really important to you and your family

BUDGET
As mentioned above if we want to achieve our goals, we have to plan and prepare using our good judgment, just as the quote wisely advises. A tool that can help us to achieve our goals is a budget.

MEANING OF A BUDGET
A budget is a summary of estimated income and how it will be spent over a period of time. Budget is an important tool that can help us to manage our money. It is more than just a plan to spend our money. It is a plan that divides our income among our necessary living expenses, our discretionary expenses – like entertainment or sweets - our savings or investments. In summary it helps us to track our income and expenses over a certain period of time, like a week or a month.
Budgets can be created for both our personal income and expenses, and our business income and expenses. A budget is useful to everyone regardless of their income level and financial situation. Anyone can use this tool to help them better manage their money.

CREATING A BUDGET
Below is Mama Matoke. Her sales vegetables in her local market and on average make sales averaging kshs 500 a week. She also has two cows in which she gets milk and sells every morning. From the milk her average sales is Kshs 600 in a week. Every week her husband gives her Shs.250 to support the family’s weekly financial needs. Her eldest daughter who has finished college has committed to support her through sending kshs 250 every week. Her weekly expenses includes paying kshs 100 to a veterinary doctor, paying ksh 250 toward school fees, paying ksh 200 for her hair, She also buys clothes for shs 100 for either her children or herself. Other expenses totals shs 250

Recall from the definition of a budget, that a budget has three essential components i.e. time period, income and expenses .Mama Matoke’s period for the budget is therefore one week and her major income and expenses are as follows

INCOME EXPENSES
Vegetable Sales Veterinary fee
Milk Sales Schools fees
Husband Money Clothes
Daughter Money Food Hair Other expenses
Having identified the major sources of income and expenditure we can now prepare her budget. But before we do that it is important to understand the Format of a budget.

FORMAT OF A BUDGET NAME OF BUSINESS TIME PERIOD | INCOME | AMOUNT (Kshs) | SalesPart Time jobSalariesWagesGiftsDonations | | TOTALS | | EXPENCES | | FoodClothesRentHospitalHairTransportElectricityStationary | | TOTAL | | SAVINGS | | SURPULS/DEFICIT | |

MAMA MATOKE BUDGET Mama MATOKE’S BUGTET FOR ONE WEEK | INCOME | AMOUNT (Kshs) | Sales VegetableSales MilkMoney From HusbandMoney From Daughter | 500 600 250 250 | TOTALS | 1 600 | EXPENCES | | Veterinary expensesSchool feesHair plaitingFoodclothesother expenses | 100 250 200 100 100 250 | TOTAL | 950 | SAVINGS | | SURPULS/DEFICIT | 550 |

CONCLUSION Take note of the following points about a budget * A budget is a tool that helps one to achieve set goals, it is therefore critical to clarify and fully understand the goals * A budget is an estimate of income and expenditure in a given predetermined period * A budget is prepare before the period and not after the period * On does not necessary have to have money in order to budget.

CHAPTER TWO: LIVING WITHIN YOUR MEANS

I will go line by line to make sure that we are not spending money unwisely. Barrack Obama
OBJECTIVES
(i) Distinguishing between needs and wants (ii) Steps to help live within your means

NEEDS AND WANTS
Living within your means simply means to adjust your needs and wants to fit the amount of money you have to spend. If you have to spend more than you have to earn, you are less likely to have debt that you cannot pay.
We spend money on many things. Some of these things are necessary for our survival. These things are called needs. Needs are therefore a basic necessity we cannot do without. Other things that we spend money on are things we want and when we buy them we are happy. We call these things wants. Wants are therefore something optional, or not needed for every day survival.
The following is a least of things that Makori spend money on
-Rent -Makeup
-Soda -Food
-Hair plaiting -Clothes
-School supplies -Airtime

Makori has categorized the things that are most important ,or necessary ,items for his surval and the least important items as shown below:
Necessary items Least Necessary Item
-Food -Soda
-Rent -Makeup
-School supplies -Hair plaiting
-Clothes -Airtime

STEPS TO HELP LIVE WITHIN YOUR MEANS Step 1: Identify important responsibilities .make a list of high priority expenses will occur in your lifetime. These expenses include your responsibilities like education and expenses on extracurricular activities of your children, health of all members of family including parents and pets, and life insurance, apart from routine expenses.
Step 2: Adjust your budget for the future Put money aside from your budget every year for the future. This may involve spending lesser amounts now. You might have to buy a smaller car, so that money is available to pay installments for the house purchase.
Step 3: Pick up bargains Spending wisely implies saving money where you can. Watch out for discounts and sales carefully. Pick up the free offers at the supermarkets.
Step 4: Track expenses Many times we wonder where all the money goes

SESSION 2: SAVINGS

CHAPTER THREE: PLAN TO SAVE It has been presented to me that the inability to save, in little things, is one reason why so many families suffer for lack of the necessities of life (E.G White).
Objectives
i) Define saving and tips to start saving ii) Creating a saving plan iii) Conclusion
Definition: Putting money aside is called saving. Our saving can help us meet our goals .Goals that involve what we want to do with the money we save are called saving goals or financial goals. These goals can either be short term or they may be long term in nature. A goal that will take you just a few months to achieve can be called a short-term goal. You can achieve short-term goals in a relatively short amount of time.
A good savings goal can help you save since when you are saving for something that you really want, or that is really important to you, you are motivated to save and have discipline to control your spending.
TIPS TO START SAVING * Save any little change * Cut back on food * Put a shilling a day into a savings account * Save any raise in pay * Hide your saving n a save place until you have enough to put in the bank * Open an interest paying savings accounts
CREATING A SAVING PLAN
A good saving plan has four major components * a saving goal * how much money you need for the set saving goal * the duration you think you need to save money for the goal * amount of money needed per duration
CASE STUDIES:
The table below summarizes application of the components of a good plan to save by use of practical examples from the Region of Kisii. SAVING GOAL | TOTAL AMOUNT | DURATION | AMOUNT TO SAVE EACH MONTH | Hiring 2 hectares for farming Maize and beans | Kshs 15 000 | 6 months | Kshs 2 500 | Buying Milking Cow | Kshs 30 000 | 12 months | Kshs 2 500 | Salon | Kshs 50 000 | 18 months | Kshs 2 800 | Motor Bike | Kshs 90 000 | 24 months | Kshs 3 750 |

JUSTIFICATION CASE OF FARMING: Two hectares can give you roughly at the worse 30 sacks of maize and 6 sacks of beans. Assuming at the worse scenario a sack of maize is kshs 2 and beans is ksh 8 000.At the end of the harvest one is therefore bound to have Kshs 60 000(30 x 2/) and kshs 48 000(8000 x 6).Hence a total of kshs 108 000.
CASE OF COW, SALON AND MOTORBIKE: From the research done and the response from the kisii entrepreneurs in this field the average one can get per is a net income of Kshs 10 000
CONCLUSION
It is important to take note of the following * A good plan to save defines your wealth * A good plan to save has four components, goal ,capital, duration and amount per duration * A good plan to save is prepared before commencement of the period * A good plan to save is prepared not necessarily when one has money. *
CHAPTER FOUR: SAVING ON LIMITED INCOME

The greatest wealth is to live content with little Plato
Objective
i) Reasons for savings ii) Categorization of reasons for saving iii) Ways to increase savings iv) Conclusion

REASONS TO SAVE
Saving money is important for several reasons as outlined below i) Provides funds for unexpected expenses ii) Helps one reach his/her financial goals iii) Gives a feeling of security iv) Helpful in building assets v) Helpful to provide funds for expected future events vi) Useful in providing funds for optional expenses.
To be more specific the following are reasons why we should save money:
Sickness Weddings Funerals
Retirement/Old age Seasons of low income because others are saving
Emergencies House or property TV
Refrigerator Motorcycle Bicycle
Education Home Improvement Invest in business
Luxury item A new born baby Gifts

Given the list above we can categorize the reasons for saving by combing similar items and the resultant is shown in Tabular form below. UNEXPECTED FUTURE EVENTS | EXPECTED EVENTS | OTIONAL EXPENSES | BUILDING ASSETS | SicknessFuneralEmergenciesTheft | EducationWeddingA new babyRetirement/old ageSchool FeesLow income seasons | Home improvementLuxury itemsGiftsMotivation to be like others | HouseBicycleMotor cycleBusiness |

WAYS TO INCREASE SAVINGS

* You should save when the business is doing well * Reduce on unnecessary expenses * Use a budget to track and plan expenses * Use the seasonality calendar to think about the year as a whole, and plan accordingly * Find ways of increasing your income
CONCLUSION
It is important to take note of the following * Classification of the reasons why we save helps us to plan to save when the income is limited * You should spend less than you earn * Save something – even 1 shilling every day or every week

CHAPTER FIVE: WAYS TO SAVE

It’s the little things citizens do. That’s what will make the difference. My little thing is planting trees. Wangari Maathai
Objective
i) Factors that Influence saving ii) Identifying saving options iii) Consideration for saving services iv) Conclusion

FACTORS THAT INFLUENCE SAVING
These can be factors that are part of an individual or something in that individual’s environment..They include * A safe place to keep savings * A good saving plan * Discipline * Family support for the decision to save * Motivation to meet personal goals(Like a house or school fees) * A convenient place to save (close to home or easy to get to). * Interest on savings * Desire to resist temptation * Size of deposits(in a bank, for example) * Willingness to reduce expenses. * Ability or opportunity to earn more income
Take note that those factors that are within your control have been underlined

IDENTIFYING SAVING OPTIONS There are many ways to save as listed below * Banks Livestock SACCO * Chamas Land Microfinance Institution * Jewelry Home Bank Post Bank * Under Mattress TYPES OF SAVING INSTITUTIONS One way to understand the differences between ways to save and how to make the best and safest decisions is to understand the difference between formal, semiformal and informal savings. Formal: Regulated by a government agency to ensure savings. Sometimes pay interest on saving and insure savings. Informal: Something you manage yourself, usually at home. You may keep this type of savings in cash, jewelry, or livestock, for example. Semi-Formal: Somewhere between formal and informal. These services are organized, but not overseen or regulated by the government. This could be a saving circle or chama.

Advantages and disadvantages of various saving services SERVICES | ADVANTAGES | DISADVANTAGES | Formal | | | BanksPost-officeCredit UnionRegulated MFIRegulated SACCO | * High Safety * Less temptation to withdraw and spend * May earn interest * Access to other products e.g. loans * Helps to manage money | * May have high minimum deposit * May charge fess * Long lines * May be confusing or require literacy * May be far away | Semi- Formal | | | Saving GroupROSCASavings collector | * Easy Access * Savings may be linked to credit * May earn dividends on loans made with savings * Group rules encourage savings * Can be somewhat safe | * Safety not guaranteed * May or may not earn interest * May have limited or no access to loans * Limited access to savings * Withdrawals based on group approval | Informal | | | At Home /Cash under the mattress | * Easy access | * Low safety * Easy to spend or waste money on wants | In Kind e.g. Jewelry, livestock or land | * Value might increase over time. e.g. livestock gives birth , etc * Must sell to access cash , which decreases temptation | * May be difficult to sell quickly in case of emergency * Value could decrease over time * Risk of theft or death |

Conclusion It is important to remember that the following factors are important in considering when choosing a saving service * Access * Convenience * Opening deposit requirements * Safety * Interest * Fees SESSION THREE: BANKING SERVICES Objectives i) Myths about Banks ii) Financial Services iii) Fixed deposit account iv) Current account v) Conclusion COMMON MYTHS ABOUT BANKS We will start by looking at myths and facts about banks. Sometimes, a group of people or a type of institution develops a false reputation – Something that is believed to be true but is not actually based on reality. * You must be rich to use a bank Myth – Even though many banks require a minimum amount of money to open an account, ,it is still often possible for people who do not have a lot of money to open an account and benefit from banking services. Sometimes there are even special accounts with low fees or minimum balances * Banks are a safe place to keep your money Fact- Banks is often the most secure place to keep money. Many are guarded by askaris and have secure premises. Many have insurance to cover losses if there is theft. * Going to the bank takes a lot of time Myth or fact- It depends on the place. Sometimes the lines in a bank can be long .However, now there are ATMs to help deal with traffic. * Banks lend you money so that they can take your assets like T.V when you fail to pay. Myth; Banks make loans and sometimes the borrower must offer something for value to guarantee the loan incase he or she cannot repay. But banks prefer that clients repay, and do not want the hassle of taking their client’s valuable things.. * If a bank is robbed, you will lose your money. Myth- Banks usually have insurance to cover theft of other losses, such as fire FINANCIAL PRODUCTS A bank can provide you with various financial services. These includes loans, ATM, salary advances, keeping title deeds, savings account, employment, help pay bills, Training, foreign currency services, money transfer among others. The following table summarizes various bank services SAVINGS | INSURANCE | CURRENT | LOAN | PAYMENT | Hold deposits and may pay interest Different accounts tailor to short or long term saving goals Interest rate varies with type of account and length of time | Client makes regular payments to institution for protection in case of accident or loss Events could include accident, death ,hospitalization.etc | Account that enables a client to make regular deposits and withdrawals. May provide ATM or debit cards for easier withdrawals | Money lent to clients for consumer and business purposes Type of loan and terms vary with purpose | Institution transfer money to recipient Bill payment |

FIXED DEPOSIT ACCOUNT This is a long term savings account where you put your money for a fixed period of time and earn a higher interest than a demand deposit account. If you withdwal the money before the time period is complete, you will not earn all of the interest. ADVANTAGES * Usually has a high interest rate * Your money is not easily available for you to spend on temptations or day to day needs , making it easier to meet your long term saving goals DISADVANTAGES * Bank charges a fee if you take money out of the account before your term is complete * Your money is not readily available to you in case of an emergences * Normally requires a minimum amount to open the account which may be higher than for many people.
CURRENT ACCOUNT
Is an account where you can make deposits and withdrawal when you want.You may earn interest on the amount of money in the account.There is normally a minimum amount required to open the account and minimum balance required to maintain the account.
ADVANTAGES
* Your money is easly available to you if you have an emergence or unexpected need * Sometimes withhdrawal are free
DISADVANTAGES
* Normally hhas montly service fees fee for maintaining te account * Sometimes there are fees on transactions like deposits or witdrawals

CHAPTER 6:USING AUTOMATIC TELLER MACHINE Objectives
i)Meaning of ATM ii)How to use an ATM Machine iii)Risks associated with ATMs and How to manage them iv)Advantages and disadvantages of ATMs
v)Conclusion

MEANING OF AN ATM An ATM is a machine that takes the place of going to the bank to make withdrawals and check balances. Sometimes you can even transfer money or make deposits using an ATM. Its purpose is to make bank services more convenient, quick and accessible. Each bank has its own network of ATMs, but you can use your bank card or ATM card to withdraw cash from any ATM – Whether it belongs to your bank or not. Be careful, though – you may be charged a fee each time you use an ATM that is not part of your bank’s network. An ATM card is the tool you use to access you r money in the machine .It is your own personal card, with your own personal number. Your card also comes with a PIN - Personal Identification Number – that only you know. In that way, no one else can take your card and get more money without permission. An ATM card is not the same thing as credit card. An ATM card helps you access or use money that you already have, while a credit card is like taking out a loan

HOW TO USE AN ATM MACHINE * Insert your ATM card * Choose language (English or Kiswahili) * Enter your PIN * Select “withdrawal” * Choose the correct account * Enter or choose the amount you want * Take you cash * Take your card * Take your receipt or withdrawal slip RISKS ASSOCIATED WITH ATMS AND WAYS TO MANAGE THEM ATM cards are changing the way that customers interact with banks. There are many advantages and disadvantages to using ATM cards. Some of the disadvantages are linked to the risks involved with using these machines and cards. They Include: Forgot to take the card when you finish: Do not be in a rush or hurry when you use the ATM; remind yourself of the steps of ATM use each time you use the ATM. Robbed at ATM: Do not use an ATM that is located in a place that is not secure; do not use the ATM after dark; do not use an ATM when there is someone lurking near you. Lost ATM Card: Keep your card in safe place; report the lost card immediately; keep the bank’s help line information in a safe place. People standing too close to you: Do not use an ATM when someone is standing too close to you to be safe. Forgotten PIN: Keep your PIN somewhere in a safe place separate from your card; choose a PIN that you can remember – but not a PIN that is too easy for other people to guess. Card is swallowed by the machine; alert a bank staff person or staff person in the store or shopping centre. Advantages and Disadvantages of ATM ADVANTAGES | DISADVANTAGES | * You do not have to carry cash around with you * If your card is stolen, the thief cannot get your money without your PIN * You can use it to pay at some retail shop * Keep your money safe * You can withdraw cash at any time day or night. * ATMs offer the convenience of multiple locations. You can withdraw cash at any bank that is part of the system to which your card is linked * ATMs are faster than going to the bank -- No long lines * You can withdraw cash at ATMs in foreign countries | * If you forget your PIN number you cannot use the card * The system can be offline * Training is needed * Difficult to maintain spending discipline * Risk of robbery when you leave the ATM * The ATM can break down or run out of cash * Fees charged to use ATMs of other banks can become expensive |

Tips for Using ATM Cards * Keep your card in a safe place * Do not write the PIN number on the card * Never allow other people to use your card * Never tell anyone else your PIN number * Do not accept help from strangers at ATM .Wait until you can ask bank staff member to help you * If someone is standing too close to you at ATM, ask that person to move away

SESSION FOUR: DEBT MANAGEMENT

The borrower is servant to the lender Bible
Objective
i) Reasons For Borrowing Money ii) Identifying Creditworthiness iii) Distinction between good loan and Bad Loan iv) Conclusion

A loan is money that a borrower can use temporarily. After which a defined period of time, the money is repaid to the owner, usually with interest or a fee charged for the money. Credit means becdd\

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WHY DO WE BORROW MONEY?
We borrow money to fulfill the following * Investment purposes: Loans for investment will earn income that you can use to repay the loan. * To respond to an unexpected emergence: Loan for emergencies do not bring new income and must be paid back from other sources .They include for instance sickness, death etc. * To consume: Loan for consumption do not bring new income and must be paid back from other sources. They include loans generally for personal expenses.

DETERMING CREDITWORTHNESS
When you apply for credit, the potential creditor will want to know if you are “creditworthy.”. In other words the creditor wants to know if you are willing and able to repay the debt. To determine your creditworthiness, a creditor usually looks at three factors * Capacity: This refers to your current and future ability to repay. * Capital: What do you own that could be used to guarantee the debt? Even if you don’t have to put up “security”, creditors usually prefer that you have assets other than just your income that could be used to repay the debt. * Character: This refers to your willingness to repay the debt. How trustworthy are you? In the past, how prompt have you been in paying your debts, rent and utility bills?

REVIEWING TH ECONTRACT
I f you decide to use credit, you will be asked to sign a contract or agreement .It is legally binding. You need to understand the following. * The cash price * The down payment * Finance charge * The annual percentage rate * Any other charges that are not included in the cash price * The number, amount and due dates of payment * What happens if you miss a payment * A description of any security held by the creditor
Distinguishing Between Good and Bad Loan
A good loan is a loan that can help the borrower to improve their current condition and that the borrower is able to repay. Borrowing money can help you start or expand a business. It can help you respond to an emergency in your family. Or, it can help you improve your living conditions sooner rather than later. When a loan helps you in these ways, it is usually a good loan. When it ends up costing you money or forcing you to go deeper into debt or default, it is a bad loan. In short a bad loan is a loan taken out that brings fewer benefits than it costs hence making it difficult for the borrower to repay.

Deciding to use Credit/Loans
Whether or not you use credit is a decision that requires careful thought. Using credit creates a financial obligation that can affect your family’s future. So, whenever you are considering using credit, ask yourself the following question * Is it worth the extra cost to have the item now? * Is this something I really want? * Is this something I had planned to buy? Is it related to my financial goals? * Can I make the payments? * Have I been realistic in estimating my other expenses? * Will I want to be paying for this for the length of the credit agreement * Will the payments force me to use savings that have been set aside to meet my financial goals? * Can I afford to tie up my future income * What if I get sick or have an accident * Do I want to risk repossession, a bad credit history , or legal action if I cannot repay the debt * Would it be wiser to save money and buy this later * Am I borrowing from a fair and honest lender * Do I understand what the contract says

How Much Debt Can I Afford
Often people take too much debt and have trouble making repayments. It is worth nothing that as you take a loan the Following “Rule of Thumb” will be helpful. * Do not let debt prevent you from paying for basic expenses such as food, school fees, and their necessary items * Keep track of the amount and frequency of your loan payments * The total of your loan payments should not exceed 20% of your usual income * Try to limit borrowing for personal consumption * Have a plan for making loan payments if it take time for the loan to generate more income for you.
Conclusion
Remember when you use credit, you are promising * Pay back the amount of money you borrow * Pay back the debt regardless of any personal crisis or expected situation you face. * Keep any item that has been used as security for the debt until all payments have been made.