The Racial Gap in Financial Literacy

Achieving financial literacy is essential to thriving or even functioning in today’s world, but its fundamentals are clearly not being passed along equally to all Americans.

These are the basics of personal finance, budgeting, and investing. Once they’re grasped, an individual can make ends meet, invest for the future, take care of a family, manage debt, and make good decisions.

Yet, according to national surveys, basic financial literacy is generally low in the U.S., and it is significantly lower for members of some racial and ethnic groups.

What Does the Data Say?

The latest update of a study by the Financial Industry Regulatory Authority, released in mid-2021, found that financial literacy among American adults overall is actually declining. When it tested survey respondents with five basic questions about money, the average respondent could answer only 2.6 out of five questions correctly, compared with a score of 3 out of five in 2008.

In general, the decline in scores was most pronounced among adults aged 39 and under.

And, the 2021 report found, there was a clear correlation between lower financial literacy and a greater likelihood that a person would suffer financial stress during the COVID-19 pandemic.

Financial Literacy

When categorized by racial or ethnic group, the data suggests that financial literacy rates are not evenly dispersed, with Asian-American and White test takers tending to score higher than Hispanic and Black test takers.

An earlier installment of the FINRA student, released in 2018, reported that Asian and White Americans were able to correctly answer 3.2 out of six questions meant to assess basic financial literacy, while Hispanic Americans were able to answer 2.6 and Black Americans 2.3. Both scores are below the national average.

The gap can be seen early in life. For instance, the latest PISA Financial Literacy Results data, also published in 2018, shows that White and Asian 15-year-olds have much higher financial literacy rates than Black and Hispanic populations of the same age.

Economic Well-Being

There are also racial differences in economic well-being. Survey data on unbanked and underbanked Americans from the Federal Deposit Insurance Corporation (FDIC) reveals that the portion of Americans who don’t use banking services, and thus are deemed “unbanked,” has declined to single digits.

However, it also revealed that American Indian and Alaska Native, Black, and Hispanic households are more prone to rely on bill payment services, money orders, and check cashing services, which are often related to financial insecurity and a lack of access to basic bank services.

Native American communities in particular suffer from higher levels of financial fragility and distress than most other racial and ethnic groups. They have roughly the same financial literacy rate as Black and Hispanic populations, which is lower than that of White and Asian American populations.

Some studies suggest that Native American young people are of particular concern, as there is a large gap between them and non-Native young people.

Making Ends Meet

The overall picture, especially in this broader context, can be complicated. Between 2009 and 2018, there was a general increase in Americans’ ability to cover costs but also a decline in savings, which was tilted by race, as well as a disparity in the rates of unexpectedly lost income.

During that time, White Americans saw a 16% improvement in their ability to make ends meet, with Asian Americans at 15%, Hispanics at 14%, and Black Americans at 9%, according to national surveys.

At the same time, White Americans experienced an unexpected reduction in income of 21%, as did Hispanic Americans, while Asian Americans dropped 19% and Black Americans 12%.

Women were less likely to be able to make ends meet than men.

Why Does the Racial Financial Literacy Gap Exist?

For most Americans, basic financial literacy comes from as many as five sources: family, high school, college, employers, and the military.

Studies of the national survey data say that education and household income are the two biggest factors in predicting whether someone has a high level of financial literacy.

Socioeconomic and Political Barriers

Traditional accounts have laid some of the blame for financial illiteracy on a lack of parental guidance and poor decision-making. However, recent studies point to socioeconomic and political barriers.

In other words, from their earliest years, members of minority groups are channeled into using predatory financial services and denied access to basic financial education.

The Gender Gap

Explanation of the gender gap in financial skills focuses, in part, on the tendency of men to have more financial experience and education than women. A similar dynamic may be at play in the racial gap, abetted by structural barriers, as minorities may have less access to wealth, higher rates of unemployment, and lower quality education.

Analysis of the reasons why Native American communities in the U.S. lag behind White Americans in financial literacy, for example, points toward historical injustices—the legacy of which are high rates of poverty and unemployment, as well as other barriers that impact the broad concept of economic well-being.

This specific blend of factors has left Native American populations with few opportunities to build financial skills, as well as few family sources of knowledge.

Other Issues

Lack of financial literacy is not just a matter of insufficient parental guidance. A complex recent study of the persistence of the racial gap in financial literacy reported that the gap lingers even with equal access to financial literacy education and that the positive impacts of parental dissemination of financial knowledge depreciate faster for minority groups than for the White population.

On the other hand, members of minority groups in the study benefitted as much as White students from high school and employer education on finances.

Why Does Financial Literacy Matter?

Financial literacy has a clear impact on financial well-being. The U.S. Financial Literacy and Education Commission—the federal body that makes recommendations for increasing financial literacy and education—describes financial literacy as foundational for full participation in the market. The commission says that it is especially vital for “unlocking the foundations of economic opportunity” at the individual level and “powering a strong and resilient economy” at the national level.

As the use of credit cards, mortgages, and student loans has become more common, financial literacy has become more crucial because it correlates to a person’s ability to successfully navigate increasingly complex financial services. People without financial knowledge risk falling behind.

Among other benefits, financial literacy decreases vulnerability to fraud and increases the likelihood of acquiring wealth over time. High financial literacy scores are key to retirement planning, which is a key component of household wealth.

The financial literacy gap also influences other notable metrics, such as the racial wealth gap, which is the measure of wealth held by different races in the U.S. 

Closing the Gap

There are a number of public and private proposals for narrowing the racial gap in financial literacy.

The U.S. Financial Literacy and Education Commission’s 2021 proposal highlighted a set of changes to improve financial literacy in the country. It recommended establishing clear guidelines for financial educators, opening access to one-on-one financial counseling, and consistently measuring the results.

The report emphasizes the importance of tailoring financial literacy to the people and communities in need of education, which it says helps in key areas such as building motivation to learn financial tools. The commission’s mandate extends from advising on kindergarten education to helping senior citizens avoid becoming prey to fraud.

In particular, the commission focused on the role of financial literacy in a robust economic recovery. The COVID-19 crisis highlighted both inequality and the vulnerability of some minority populations.

Of particular note was the vulnerability of at-risk populations to scams and their need for information about economic impact payments and unemployment insurance benefits, and about managing debt and surviving hardship.

Other federal reviews of the existing financial literacy programs have also concluded that one-on-one counseling programs are effective.

Government Resources

The federal government funds many of the available resources to improve financial literacy.

Digital literacy programs are sometimes connected to advocacy organizations positioned to target them to the communities most in need.

For example, the Native American Financial Services Association (NAFSA), a national, Native American–focused financial services association, sponsors a digital literacy program. Programs such as the Native Financial Education Initiative provide resources specifically to tribal leaders and promote best practices to increase financial literacy in these communities.

The Bottom Line

If you look for the causes of the wealth gap, one major answer lies in unequal access to basic financial education. Financial literacy is obtained over time from one’s family, high school, and employer. Studies show that minorities and women are more likely than others to lack the background they need to cope with an increasingly complex world.

Luckily, there are resources out there, many of them funded by the federal government and by non-profit groups. A good place to start might be an online financial literacy test such as the one developed by FINRA. Then follow up by exploring some of the online resources available to everyone who wants to make smarter financial decisions.