The Racial Gap in Financial Literacy

What Is the Racial Gap in Financial Literacy?

“Financial literacy” is a term used to describe a person’s ability to comprehend and use financial skills, such as personal finance, budgeting, and investing.  It is sometimes used interchangeably with “financial capability.” Its opposite is “financial illiteracy,” which is meant only as a description of financial knowledge and not as a pejorative.

Financial literacy is one of a few factors that affect the broader concept of economic well-being, which also includes the ability to make ends meet, plan ahead, manage financial products, and make good decisions. According to national surveys, basic financial literacy in the United States is generally low, and federal surveys reveal gaps among racial groups and ethnicities.

This article uses publicly available studies and compares four racial and ethnic groups—Black, Hispanic, Asian, and Native American—with Whites. It follows standard descriptive designations to help avoid confusion in reporting on the existing data: For example, data collectors generally use “Hispanic” rather than “Latinx.”

What Does the Data Say?

A 2018 Financial Industry Regulatory Authority (FINRA) national survey found that only about a third of American adults could correctly answer four out of five questions meant to assess basic financial literacy. In general, financial literacy is lowest among the young, women, and people with less education, according to data from a ResearchGate in 2011.

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. The FINRA study 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. Studies on Native American financial literacy show that these Americans have rates equivalent to Black and Hispanic Americans.

A gap also exists between youth and adults. For instance, the 2018 PISA Financial Literacy Results data show that White and Asian 15-year-olds have much higher financial literacy rates than Blacks and Hispanic populations of the same age.

Economic well-being

There are also racial differences in economic well-being. Survey data on economic inclusion for 2019 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. However, it also revealed that American Indian or Alaska Native, Black, and Hispanic households, as well as less educated and younger households, are more prone to use bill payment services, money orders, and check cashing, which are often tied to financial insecurity.

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 Blacks and Hispanic populations, which is lower than that of White and Asian American populations. Some studies suggest that Native American youth are of particular concern, as there is a large gap between them and non-Native youth.

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 there was 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 saw 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 Gap Exist?

There are five primary sources of financial education—families, 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 lack of parental guidance and poor decision-making. However, recent studies have begun to reject the conventional notion that underachievement is to blame, arguing instead that socioeconomic and political barriers are responsible. In other words, members of minority groups are channeled into using predatory financial services and denied access to sources of financial skills.

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 minority groups can have less access to wealth, higher rates of unemployment, and less 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 necessarily just a matter of insufficient parental guidance. A comlex 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, races benefit equally from high school and employer education on finances and there is some question about whether the “big five” questions used to measure financial literacy may be racially biased. The quality of financial education received by different groups is not clear, as well. Financial illiteracy, on the other hand, persists over lifetimes, according to some studies.

Financial marketing also clouds the picture, making it surprisingly difficult to adequately vet financial information. A study of spending in the financial information sector in 2013, commissioned by the Consumer Financial Protection Bureau, reported 25 times more spending on marketing for the financial industry than on financial education. In other words, for every dollar spent on financial education, 25 were spent on marketing for financial services.

Consequently, there is concern over how these factors converge to disproportionately impact poor and disadvantaged households, such as minority households, which tend to both earn less and have lower rates of financial literacy. Over long periods of time, especially as some studies show that the gaps in financial literacy may persist across age groups, these knowledge gaps have the potential to fuel structural inequality.

Why Does Financial Literacy Matter?

Financial literacy represents an aspect of a person’s financial well-being. The U.S. Financial Literacy and Education Commission, the federal body that makes recommendations for increasing financial literacy and education that was created by the Fair and Accurate Credit Transactions Act of 2003, describes financial literacy as foundational for full participation in the market. The commission says that it is vital, especially, for “unlocking the foundations of economic opportunity” at the individual level and for “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 navigate financial services successfully. This can leave people denied access to financial knowledge at further risk of falling behind, particularly if they belong to racial groups that already earn less income.

Among other benefits, high rates of financial literacy decrease vulnerability to fraud and increase the likelihood of accruing savings over time. High scores for financial literacy are also connected to things such as retirement planning, which can influence 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

The U.S. Financial Literacy and Education Commission’s 2020 proposal highlighted a set of changes to improve financial literacy in the country, including among minority populations. 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. Other federal reviews of the existing financial literacy programs have also concluded that one-on-one counseling programs are effective.

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. Financial education was part of the federal government’s COVID-19 relief efforts. 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.

Many resources and studies connected to the federal government exist. Although, as noted, profit motives can make it important to disentangle impartial advice from the available resources, nongovernmental institutions also offer resources. Digital literacy programs are even sometimes connected to advocacy organizations that are 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, released a digital literacy program in 2018. Programs such as the Native Financial Education Initiative provide resources specifically to tribal leaders and promote best practices in order to increase financial literacy in these communities.

The U.S. Government Accountability Office (GAO) issued a report in 2011 that said there is no government or certification process for organizations that offer financial information. However, there are U.S. Trustee Program and Department of Housing and Urban Development (HUD) approval processes for financial literacy providers specifically tied to bankruptcy and some housing programs. The report found that a government certification process would possibly improve the quality of available financial literacy programs, but it would come with high administrative costs.