Learning about how to handle money is very important in today’s world. But not everyone learns these important skills.
Financial literacy includes understanding how to manage money, make a budget, and invest. When someone understands these things, they can pay the bills, plan for the future, take care of a family, and make good choices about borrowing money.
But studies show that many people in the U.S. don’t know much about financial literacy. And people from different racial and ethnic groups have different levels of financial literacy.
Key Takeaways
- Financial literacy is the possession of the basic skills needed to manage an income, keep debts in control, spend wisely, and invest for the future.
- Access to credit and debit cards, mortgages, and student loans has made financial literacy more difficult to achieve and more important to have.
- Not everyone in the U.S. has the same level of financial literacy. Black, Hispanic, and Native American people tend to know less about money than White and Asian people.
- Financial literacy is related to the reasons why there is a racial wealth gap in the U.S.
What Does the Data Say?
A study by the Financial Industry Regulatory Authority in 2021 found that financial literacy among American adults is going down. When people were tested with five basic questions about money, the average person could only answer 2.6 out of five questions correctly. This was lower than the score of three out of five in 2008.
The scores were especially lower for adults under 39 years old.
The 2021 report also found that people who knew less about money were more likely to have financial problems during the COVID-19 pandemic.
Financial Literacy
When looking at different racial and ethnic groups, the data shows that Asian-American and White people generally scored higher on financial literacy tests compared to Hispanic and Black people.
A study by FINRA in 2018 found that Asian and White Americans could answer 3.2 out of six financial literacy questions correctly, while Hispanic and Black Americans could only answer 2.6 and 2.3 questions, respectively. Both scores were lower than the national average.
This difference can also be seen at a young age. The latest PISA Financial Literacy Results from 2018 show that White and Asian 15-year-olds have much higher financial literacy rates than Black and Hispanic 15-year-olds.
Economic Well-Being
The Federal Deposit Insurance Corporation (FDIC) has data on people in the U.S. who don’t have bank accounts or don’t use banks very much. This data shows that American Indian and Alaska Native, Black, and Hispanic households use bill payment services, money orders, and check cashing services more often, which shows they may not have as much access to basic banking services.
Native American communities have more financial problems compared to other racial and ethnic groups. They have about the same level of financial literacy as Black and Hispanic people, which is lower than that of White and Asian people.
Some studies show that young Native American people have low financial literacy compared to young people from other racial groups.
It’s Never Too Early
Did you know the Federal Reserve publishes comic books for kids? They’re just one of many resources available to parents who want to introduce their children to money matters at an early age.
Making Ends Meet
Looking at the bigger picture, especially when thinking about keeping money managed and paying bills,Between 2009 and 2018, Americans saw an improvement in their ability to cover costs, but there was also a decline in savings. This trend was influenced by race, and there were disparities in the rates of unexpectedly lost income.
During that time period, White Americans experienced a 16% increase in their ability to make ends meet, followed by Asian Americans at 15%, Hispanics at 14%, and Black Americans at 9%, according to national surveys.
At the same time, White Americans and Hispanic Americans both experienced an unexpected reduction in income of 21%, while Asian Americans and Black Americans faced drops of 19% and 12% respectively.
Women were also found to be 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 sources such as family, high school, college, employers, and the military. According to studies of national survey data, 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 blamed financial illiteracy on a lack of parental guidance and poor decision-making. However, recent studies point to socioeconomic and political barriers. Members of minority groups are channeled into using predatory financial services and denied access to basic financial education from their earliest years.
The Gender Gap
The gender gap in financial skills is partly attributed to the tendency of men to have more financial experience and education than women. A similar dynamic may be at play in the racial gap, which is exacerbated by structural barriers such as limited access to wealth, higher rates of unemployment, and lower quality education.
Other Issues
Lack of financial literacy is not just a matter of insufficient parental guidance. A recent study reported that the racial gap in financial literacy persists even with equal access to financial literacy education. Minority groups benefit 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. It is described as foundational for full participation in the market and is 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 becomes more common, financial literacy has become crucial for successfully navigating complex financial services, reducing vulnerability to fraud, and increasing the likelihood of acquiring wealth over time.The disparity in financial literacy affects various significant measures, including the racial wealth gap in the United States.
Closing this gap is being addressed through public and private proposals aimed at enhancing financial literacy. The U.S. Financial Literacy and Education Commission’s 2021 proposal suggests specific changes to improve financial literacy, such as providing clear guidelines for financial educators, offering one-on-one financial counseling, and consistently assessing the outcomes.
An emphasis is placed on tailoring financial education to the specific needs of individuals and communities, including motivations for learning financial tools. This proactive approach extends from early education to assisting senior citizens in avoiding financial scams.
The commission also highlights the role of financial literacy in bolstering economic recovery, given the inequalities and vulnerabilities exposed by the COVID-19 crisis. Furthermore, federal reviews indicate the effectiveness of one-on-one financial counseling programs.
Government funding supports numerous resources to enhance financial literacy, with digital literacy programs often tailored to address specific community needs. For instance, the Native American Financial Services Association sponsors a digital literacy program, targeting Native American communities and promoting best practices to improve financial literacy.
Financial literacy is crucial as it enables individuals to make informed financial decisions and plan for the future, thereby avoiding falling prey to scams and illegal financial schemes.
Everyone is increasingly expected to navigate a complex financial environment, making financial literacy essential to understand and make decisions regarding credit, loans, investments, and retirement planning.
Acquiring financial literacy can begin with familiarizing oneself with the National Financial Capability study and taking financial literacy quizzes, followed by focusing on areas where improvement is needed.
The wealth gap is linked to unequal access to basic financial education, particularly for minorities and women. Fortunately, there are numerous resources available, including online financial literacy tests and other valuable tools, funded by both the federal government and nonprofit organizations. These resources can help individuals make smarter financial decisions and bridge the financial literacy gap.
