Since April 2004, the United States has observed Financial Literacy Month, a time to appreciate the skills that support our economic well-being. The ability to manage a personal budget and make sound financial decisions can play a large role in a person's financial success, and it's important for all people to develop the skills needed to do so.
Unfortunately, the U.S. is facing a crisis around ensuring that everyone in the country has a basic understanding of financial concepts. A 2018 study by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation found that only 34 percent of Americans could answer at least four out of five basic questions assessing their financial know-how. Furthermore, that same study showed that Black and Hispanic Americans experience much less economic prosperity than their White counterparts.
So, what's the reason behind so many people not being able to manage their money?
Financial Literacy in the U.S.
The FINRA study demonstrates the connection between financial knowledge and economic success. Nationally, the report found that the more a student was exposed to financial education, the more likely they were to engage in responsible money management practices like not overdrawing a checking account or spending within their financial means.
However, when it comes to race and ethnicity, the data shows a few eye-opening difference. For example, FINRA found that 41 percent of Black respondents and 38 percent of Hispanic respondents were confident they could not come up with $2,000 if an emergency expense arose, as opposed to 27 percent of white Americans and just 21 percent of Asian Americans. And a startling 68 percent of Black respondents and 54 percent of Hispanic respondents were found to engage in risky credit card behaviors, such as exceeding their credit lines or making late payments, compared to 38 percent of Asian Americans and just 36 percent of white Americans.
If you were to guess that a poor understanding of financial management is tied to poverty, you'd be right. According to the 2019 Survey of Consumer Finances (SCF) released by the Federal Reserve, the typical white family has nearly eight times the median wealth ($188,200) of the typical Black family ($24,100) and five times the median wealth of the typical Hispanic family ($36,100). Meanwhile, a group of respondents including those identifying as Asian, American Indian, Pacific Islander, multiracial and other have lower wealth than white families but higher wealth than Black and Hispanic families.
Even as families age, we still see disheartening statistics around financial preparedness. The SCF found that only 45 percent of Black families and 34 percent of Hispanic families participate in a retirement plan compared to 60 percent of white families and 54 percent of other families.
Working Toward a More Equal Society
What can be done to improve this situation for all Americans?
Tony Shu is the co-founder of Breaktime, a Boston-based nonprofit supporting young adults between the ages of 18 and 24 who are experiencing homelessness. The clients Breaktime serve receive job training and professional development support and work with different site partners from 3 to 6 months. During that time, the youth earn a wage of $16 per hour, build up greater than $1,000 in funds in a Matched Savings program, and receive financial empowerment coaching to boost their credit scores.
According to Shu, a basic understanding of financial management is "the foundation of financial success, and yet, there are so few opportunities for young people to nurture their financial literacy."
"Even when people of color are able to cultivate financial literacy, they face more barriers than their white counterparts in obtaining stable employment to actually put those financial skills into practice," Shu says. "Implicit bias, educational inequality, the impacts of mass incarceration, and so much more contribute to unemployment inequity, which exacerbates the racial wealth gap."
To close the wealth gap and address racial inequality, Shu notes that not only financial literacy, but also stable employment, is paramount.
"For young adults experiencing homelessness, the majority of whom are people of color, stable employment is the most critical factor in achieving stable housing," he said. "However, starting one's career and getting that first opportunity can often be a critical barrier to long-term financial stability and success."
You Can Make Change
All of us can take concrete steps to help close the racial wealth gap. We can continue to educate ourselves and those around us about the issue. We can reach out to elected officials to lobby for financial literacy to be included as a key part of our education system. Business and community leaders can collaborate with local governments and institutions, such as the City of Boston's Office of Financial Empowerment, to offer free or reduced cost financial education services for young people. Those with the resources can also donate to organizations who are making a difference, such as Budget Buddies, which helps builds the financial literacy, confidence, and security of low-income women and girls in Massachusetts and New Hampshire.
As part of Financial Literacy Month and into the future, let's work together to close the racial wealth gap. How will you make a positive change?
Join Us for Good in celebrating Financial Literacy Month and advocating for an end to racial inequality.