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Disparities in African American Financial Literacy: Serious Problems with the Concept

By National Urban League

Published04 PM EST, Mon Dec 13, 2021

Cy Richardson and Ayanna Fortson

Even though African Americans make a significant economic contribution in the United States, their financial wellness lags behind that of the rest of the country. Numerous economic indicators highlight this disparity, such as median household income, net worth, and the likelihood of carrying student-loan debt. The reasons behind these financial wellness gaps are complex; accordingly, a report conducted by the TIAA Institute, highlights new insights from the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index).

The P-Fin Index measures eight key areas of personal finance knowledge: earning, consuming, saving, investing, borrowing and managing debt, insuring, comprehending risk and uncertainty, and go-to information sources. According to the report, African-American adults answered 38 percent of the P-Fin Index questions correctly, compared to 55 percent of white adults. African Americans scored highest in the areas of borrowing and debt management but scored lowest on questions relating to insuring. African Americans scored comparatively low on questions related to comprehending risk, investing, and identifying go-to information sources. The report states that low levels of financial literacy in insuring and comprehending risk are especially troubling.

"Risk and uncertainty are inherent in financial decision-making, and individuals face a range of choices regarding events to insure and how to structure their coverage," the report states. "Poor insurance decisions can leave an individual under-insured for some risks and over-insured for others, as well as overpaying for coverage."

There are demographic differences in financial knowledge among African Americans. For example, financial literacy is greater for those with more formal education, those who received financial education, and those with higher incomes. Men and older individuals also tend to have greater financial literacy than women and younger adults. The gap in financial knowledge between African Americans and whites can be partially attributed to underlying demographic differences between the two groups. However, the differences cannot account for the entire gap as financial literacy is still lower for African Americans compared to whites in each demographic subgroup reported in this study.

The connection between financial literacy and financial wellness is well-documented, and this is true among African Americans as well. For example, those with higher financial literacy tend to save for retirement, have non-retirement savings, and manage their debt better overall. They are also less likely to be financially fragile.

While not a cure-all, the National Urban League (NUL) believes increased financial literacy can lead to improved financial capability and practices that benefit even those with relatively low incomes. We also believe that future initiatives that aim to bridge these gaps must better target the needs of specific demographic subgroups if they are to be successful.

Financial literacy is combining financial knowledge with attitudes, skills, and behaviors, which are essential to make a financial decision based on personal circumstances. It helps improve your financial well-being. Undoubtedly, being financially literate will assist in influencing financial decisions. The ability to make financial decisions and improve financial well-being are two important aspects of the definition of financial literacy.

However, concepts defining financial literacy have failed to highlight the financial issues associated with the complex financial environment. According to traditional financial literacy framing, anyone can be considered financially illiterate for not having enough skills or knowledge regarding finances. Researchers have learned that people who have low incomes can possess the same decreased bandwidth in decision-making as those suffering from personal and other stressful situations.

Being financially literate can be difficult for people living in poverty who are also struggling to change their financial conditions. Financial assets may also affect lower earners adversely as they fall into the ‘bank fee poverty trap.’ This trap occurs because they do not own any mortgages or cannot meet minimum bank balance requirements.

Problems with the Concept of ‘Financial Literacy’


Following certain cultural customs could positively impact neighborhoods from a community perspective while causing people to appear to be financially illiterate from an individualistic perspective. Financial literacy does not determine how others are affected when an individual makes a financial decision, such as supporting a local store that will open opportunities for employment by creating ample benefits specifically for the community. Whereas shopping online with large stores is more likely to be a less expensive financial decision, it can produce adverse effects on those who are running physical brick and mortar store locations. It is essential to highlight the influences of financial decision making and how others are affected according to the definition of financial literacy. It includes cultural and personal values, socioeconomic status, life stages, professional associations, educational level, media, and much more.

Financial Dilemmas

Financial literacy should include an individual’s capacity to reflect on the critical consequences of their financial decisions. For example, individuals may face “financial dilemmas,” which include stressful situations such as sudden expenses or unemployment. It is highly rational, therefore, that people with low-income can be the “best budgeters” due to the implementation of their practiced survival skills. For instance, if there is an option to either pay rent or feed the family, an individual’s financial decision may be conflicted. It is not a “lack of financial literacy” that affects these decisions. Rather, low-income families may have a limited stronghold over their financial matters.


Another main issue related to financial literacy is that only 17 states are providing financial education. Schools must give essential life lessons about financial skills to young people. This education will help them to effectively monetize their own labor and manage their assets efficiently. There is a definite need for programs comprised of financial literacy skills to be offered to students to learn how to manage and implement their finances appropriately in the real world.

Finally, NUL believes that financial literacy is a collective problem. Issues related to financial literacy are not associated with only one individual or group or individuals. It is a common problem for the whole nation as it directly affects the younger generation. Our country needs to plan on how to implement and operationalize the concept of financial literacy in the most efficient and effective possible manner. The government at all levels should allocate funds for proper training programs that will create awareness regarding financial and risk management. It is urgently necessary to impart the efficacy of financial literacy onto young adults of color as it will allow them to make better financial decisions and manage their finances intergenerationally and with heightened eloquence.

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