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, particularly that of whites, according to a new report from George Washington University.
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, the new report from the Global Financial Literacy Excellence Center (GFLEC) indicates, but one way of addressing these disparities may be increasing financial literacy.
GFLEC, which is housed in the GW School of Business, aims to increase financial knowledge around the world because greater financial literacy contributes to better financial well-being. Its latest study, which was conducted with the TIAA Institute, reports 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 new 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 report also states that it is important to increase efforts to promote financial education in school and the workplace to help bridge some of the gaps in financial literacy and ultimately financial wellness. These efforts could include programs that emphasize topics where financial literacy is lowest, such as insuring and understanding risk and uncertainty.
The connection between financial literacy and financial wellness is well-documented, and this is true among African Americans as well, the report states. For example, those with higher financial literacy tend to save for retirement, have non-retirement savings and be better in managing their debt overall. They are also less likely to be financially fragile.
“While not a cure-all, increased financial literacy can lead to improved financial capability and practices that benefit even those with relatively low incomes,” the report states.
It also states that future initiatives that aim to bridge these gaps must better target the needs of specific demographic subgroups if they are to be successful.