Financial Literacy: Is it the True Culprit Behind America’s Racialized Wealth Gap?

Financial literacy can be simply described as the accumulation of skills that helps an individual make informed and rational decisions regarding budgeting, debts, and investing. The idea of rational decision-making also occupies the baseline assumption found in many economic models and implies that individuals will always maximize their utility with respect to their endowments. From this, we can see that there is a possible linkage between financial skills and economic outcomes. However, because of new research and academic discourse surrounding financial literacy, there seems to be an even greater, socially relevant association between the two disciplines: the role of financial literacy in the existence of the racialized wealth gap. 

The racialized wealth gap simply refers to income disparities that exist along the lines of racial marginalization. In America, the racialized wealth gap is particularly glaring. In 2020, the Federal Reserve released a summary of the 2019 data on the incomes of Americans, obtained through the Survey of Consumer Finances. The data showed that the median and mean incomes of White Americans were $188,200 and $983,400, respectively. The survey also reported that the median and mean incomes of Black Americans in 2019 were $24,100 and $142,500, respectively (Bhutta, Chang, and Hsu, 2020). A quick analysis of this data will reveal that the median and mean incomes of Black Americans only occupy less than 13 and 14 percent than the median and mean incomes of White Americans. 

The existence of an income gap between Blacks and Whites has been a relatively undisputed sociological reality. What has been heavily disputed, however, is the cause of this wealth gap. Recent discourses surrounding racial socioeconomics have been focused on the role of financial education on the disproportionate economic plight of Blacks in America. Those who argue that financial literacy, or lack thereof, is one of the primary root causes of Black poverty were often swayed by the solid statistical data showing a particular pattern between race and financial knowledge. The TIAA Institute administered their personal finance survey (P-Fin Index) in 2020 which managed to reveal this relationship. According to their reports, “African Americans answered 38% of the P-Fin Index questions correctly, with only 28% answering over one-half of index questions correctly. The analogous figures among whites were 55% and 62%, respectively” (Yakoboski, Lusardi, and Hasler, 2020). The gap that exists between the level of financial knowledge between Black and White Americans seems to mimic the degree of the existing wealth gap that also lies in between them, fostering a potential association between race, wealth, and financial knowledge. Similar data have been produced by other studies as well, contributing to the current dialogue surrounding the influence of financial literacy on Black economic prosperity. 

In the end, the ultimate goal is to find out if there is any real usefulness behind the numbers shown. As a result, we need to ask: Is financial illiteracy one of the root causes of Black poverty and the consequent racialized wealth gap in America? No, not at all. 

Many reports that argue that financial education is the key to remedy the racialized wealth gap often look at the data in isolation. Yes, there is an association between being Black, poor, and financially “illiterate.” However, the notion that financial education is a potential solution to the economic stagnation among Black Americans undermines the persistent structural and institutional social inequities that torment Black communities and their hopes for socioeconomic ascension. The statistics below tell this story quite concisely: 

• Black men are 5 to 7 times more likely to be incarcerated for a drug-related offense relative to White men, despite the fact that both groups use drugs at similar rates according to research by the NIH (Rosenburg, Groves, and Blakenship, 2017). 

• In 2015, it was revealed by the Prison Policy Initiative organization that post-incarceration incomes of men in America were 41% lower than their pre-incarceration incomes (Rabuy and Kopf, 2015). Considering that Black men are more likely to be incarcerated than White men in America, it is accurate to conclude that the financial burden of being a convicted felon falls the heaviest on the Black community. 

• 2018 data from EdBuild revealed that predominantly White school districts receive $23 billion more than predominantly Black school districts on a yearly basis. 

• 1 in 5 renters on the verge of eviction are Black women despite Black women only occupying less than 10 percent of the renter population in the U.S (U.S Census, 2021). 

Social disparities such as disproportionate incarceration rates, eviction rates, and school funding all represent just a few of the underlying factors that sustain economic oppression among Blacks, all of which can and do exist irrespective of the ability of Black Americans to prove "adequate” financial knowledge. Placing the blame on financial illiteracy is essentially placing the blame on Blacks for their socioeconomic standing; it encourages the long-held narrative that Black poverty is self-inflicted while simultaneously dwindling the accountability of America’s flawed social structures. The real cause of the racialized wealth gap is the existence of the nation’s institutionalized racism and implicit (and sometimes very explicit) political, social, and economic public policies that work directly to limit Black economic potentiality. Is financial education important? Absolutely. Is it our end all solution? Not even close. Closing the gap begins with addressing the current social complexes that are particularly unforgiving towards the Black community. With that, financial education can be one of many initiatives that can be used to supplement the (hopefully) growth of Black wealth in America within the near future. 

 Edited by: Andrew McArthur

Works Cited

Bhutta, N., Chang, A. C., & Hsu, J. W. (2020, September 28). Disparities in wealth by race and ethnicity in the 2019 survey of Consumer Finances. The Fed - Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances. Retrieved from https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm. 

Lusardi, A., Yakoboski, P. J., & Hasler, A. (2021). The TIAA Institute-GFLEC Personal Finance Index: A New Measure of Financial Literacy. New York: TIAA Institute. 

Rosenberg, A., Groves, A. K., & Blankenship, K. M. (2016). Comparing black and White

Drug Offenders. Journal of Drug Issues, 47(1), 132–142. https://doi.org/10.1177/0022042616678614 

Rabuy, B., & Kopf, D. (2015, July 9). Prisons of poverty: Uncovering the pre-incarceration incomes of the imprisoned. Prison Policy Initiative. Retrieved from https://www.prisonpolicy.org/reports/income.html. 

EdBuild . (2019). $23 billion. Jersey City, NJ: Author. Retrieved from https://edbuild.org/content/23-billion 

U.S. Census Bureau (2021, July) Week 33 Household Pulse Survey June 23 – July 5  

Public Use File. Retrieved from https://www.census.gov/programs-surveys/household-pulse-survey/datasets.html