New insights from the Personal Finance (P-Fin) Index
Financial wellness depends in part on how well individuals navigate the myriad of financial decisions faced in the normal course of life. Financial literacy is knowledge and understanding that enable sound financial decision making and effective management of personal finances. As such, financial literacy contributes to financial well-being.
Unfortunately, financial literacy among U.S. adults is modest at best. Financial literacy among African Americans is even lower. Furthermore, African American financial literacy is lower than that of whites in all but one functional knowledge area. African American financial literacy tends to be lowest in the areas of insuring, comprehending risk and uncertainty, investing and go-to information sources. In addition, data collected in January 2019, a time of economic expansion, shows how ill-prepared African Americans were to face any financial shock, let alone an economic contraction as severe as the one caused by the COVID-19 pandemic.
A more refined understanding of financial literacy among African Americans, including areas of strength and weakness and variations among subgroups, can inform initiatives to improve financial well-being. While not a cure-all, increased financial literacy can lead to improved financial capability and practices that benefit even those with relatively low incomes. There is a strong link between financial literacy and financial wellness among African Americans. Those who are more financially literate are more likely to plan and save for retirement, to have non-retirement savings and to better manage their debt; they are also less likely to be financially fragile.
Given the financial literacy gap between African Americans and whites and the variations among African Americans described in this report, it is important for initiatives to better target the needs of specific demographic subgroups. This includes increasing efforts to promote financial education in school and the workplace. It is also important to provide programs that emphasize topics where financial literacy is particularly low, such as insuring and understanding risk and uncertainty.