There are deep-seated systemic issues at the heart of financial inequality in the U.S. Discriminatory practices such as redlining, which denied Black individuals and families home mortgages, have perpetuated income and wealth inequality even decades after these practices were dismantled.
Today, average Black incomes are 60% of average white incomes, but Black wealth is just 5% of white wealth. Redlining has directly contributed to this inequality because most families gain wealth from equity in homes, and discriminatory lending practices have prevented Black communities from building wealth through home equity for decades.
Financial insecurity is rampant in BIPOC communities. Two out of three households of color in America do not possess savings that can sustain themselves for three months if income were disrupted — a scenario that is particularly acute amidst the pandemic. Financial literacy is a resource that can be used to increase access to resources, build assets, and break cycles of poverty that have been systemically imposed on Black and Indigenous communities for generations.
Financial literacy is defined as financial knowledge that allows individuals to make sound financial decisions. The body of knowledge includes foundational concepts from economics and finance that are relevant to everyday life, such as interest rates, inflation, mortgages, and bonds. A strong working knowledge of financial literacy empowers people to make smart choices with their money, which in turn can open opportunities including saving for retirement, investing in property, paying for education, and securing their families’ futures.
The 2016 National Financial Capability Study found that, of thousands of Americans surveyed on five basic financial literacy topics (interest, inflation, risk, bonds, and mortgages), only 37% of individuals were able to answer 80% of questions correctly. A study from the University of Illinois Urbana-Champaign compounded on the National Financial Capability study, finding evidence that college-educated white men are the most financially prepared and literate. This is largely due to the trend that in the U.S., financial knowledge spreads through family, not through public education.
Because education is a state-dominated issue, there are no federally enforced financial education requirements. To increase financial literacy in BIPOC communities, significant actions must be taken to educate BIPOC youth on financial decision-making from an early age.
A strong financial literacy foundation is essential to navigate the path to financial well-being and eventually, to build wealth. Wealth, which is technically defined as the value of assets after subtracting the value of debt, is a basic indicator of financial health and the ability to weather difficulties such as illness, unemployment, and financial crises. During crises such as the COVID-19 pandemic we’re experiencing, wealth becomes particularly essential for individuals, families, and communities to weather unforeseen financial impacts.
It is extremely concerning that wealth inequality in the United States is at its most extreme levels since World War II. Research by the Center on Budget and Policy Priorities found that from 1989 to 2016, the proportion of wealth held by the top one percent of wealthiest people in the U.S. grew from 30% to 39%, whereas the proportion of wealth held by the bottom 90 percent dropped from 33% to 23%. In particular, the wealth gap is observed most severely between white communities and BIPOC communities.
The wealth gap between people of color and white men and women is staggering. The median wealth for a single white man aged 18 to 64 is $28,900; for a single white woman, the median wealth is $15,640. This is significantly higher than the median wealth for a single Black woman, which is $200, and for a single Latinx woman, which is $100.
To bridge the wealth gap between BIPOC and white individuals, serious education reform must occur. If there are barriers to implementing financial education requirements at a federal level, then statewide policies and privately-funded programs may be the next best solution. Some states already have such mandates in place; the Council for Economic Education found that 21 states currently require high school students to take a personal finance course to graduate.
Without government-facilitated education, only individuals who have the privilege to be taught about personal finance at home will have the direct resources to develop their financial literacy and make smart monetary decisions.
Without government-facilitated education, only individuals who have the privilege to be taught about personal finance at home will have the direct resources to develop their financial literacy and make smart monetary decisions. This argument is substantiated by a survey of 11,000 high school course catalogs conducted by Next Gen Personal Finance, which found that in states that do not mandate financial education, low-income students had vastly less access to financial knowledge than wealthier students. Because Black, Latinx, and Indigenous populations comprise the majority of the first-generation, low-income group, BIPOC communities continue to have significantly less access to financial learning resources.
Some private solutions have emerged to combat financial literacy issues. For instance, The Academy Group builds financial foundations for youth of color in Chicago. The organization strives to actively aid students’ financial well-being by guaranteeing scholarships, internships, and jobs after graduation for those that stay involved with the program. Programs such as the Academy Group’s should be widely established and propagated to engage youth of color and low-income students in the financial learning process.
With private institutions like The Academy Group on the rise, there exists opportunities for BIPOC youth to build financial knowledge and apply their skills to build wealth. There’s a long road ahead, with many steps to be taken, especially in the way of ubiquitous mandatory financial education across state policies. To build wealth in BIPOC communities, we must aggressively pursue universal financial education, giving BIPOC individuals the skills they need to make empowered financial decisions.
Last updated 11/30/20
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