Can Improved Financial Literacy Close the Racial Wealth Gap?

In the US, the median Black household has just 10% of the wealth of the median White household, a problem known as the racial wealth gap. A number of solutions have been proposed over the years, including financial literacy courses for Black teenagers and adults to help them learn the skills needed to build wealth. But would these classes alone be enough to close the gap? Let’s review some of the research.

What Causes the Wealth Gap?

 To find solutions for wealth disparities, it’s important to understand what they are and their underlying causes. A household’s wealth is calculated by combining the value of its assets and subtracting its debts. Assets that contribute to wealth include:

  • Liquid assets (cash)
  • Primary residence and other properties
  • Retirement accounts
  • Life insurance policies
  • Stocks and bonds
  • Business interests (such as owning part or all of a company)

The racial wealth gap in the US has many historical and current causes. The legacy of slavery and the Jim Crow era has prevented the average Black family from building wealth over multiple generations. Modern-day issues like income disparities between Black and White workers also contribute to the problem, as well as continued racial discrimination in employment, education and financial services.

Can Financial Literacy Education Help?

Because wealth disparities are caused by systemic problems like discrimination, the solutions will need to happen on a large scale. Some organizations have proposed widespread financial literacy classes as one way to tackle the problem.

In these classes, which can be offered in schools, community centers or online, students learn the basics of managing finances, such as:

  • Saving and investing money
  • Understanding credit and interest rates
  • Avoiding unnecessary debt
  • Developing a budget

Research shows this education is needed across the country. In one 2018 study, 66% of respondents were unable to answer more than 3 out of 5 questions about finances and the economy. But this is a problem across racial groups. As Dr. Debby Lindsey-Taliefero, an economist at Howard University, put it:

“We are at a big disadvantage, but it is not anything that’s supposed to be unique to us, that we need to learn differently from people who aren’t African Americans. We need to learn the same stuff but we are at a disadvantage.”

In fact, a 2016 study showed that Black families across all income levels tend to spend less than their White counterparts. So while financial literacy is an important issue, it doesn’t explain why the wealth gap persists. The solution may incorporate educational elements, but it will also need to approach the problem in other ways.

What Can Close the Gap?

There is some debate about the most effective ways to achieve wealth equality. One potential solution is to invest in Black families and communities through the work of Community Development Financial Institutions, commonly known as CFDI’s. These institutions provide low-interest or interest-free loans to help people open businesses, pursue education, cover medical expenses and more. Some were specifically created to help Black and Latino communities build wealth.

Other proposed solutions require government action, such as raising the federal minimum wage or the creation of opportunity accounts, which are savings accounts that would be opened for each child born in the US. Anything that would help low-income families acquire assets and build their wealth could be part of the solution.

The UPI Loan Fund

The UPI Loan Fund is an emerging CDFI that wants to help close the racial wealth gap by providing loans to people of color. To learn more about qualifying for a low-interest or interest-free loan, contact us today.

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