This post is a guest post by Ali Rennoll
Asian and White Americans were able to correctly answer 3.2 out of six questions meant to assess basic financial literacy, while Hispanic Americans were able to answer 2.6, and Black Americans 2.3, according to a 2018 report. With both of the latter scores below the national average, it’s clear that when categorized by racial or ethnic group, the data suggests that financial literacy rates ‘are not evenly dispersed.’ When aiming to address financial literacy among marginalized groups across the country, here’s what you should know regarding the matter, and what legislation aims to do about it.
The state of financial literacy among Americans
When it comes to the state of financial literacy among Americans, Moneyzine points out plenty of statistics that highlight cause for concern. For instance, in 2020, Americans lost a whopping $415 billion due to poor financial literacy. Considering the fact that 87% of teenagers in the U.S. admit to not understanding their finances, it’s not surprising that in 2022, only 23 states required high schools to teach financial literacy.
To further highlight where Americans stand regarding the subject, only one-third of adults could answer at least four out of five financial literacy questions on fundamental concepts, such as mortgages, interest rates, inflation and risk, according to studies compiled by the U.S. Financial Literacy and Education Commission. The Forbes post further notes that about 40% of Americans turn to family, friends, or coworkers when they have a question about finances. With the 2022 Personal Finance Index reporting the lowest financial literacy among American adults since at least 2017, those with low financial literacy are found to be six times more likely to struggle making ends meet — however, that isn’t the only consequence that being financially illiterate can bring.
The power of financial knowledge
Having financial knowledge can support healthy finances, from instilling values such as building an emergency fund, budgeting, paying bills, and navigating matters such as insurance and taxes — to name just a few key benefits. Financial literacy is also imperative when aiming to support financial goals throughout life, whether it be saving for long term goals like retirement, or buying a home for the first time. Financial literacy can help when budgeting properly and managing student loans, too — especially when considering that even before the coronavirus pandemic, one in four borrowers was in default or serious delinquency, with many having to choose between making a payment or paying for basic life necessities like food.
Financial literacy can also serve one well when it comes to matters such as successfully managing a mortgage as a first-time homeowner. For example, understanding how the prime rate works — whether you live in the U.S. or Canada — gives you insight when it comes to the state of your personal finances, particularly when it comes to the interest rates that you pay on a loan or a mortgage. Being set by the individual banks, changes in the prime rate will directly impact the interest you’ll have to pay (when the prime rate rises, your interest will increase, when it falls, your payments will decrease).
Understanding the effects of financial illiteracy
Regarding the impact that financial illiteracy can have on one’s life, One Fortune.com article notes that people with lower levels of financial literacy “are more likely to rely on credit cards and less likely to plan for retirement or have an emergency fund.” The article further explains that “This financial insecurity can follow them into the workplace and negatively impact their career goals, and about 40% of Black and Hispanci employees report that financial stress has a negative impact on their productivity at work.” Investopedia points out that financial literacy can help prevent a variety of undesirable situations from becoming a reality. For instance, good financial literacy will help prevent one from becoming a victim of financial fraud, accumulating unsustainable debt burdens (such as those created from poor spending decisions or lack of long-term preparation), as well as help prevent other negative consequences, such as having poor credit, encountering bankruptcy, and housing foreclosure.
Where legislation stands
Ensuring that those in marginalized groups have access to financial literacy programs and courses is a must. Free resources, such as online personal finance courses, for example, can be a great way for adults to learn more, while talking with a professional can further help heighten your understanding of various topics. “Keep in mind that online personal finance courses should be seen as an education resource and not specific personal financial advice,” advises Drew Feutz, a certified financial planner in Indianapolis and co-founder of Migration Wealth Management. “The information learned from taking a personal finance course should be applied within the context of your own financial situation, rather than following everything that is taught 100% to a T.”
Implementing financial literacy in education is a fantastic way to empower all young Americans when it comes to successfully navigating personal finance throughout life. During the 2021-22 legislative sessions, 585 bills were introduced pertaining to financial literacy, 42 states and DC proposed bills addressing financial literacy, with 62 bills passing. Regarding legislation related to school instruction, Florida, Nebraska, Georgia, New Hampshire, and Ohio all passed bills that involved adding financial literacy education requirements for high school graduation. It’s noted that the Florida bill, for example, aims to address topics in financial literacy education, from balancing a checkbook, to money management, how to contest an incorrect bill, as well as understanding loans, taxes, contracts, insurance, saving, and investments.
To further highlight legislative efforts throughout the country, New York City Mayor Eric Adams recently signed Intro 54-A into law, amending the city’s administrative code “to allow financial empowerment education in New York City Department of Youth and Community Development (DYCD) programs.” Mayor Adams noted “Financial literacy is a foundational skill for our young people, but far too many of our kids are being left behind.” Adams went on to describe his own experience regarding the issue, stating “As a young man, I never had information on how to save or how to be financially responsible. By signing this bill into law, we are helping our youth learn the skills they need to succeed financially. We want to help our children understand the power of investing and the power of saving to put them on the road to financial independence.”
Financial literacy is imperative when it comes to successfully navigating finances throughout life, from learning to save and budget to understanding aspects like insurance. While there is a noteworthy difference in financial literacy among marginalized groups, various legislative acts are working to empower those for a healthy financial future.
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