Financial Literacy and Wellness among African-Americans: Personal finance functional knowledge
New Insights from the Personal Finance (P-Fin) Index
The P-Fin Index gauges personal finance knowledge and understanding in eight functional areas:15
1. Earning—determinants of wages and take-home pay.
2. Consuming—budgets and managing spending.
3. Saving—factors that maximize accumulations.
4. Investing—investment types, risk and return.
5. Borrowing and managing debt—relationship between loan features and repayments.
6. Insuring—types of coverage and how insurance works.
7. Comprehending risk and uncertainty—understanding uncertain financial outcomes.
8. Go-to information sources—recognizing appropriate sources and advice.
In each functional area, African-Americans answered less than one-half of the index questions correctly (Figure 6). Beyond that, financial literacy is particularly low in some areas. Insuring is where African-American financial literacy tends to be lowest with 32% of questions answered correctly, on average. Comprehending risk, investing and go-to information sources are areas where functional knowledge is essentially just as low.
Low financial literacy in the areas of insuring and comprehending risk is particularly troubling—risk and uncertainty are inherent in financial decision-making, and individuals face a range of choices regarding events to insure and how to structure their coverage. Understanding how insurance works (e.g., the trade-off between deductibles and premiums) and what constitutes appropriate coverage is important. Poor insurance decisions can leave an individual under-insured for some risks and over-insured for others, as well as overpaying for coverage. Sobering, the percentage of correct answers in the area of insuring tends to be even lower among African-American women (29%), the young (25% among 18-29 year-olds), and the unemployed and disabled (18%).
Borrowing and debt management is the area of greatest personal finance knowledge among African-Americans with 47% of index questions answered correctly, on average. This is also the area of greatest knowledge among all U.S. adults. Borrowing and managing debt often begin relatively early in life. Knowledge and understanding, in turn, can emerge from experience tracing back to relatively young ages.
Differences in functional knowledge between African-Americans and whites are striking (Figure 7). The percentage of P-Fin Index questions answered correctly is lower among African-Americans in each functional area except comprehending risk and uncertainty where the 4 percentage point difference is not statistically significant. All other functional areas have double-digit differences ranging from 11 to 21 percentage points.
15 These areas correspond to the National Standards for Financial Literacy outlined by the Council for Economic Education. See http://councilforeconed.org/resource/national-standards-for-financial-literacy/.