African American Personal Finance Knowledge

New Insights from the Personal Finance (P-Fin) Index 

Introduction

The financial well-being of African Americans lags behind that of the U.S. population as a whole, and whites in particular. The reasons for this gap are complex, but one area of importance in addressing it is increased financial literacy.

Summary

Financial literacy is knowledge and understanding that enable sound financial decision making and effective management of personal finances. As such, improved financial literacy contributes to improved financial well-being. This report uses the third wave of the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) to examine the state of financial literacy among African American adults and the relationship between financial literacy and financial wellness. 

Key Insights

  • On average, African Americans answered 38% of the P-Fin Index questions correctly; only 28% could correctly answer over half the questions. 

  • Financial literacy within the African Americans community is greater among men, older individuals, those with more formal education, and those with higher incomes.

  • “Insuring” is the least understood area of personal finance among African Americans, followed closely by “comprehending risk,” “investing,” and “identifying go-to information sources.”

  • “Borrowing and debt management” is the area of highest personal finance knowledge among African Americans.

  • African Americans who are more financially literate are more likely to save for retirement, have non-retirement savings and better manage their debt. 

Methodology

The P-Fin Index is an online survey fielded each January with a sample of U.S. adults. The 2019 sample consists of 1,008 individuals. At each administration of the survey, the researchers oversample a particular demographic group to enable a detailed analysis of that group. In 2019, 1,015 African American adults were oversampled. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Executive Summary

The financial well-being of African Americans lags that of the U.S. population as a whole, and whites in particular. The reasons for this gap are complex, but one area of importance in addressing it is increased financial literacy.

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Introduction

The financial situation of African Americans lags that of the U.S. population as a whole and of whites in particular. Simple economic indicators illustrate the gap. While 66% of African Americans report that they are doing at least OK financially, the comparable figure among whites is 78%. Median household income among African Americans was $35,400 in 2016; median household income of whites was $61,200. African American household net worth was $17,600 in 2016 and 19% had zero or negative net worth; the analogous figures for white households were $171,000 and 9%, respectively.

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African American financial literacy

Financial literacy is low among many U.S. adults, including African Americans. On average, African American adults answered 38% of the P-Fin Index questions correctly. Only 28% answered over one-half of index questions correctly, with 5% answering over 75% correctly (Figure 1).

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2019 P-Fin Index Figure #1
2019 P-Fin Index Figure #2
2019 P-Fin Index Figure #3

Demographic variations among African Americans

Financial literacy varies across demographic groups among African Americans (Figure 4). Observed variations in the average percentage of P-Fin Index questions answered correctly are consistent with those identified among the U.S. adult population as a whole.

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2019 P-Fin Index Figure #4
2019 P-Fin Index Figure #5

Personal finance functional knowledge

The P-Fin Index gauges personal finance knowledge and understanding in eight functional areas:

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.

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2019 P-Fin Index Figure #6
2019 P-Fin Index Figure #7

Financial wellness

The 2019 P-Fin Index survey contained several questions indicative of financial wellness—questions regarding behaviors that should promote financial wellness or regarding outcomes that demonstrate financial wellness. Our previous research found a strong link between P-Fin Index scores and these indicators of financial wellness. This finding holds among African Americans, as well—those with greater financial literacy tend to exhibit greater financial well-being. In addition, consistent with other research discussed above, African Americans tend to exhibit lower financial well-being than whites do. In some instances, however, greater financial literacy mitigates such differences in financial wellness.

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2019 P-Fin Index Figure #8
2019 P-Fin Index Figure #9
2019 P-Fin Index Figure #10
2019 P-Fin Index Figure #11
2019 P-Fin Index Figure #12

Discussion

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.

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