Financial Literacy in the Black Community

How the Racial Wealth Gap Formed

The racial wealth gap that exists today can trace its origins all the way back to the end of the Civil War when slavery came to an end.

While millions of African Americans had secured freedom, barriers to ensure that they could not secure wealth along with it sprung up almost immediately.

According to NPR, a strategy had been formed by 1865 to help transfer much of the South’s wealth to newly freed slaves. Union General William T. Sherman devised a plan to redistribute around 400,000 acres of Southern land to African Americans.

Since land ownership was the primary form of wealth at the time, this action would have given millions of African Americans a chance to become immediate participants in the economy.

But, following Abraham Lincoln’s assassination, the plan was nixed, and the land remained in the control of white Americans.

For decades following the end of slavery, there was simply no meaningful avenue for African Americans to build up wealth. They had been denied access to land, laws remained in place restricting their rights and access to education was heavily limited.

While the wealth gap did begin to shrink from its pre-war state as African Americans first entered the workforce, a wide gap remained.

According to the Minneapolis Fed, real progress was strongly felt during World War II, when the wartime economic boom buoyed employment opportunities for Black workers.

The gap narrowed once again following the Civil Rights Movement when equal rights and new legislation led to new opportunities.

But since then, movement has been virtually stagnant, with the wealth gap actually increasing slightly from 1980 to 2020.

The Minneapolis Fed found that a major part of the issue was the fact that the easiest way to build wealth is to already possess it.

Once a family has money, that wealth can easily expand over time, creating virtually guaranteed growth for white Americans over generations and establishing a tough-to-break cycle for Black Americans.

Over many years, Black Americans have been denied access to education and high-paying jobs, meaning they have less wealth. Since they have less wealth, they continue through generations to have fewer opportunities to grow their finances.

White families that have held wealth over generations, meanwhile, see that money continue to expand over time, making it very difficult to close the gap.

What Is the Racial Gap in Financial Literacy?

In 2018, just one-third of Americans could correctly answer at least four out of five financial literacy questions on concepts such as mortgages, interest rates, inflation and risk, according to a 2018 study by the Financial Industry Regulatory Authority(FINRA).

The disparity is greatest among African Americans.

According to the 2022 TIAA Institute-GFLEC Personal Finance Index, African Americans answered an average of 37% of the study’s financial literacy questions correctly, whereas white Americans answered an average of 55% percent of questions correctly.

Similarly, 28% of African Americans answered over one-half of the questions correctly, compared to 60% of white Americans.

Other findings from the TIAA study include:

• A lack of financial resilience was more common among African Americans than white Americans.
• Insurance tends to be the greatest knowledge gap among African Americans, followed closely by comprehending risk, investing and identifying reliable sources of financial information.
• Debt management is the area of highest personal finance knowledge among African Americans.
• Among surveyed African Americans, financial literacy is greater among men, older individuals, those with more formal education and those with higher incomes.

Minority financial experts agree that strengthening financial literacy — the ability to use skills to effectively manage money and resources — can be the key for African Americans to achieve a lifetime of  financial success.