The phrase “Knowledge is power” is as accurate as it comes. The financial aspect of this power has been limited to more developed communities while others are highly underserved. The levels of financial literacy haven’t gotten better in these communities at the rate at which they should have. These are the communities with the same financial problems and financial needs but do not have the same amount of financial knowledge to cater to those needs in the right manner. People of color and other underserved communities are still comparatively less financially literate which is unfair at all levels (PR News, 2022).
According to a study carried out by The Global Financial Literacy Excellence Center at George Washington University and TIAA Institute, on average, African Americans and people of color answered 37% of their joint Personal Finance Index questions correctly, while the same percentage was 55% for white respondents. Statistics like these are evidence that the gap in financial literacy still exists and it needs to be addressed (TIAA, 2022).
The Importance of Financial Literacy
Financial literacy allows an individual, his family, and the community as a whole, to make better financial decisions for them. Financially literate communities showcase a more organized financial behavior compared to the ones that are not. The underserved communities have the same families and financial needs, but the fact that even if they have the same amount of monthly income as someone who is more financially educated, they wouldn’t end up in the same situation at the time of their retirement, all due to lack of financial literacy.
This is not just harmful on a personal level, these communities are significant contributors to the country’s economy and when they don’t make the right financial decisions, it is a direct loss of the nation. According to Hogarth (2002), “an effective and efficient marketplace requires knowledgeable consumers, [who are] able to make informed choices as the informed consumers provide the checks and balances that keep unscrupulous sellers out of the market” (p. 3).
One example of a decision based on poor access to financial literacy leading to a worldwide disaster is the 2008 fiasco. People who lacked financial literacy were given houses by mortgage using inflation in the property market as a justification, resulting in communities that were buying houses that they could never afford This financial literacy disaster led to 2.3 million homeowners, a good majority of whom were these underserved communities, to default on their mortgages. These people were homeless and broke, which could have been avoided with better standards and greater access to financial literacy.
Effect of Financial Crises Nationwide
Many of these underserved communities were still battling with the shockwave of the financial crisis of 2008 when they were hit by yet another disaster in the name of Covid 19. Covid 19 is another event that raised the question of financial awareness among these communities as they continue to suffer financially with no financial planning whatsoever.
The predictability of these disasters is impossible, but it won’t be wrong to say that people with higher financial literacy are much more prepared for such events than the ones that lack financial literacy. This means that the communities being underserved in terms of financial education are bound to suffer more than the ones that are not. Financial literacy can make these communities build a defense against these natural calamities in the future.
In the case of the 2008 crisis, imagine if these same communities were more financially educated. They definitely would have gone for an option that is much more affordable or would have saved for a greater down payment. Financial literacy is not necessarily about investments and retirement accounts or mortgages; it is about being able to make better financial decisions for one’s self daily This includes being able to understand what one can and cannot afford in the long term, knowing how to do better budgeting, how to use a credit card in the best manner, set financial goals for future and have emergency funds. The fact some communities are still being deprived of a need that is so basic that it affects every other aspect of their lives directly or indirectly is awe-worthy.
Planning for Retirement
One of the most important aspects of financial literacy is to plan for times when you won’t be able to work to fill in the gaps in your monthly budget. People from communities widely end up working way longer than their more privileged counterparts in terms of years and still do not have anything in savings at the end of it, all due to a lack of financial planning and literacy.
We are not in the 80s or 90s when the pension system coupled with social security benefits was more than enough to cover the monthly expenses. Families are now in modern financial times where most employers are straying off the pension system and social security barely covers any expenses. Anyone who does not plan for their retirement is setting himself up for a very harsh financial period and this is the case with most families of underserved communities.
The 401(k) plan, which is the most popular choice in terms of retirement planning, is widely subscribed by most but many remain unaware of how to manage the account and maintain it properly to get the right returns. A good percentage of people from these communities do not have the kind of financial knowledge that would allow them to understand and use such options in their favor. These people come from families that are living their lives paycheck to paycheck. Their finances are limited to their necessities and hence these are the very people that are more bound with credit card debt, bad credit scores, and financial burdens.
Steps need to be taken to improve the levels of financial literacy among these communities. Better financial literacy means that these communities will be able to prepare themselves for the financial crisis or another event, better plan their retirement, understand the day-to-day financial aspects of their transactions and contribute to the overall economy in a much more constructive manner. If no bold action is taken to educate these communities, these families will continue to see the same financial issues the United States has been plagued with over the past few decades.
- Financial Literacy, wellness, and resilience among African Americans: African American Financial Literacy. Financial literacy, wellness, and resilience among African Americans: African American financial literacy | Institute. (n.d.). Retrieved December 20, 2022, from https://www.tiaa.org/public/institute/about/news/financial-literacy-wellness-and-resilience-among-african-americans-african-american