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Realizing financial literacy is an important part of wealth-building or even functioning in today’s world, but its fundamentals have failed to be passed along equally to all Americans.

Achieving the American Dream – opportunities to succeed, put food on the table for one’s family, education for children, hope for a better life, freedom of opportunity – demands and requires capital and consistent investment. In the U.S., however, access to capital for individuals and small business owners has been largely dependent on race. It’s an ugly reality – a reality many wish not to confront – that there exists a significant racial wealth gap. As recently as 2019, the median net worth of your standard white household, $188,200, was 7.8 times greater than that of a typical Black household, $24,100, according to the Federal Reserve.

In an analysis report by the Brookings Institution published in 2021, the report found that Black and Latino or Hispanic individuals are more likely than white consumers to depend on high-interest financial services like check cashing businesses and predatory payday lenders because there are fewer mainstream financial institutions in those Black and Latino or Hispanic communities. Increasing access to branch locations or banking services could save Black communities up to $40,000 over their individual lifetimes, according to Reuters.

Now add the constantly growing state of consumer-centric digital financial tools like QCash’s digital Life Event lending solutions to the mix. As it stands, 22 percent of Black adults who are not digitally literate is double the percentage of white adults. Both the disparity in access to financial institutions and, hence, financial literacy, in one’s community or region threatens their ability to grow financial literacy skills and wealth in this ever-developing digital economy.

How does financial literacy make such a huge difference?

Financial literacy has a direct and clear impact on members’ financial well-being. The U.S. Financial Literacy and Education Commission – the federal entity that proposes recommendations for increasing financial literacy and education – defines financial literacy as foundational for full investment and participation in the U.S. economic system. The commission says it is particularly vital for “unlocking the foundations of economic opportunity” at the individual level, but then contributes upward to “powering a strong and resilient economy” on a national scale. 

As the use of credit cards, mortgages, and student loans has become more widely used, financial literacy itself has become more important because it correlates to the consumer’s ability to successfully navigate increasingly subtle and complex financial products and services. People without financial knowledge are at severe risk of falling behind. 

Along with other benefits, financial literacy lessens the vulnerability to fraud while increasing the probability of increasing wealth over time. High scores in financial literacy are central to retirement planning, which itself is a key component to household wealth. The financial literacy gap also has a direct effect on other key metrics such as the racial wealth gap, which is the measure of wealth held by different racial groups within the U.S. 

Racial Wealth Gap
Photo: August de Richele | Pexels

Why does a racial wealth gap exist?

For many of America’s consumers, fundamental financial literacy is learned from up to five societal sources, according to Investopia: family, high school, college, employers, and the military. National survey data found that education and household income remain the two biggest factors in predicting whether someone has a high level of financial literacy.

The following categories are found to be directly affected by a lack in those two areas listed above.

Socioeconomic and political barriers

Conventional accounts have centered the blame for financial literacy, or lack thereof, on shortcomings in parental guidance or poor decision-making. More recent studies, however, also point to socioeconomic and political barriers. 

To be more specific, from their earliest years, members of minority groups are funneled into using predatory financial services like payday lending outfits or outright denied access to mainstream basic financial education resources.

Native American communities in the U.S., for instance, trail in financial literacy behind white Americans due to historic economic and civil injustices that continue to hinder that community’s economic growth to this day. Analysis shows the population’s high rates of poverty and unemployment, along with other economic barriers, influence the broader idea of improved overall financial well-being.

Gender disparities

Explaining the gender gap when it comes to financial skills focuses partly on the penchant for men to acquire more financial experience and education than women. A similar dynamic exists with the racial gap, assisted by structural economic barriers, as minorities may have less access to wealth, higher unemployment rates, and lower quality education. 

Racial wealth gap: a persistent, multi-headed monster

The lack of financial literacy is not simply the result of insufficient parental guidance. In a complex study of the persistence of the racial gap in financial literacy, the findings revealed that the gap persists even with equal access to financial literacy education. Additionally, the positive impacts of parental instruction of financial knowledge depreciates faster for minority groups than for white populations. 

Conversely, members of minority groups in the study benefitted just as much as white students from high school and employer education on finances. 

Drawing the line at solutions

When one considers the causes of the wealth gap, a vital answer lies in unequal access to the fundamentals of financial education. Financial literacy is achieved over time from family, high school (optimally elementary school!), and one’s employer. Further studies show minorities and women remain more likely than white men to lack the financial background required to deal with an increasingly multifaceted financial economy. 

Fortunately, there is no better solution than your local credit union for groups of all demographics to sit down with a staff member, reexamine their priorities, consider potential financial health tools and onboard those tools to build that member’s financial health from the ground up. That’s where QCash’s digital Life Event lending platform comes in. 

With its relational AI decisioning engine to provide a clearer, 360-degree picture of the member’s financial status and a short series of taps on their digital device, if approved the member will have the requested loan amount deposited in their account within 60 seconds. That loan enables the beginning of a new, healthier journey for the member to start building back their financial wellness goals while achieving their financial literacy objectives along the way. 

For more info on QCash’s Life Event Loans, request a demo here!