Gaps in Financial Literacy Education

Gaps in Financial Literacy Education
“Financial literacy” is a term used to describe a person’s ability to comprehend and use financial
skills, such as personal finance, budgeting, and investing. It is sometimes used interchangeably
with “financial capability.” Its opposite is “financial illiteracy,” which is meant only as a
description of financial knowledge and not as a pejorative.
A gap in financial literacy affects people in developed or advanced economies, as well as those
who live in emerging or developing countries. Consumers in advanced economies also fail to
demonstrate a strong grasp of financial principles that can help them understand and negotiate
the financial landscape, and manage financial risks.
Gender Gap in Financial Literacy
Research has shown that financial illiteracy is widespread among women, and that many women
are unfamiliar with even the most basic economic concepts needed to make saving and
investment decisions. This gender gap in financial literacy may contribute to the differential
levels of retirement preparedness between women and men. However, little is known about the
determinants of the gender gap in financial literacy. Using data from the RAND American Life
Panel, the authors examined potential explanations for the gender gap including the role of
marriage and division of financial decision-making among couples. They found that differences
in the demographic characteristics of women and men did not explain much of the financial
literacy gap, whereas education, income and current and past marital status reduced the observed
gap by around 25%. Oaxaca decomposition revealed the great majority of the gender gap in
financial literacy is not explained by differences in covariates - characteristics of men and
women - but due to coefficients, or how literacy is produced. They did not find strong support
for specialization in financial decision-making within couples by gender. Instead, they found that
decision-making within couples was sensitive to the relative education level of spouses for both
women and men.
Racial Gap in Financial Literacy
Our country is experiencing a challenging time, but as the saying goes: What doesn’t challenge
you, won’t change you. Black Lives Matter has become one of the largest movements in history,
with recent polls suggesting more than 15 million people have participated. While American
leaders cannot erase history or undo the racial inequality that Black Americans have faced, they
certainly can and should accept responsibility to create and promote new policies that interrupt
and ease these injustices.
National financial education should be a top priority. Everyone agrees that quality education
plays a huge role in career success. But a lack of national financial education policies results in
few requirements in the majority of our nation’s schools. Just six out of 50 states require high
school students to take a personal finance class for a full semester before crossing the graduation
stage
According to a report by the Institute for Policy Studies, white families in America have a
median net worth of about $116,000, after consumer goods are depreciated. The median wealth
for Black families is $1,700 — nearly 70 times less! Taking a personal finance class equalizes
understanding for all students. They learn that owning a car usually decreases wealth, while
investing in an IRA increases wealth. They explore real-world topics like establishing credit,
investing in the stock market, filing taxes, and choosing different types of insurance. Historically,
such lessons have been reserved for the wealthy, who are not commonly people of color. A
recent Brookings article includes data from 2016 showing that of the Americans in the top 10%
based on income, only 3.6% were Black.
The Urban Institute reported that in 2018, 41% of Black Americans owned homes compared to
nearly 72% of their white counterparts. Black Americans also have significantly less saved for
retirement and, understandably, less to pass onto their kids as an inheritance. Just as a lack of
access to capital prevents many Black families from achieving the level of wealth enjoyed by
most white families, so too does a lack of access to financial education. It prevents them from
learning life-changing financial lessons early in life so that they can maximize income, build
wealth and work to end generational poverty.
Financial Knowledge Gap
Financial knowledge is one’s understanding of financial matters. Individuals need to be

aware of the micro and macroeconomic environment and understand basic issues of everyday
finance such as saving, investment, credit, interest rates, inflation, and pricing of consumer
products, among others. As such, financial knowledge is a form of literacy about financial
issues. In this area of research, the term financial knowledge is sometimes used interchangeably
with financial literacy. For example, Kempson et al. (2005) define financial literacy as
individuals’ ability to obtain, understand, and evaluate financial information. In other cases,
financial knowledge is understood as one component of financial literacy. For example, various
authors have conceptualized financial literacy as being comprised of financial knowledge, skills,
and attitudes, all of which influence people's financial behaviors (Lusardi, 2011; Lusardi &
Mitchell, 2013; Xiao et al., 2014).
Both subjective and objective assessments are used to measure financial knowledge.
Objective financial knowledge is measured by assessing people’s level of understanding of
various components of financial markets and products, such as assets, debts, savings, and
investments (Leskinen & Raijas, 2006). Xiao et al. (2014) measured objective financial
knowledge using a knowledge quiz or a numeracy test on a specific domain. Lusardi and
Mitchell (2014) identified three basic areas to measure objective financial knowledge: (i)
numeracy and capacity to do calculations related to interest rates, (ii) understanding of inflation,
and (iii) understanding of risk diversification. For simplicity, we use the term ‘objective
financial knowledge’ in this study.
Subjective financial knowledge is understood as individuals’ self-assessment of them
levels of financial knowledge. Both the National Financial Capability Survey (NFCS) in the US
and the Canadian Financial Capability Survey (CFCS) used a number of questions to assess the
subjective financial knowledge of the respondents (FINRA Investor Education Foundation,
2009; Statistics Canada, 2009). To measure subjective financial knowledge, Xiao et al (2014)
used a single item from the NFCS that asked on a one to seven scale: "how would you assess
your overall financial knowledge?”.
The level of financial knowledge matters because of its relationship to financial decision making
and behavior. Accordingly, low levels of financial knowledge can lead to greater risk of
financial vulnerability amongst older adults, which is an important cause for concern. Studies of
financial decision-making suggests differences across the life course. For example, compared to
younger adults, older adults paid more for credit services (Laibson, Agarwal, Gabaix, & Driscoll,
2009), and were more likely to file for bankruptcy (Pottow, 2011). Overall, possessing financial
knowledge can serve as a protective factor against potentially deleterious decision-making in
older age (James, Boyle, Bennett, & Bennett, 2012).
Financial vulnerability is a rising concern. Social workers are now actively engaged in
building financial capability. Social workers can create equitable economic conditions, and
enhance financial security and well-being in old age by building awareness of the financial
knowledge gap.
References:
https://www.investopedia.com/terms/f/financial-literacy.asp#:~:text=Financial%20literacy
%20is%20the%20ability,a%20lifelong%20journey%20of%20learning.
https://www.marketwatch.com/story/whats-behind-the-financial-literacy-gender-gap-these-
academics-both-male-and-female-found-one-answer-11620068977#:~:text=One%2Dthird
%20of%20the%20financial,forced%20to%20give%20an%20answer.
https://www.bruegel.org/2021/03/gender-gap-in-financial-literacy-a-lack-of-knowledge-or-
confidence/
https://www.rand.org/pubs/working_papers/WR762.html
https://www.investopedia.com/the-racial-gap-in-financial-literacy-5119258
https://www.usatoday.com/story/opinion/2020/07/31/shrink-racial-wealth-gap-teach-teens-
personal-finance-column/5493353002/
Lusardi, A., & Mitchell, O. (2011a). Financial literacy and planning: Implications for retirement
wellbeing. In Financial literacy: Implications for retirement security and the financial
marketplace. Oxford, UK: Oxford University Press.
https://gflec.org/wp-content/uploads/2015/11/3313-Finlit_Report_FINAL-5.11.16.pdf?x27564
https://www.investopedia.com/articles/investing/100615/why-financial-literacy-and-education-
so-important.asp
https://www.berkshireeagle.com/opinion/editorials/our-opinion-an-education-gap-in-financial-
literacy/article_f98a9d4e-e1e8-5a33-937c-7bbf3ea4f1dd.html

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What are some factors that contribute to the gender gap in financial literacy?

What are some factors that contribute to the racial gap in financial literacy?

Gaps in Financial Literacy Education

Gender Gap in Financial Literacy

Racial Gap in Financial Literacy

Financial Knowledge Gap

Financial knowledge is one’s understanding of financial matters. Individuals need to be

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