Zawadi Rucks-Ahidiana on Race and the Financial Toolkit

Judith Siers-Poisson [00:00:59] Let’s start by defining what you mean by a financial toolkit.

Zawadi Rucks-Ahidiana [00:01:05] So the idea of a tool kit comes out of Ann Swidler’s work. And basically she uses that concept to explain the mental tools that we carry with us to make decisions. So I apply that concept to study financial decision making with what I call the financial tool kit or basically the mental tools that inform our financial decisions. So the main thing I want to point out about this concept is it’s a little bit different from what is commonly referred to as financial literacy or financial knowledge, in that there’s no value judgment on the tools that people have in their tool kit, right? So someone might have a tool in their tool kit that is viewed by the general public as a less positive thing to do with your money. But the tool kit concept captures everything, right? There’s no value judgment about what’s good or bad, where financial literacy is about holding a specific set of tools. So scholars often have a certain set of measures that they’re looking for the correct answers to the questions, and they’re “right” and “wrong” financial behaviors based on these questions. So for me, I think it’s really important to be cautious about labeling financial behaviors, as always good or always bad, because there are circumstances in which a behavior that is often viewed negatively could be the right decision for someone to make.

Siers-Poisson [00:02:38] In reading your paper, I was thinking about how many different aspects of everyday life could be affected by what is or isn’t in our own financial toolkit. Can you give us a couple examples of what kinds of decisions and behaviors could be influenced?

Rucks-Ahidiana [00:02:53] Yeah, so I’m thinking about everything from, you know, what financial institutions people use to what kinds of investments they make. So for example, you have an extra $500. What do you do with it? Right. Your financial toolkit is going to give you some options. You could leave it in your checking account. You could move it to a savings account or a money market account. You could put it into a mutual fund or your 401k, you could buy stocks. So what option do you think of and which you have enough information to implement? Those are the tools in your financial toolkit. So maybe you’re short on cash to pay your gas and electric bills. So you could use your credit card, you could take out a payday loan. You could pay not pay the bill that month. So you have a number of options that are in your financial toolkit. Obviously, these are influenced in part by your financial position. So do you have the money in a rainy day fund that you use to cover the bill? But these are also associated with information that you have from prior experiences, for example.

Siers-Poisson [00:04:02] We’ll dig into the racial differences in a minute. But let’s start with the sources of financial information that people across racial groups access and are influenced by. So, for example, from whom and how are we getting information about managing money?

Rucks-Ahidiana [00:04:19] So I identify five main sources that I think matter for most Americans, and there’s probably some variation in how important each of these sources are. But we don’t have a lot of information on each of them individually to really make that assessment. But I’m going to talk about them in the order that I think matters most. Right. So first is family. We learn a lot about how to deal with finances from the kinds of financial knowledge that parents and other family members try to impart to us. So, very direct attempts to teach about finances, but we also see how our family members interact with money. So we see that that reaction when they open that bill right at the end of the month or when they get a paycheck with a bonus. We see those emotional reactions and what they do with things, even if they’re not directly engaging with us as children about those topics.

Second, we learn a lot from our own personal experiences with finances. So that experience in your early twenties when you overdraft your bank account or when you signed up for a bunch of credit cards to get free T-shirts, or you learned how to stick to a budge, in a more positive sense. All of those experiences inform then what you do next, right, with your finances. And in that way, we’re constantly picking up financial tools right from our day-to-day experiences with interacting with money. They give us options and give us information about what kinds of results we’ll get from different actions that we can take with our finances.

Third, I would say, is mass media. So listening to a podcast, right, or a public radio station or listening to the news. You can learn about financial tools through advice that gets transmitted through those venues or just about hearing about what other people are doing with their money. So there might be some story you hear about somebody who, you know, gained $1,000,000,000 by investing in something. Right. And is now donating it all to charity. So you hear a little bit about what folks are doing with their money in those kinds of stories as well. Next, I would say friends, coworkers and other acquaintances. So our social networks are social circles. Those are spaces where we can share information and even get a sense of kind of what things folks are doing with their finances through things that they mentioned in passing. Now, I acknowledge that money is often a taboo topic, so people aren’t often directly talking about what they’re doing with their finances and how much they’re making and those kinds of things. But there can be instances where folks mention something like, “Oh, I opened up a college savings account for my kid,” which then it’s like, “Oh, you can get a college savings account. All right.” You know, that’s something to, you know, bank for the future, right, in that financial toolkit. And finally, there’s religious leaders and there is evidence that in some churches, religious leaders play a very direct role in providing financial advice and making recommendations about how their congregation spends their money, what they invest in. And even donations.

Siers-Poisson [00:07:28] These are very individual-level behaviors and attitudes that we’ve been talking about. But I think it’s important to take into consideration the impact of systems-level factors like racial segregation and the history of non-white people being subjected to predatory financial arrangements or being denied access to mortgages or other financial services. Can you tell us about how those society-level forms of discrimination play out in individual decisions?

Rucks-Ahidiana [00:07:55] Yeah, great question. Yeah, I think the structural barriers and opportunities that we face based on race play a really important role in what’s in the financial toolkit. And this is both through historic and contemporary experiences. So historically, only white Americans had access to many financial institutions. You can see this in bank lending for mortgages, but also the ability to invest in things like stocks. So that history affects what adults today saw of their family’s financial experiences as children and also has implications for wealth holdings, which again has implications for how folks think about finances, what they expect and understand to be the norm in terms of wealth holdings, and how much savings they should have. Contemporarily we see this in the form of racial discrimination in financial institutions. So the most recent nationwide example of this is the foreclosure crisis, which predominantly affected Black and Latinx Americans. So those kinds of experiences have implications for Black and Latinx Americans, family members, right? Maybe themselves directly and also their social circles. Right. Our social circles are very highly segregated. And so Black and Latinx Americans are more likely to know someone who’s gone through foreclosure, who had a subprime loan or had a negative experience with a bank, essentially. And that can influence how folks then interact with those financial institutions moving forward. So I think it’s important to think about the structural, structural and systemic issues and experiences with racism and discrimination, not just the individual and what they’re choosing to do or not do. Understanding that context of what informs their decisions is really important.

Siers-Poisson [00:09:46] You also looked at how people from different racial groups assessed different financial behaviors as good or bad. Were there some behaviors that were considered positively or negatively, regardless of race?

Rucks-Ahidiana [00:10:00] Yeah. So what’s interesting is most of the prior literature focuses on the differences. So, for example, risk aversion, right, that Black and Latinx Americans tend to be more risk averse than white Americans. But yes, what I looked at, it was also the assumption like there should be some commonalities, right? Mass media, something that has some consistent messages across different forms of media. And we should expect that folks of all races are hearing these messages and that they may be influenced by them in some way. And I do find evidence of that’s happening. So in general, there were financial behaviors that resonate with things that are transmitted through mass media that were common across Black, Latinx, and white respondents. And the data that I was looking at, where I expected to find differences and did find differences were in financial behaviors that were likely to come from family, social networks or past experiences, and likely to be different because of racial segregation, both in neighborhoods of residence and social circles, and also this history of experiences of institutional racism or racial discrimination.

Siers-Poisson [00:11:19] You just referred to the data that you used, and we should pause and talk a little bit about this. Where did you get this information to be able to make these assessments and this analysis?

Rucks-Ahidiana [00:11:29] Yeah. So I used the survey of Consumer Finances, which is a survey that is conducted by the U.S. Federal Reserve. They include the most detailed questions about finances that are available. So they’re basically three surveys that researchers use to study financial decision making and wealth holdings and the Survey of Consumer Finances has the most detail on how much folks have in every single kind of financial investment that you can think of. But they also have some really helpful questions, which is what I depend on mainly about what I call ideal financial behavior. So what do respondents think they should be doing with their money? So not necessarily what they’re doing right, but what do they think they should do? What do they think is the best practice to implement? And I use that series of questions to answer questions about the financial toolkit.

Siers-Poisson [00:12:29] So we’ve been talking quite a bit about race and we’ll talk more about it. But it seems, especially when we’re talking about money, that class could play a big role in how people relate to their finances, develop those financial attitudes and behaviors. Were you able to examine class specifically and did it make a difference?

Rucks-Ahidiana [00:12:51] Yeah. So I made sure to control for class in a variety of ways in my analysis. So for example, I use a number of different socioeconomic status measures. So a control for home ownership, for income, prior receipt of inheritance, the number of people in the household. Right. Because that affects great expenses age since, you know, folks who are older are going to hold more wealth. Right. And marital status, education and employment status. So whether someone is unemployed or employed, and I still find racial differences. So what I would argue is that the racial segregation we know persists across income levels. And so that transcends class commonalities. Right. So it’s not just that, you know, low income Blacks are segregated from whites and Asians and Latinx people. Right. It’s that middle class Black people, middle class Latinx people are still very segregated from white Americans. So the lack of exposure and contact between those groups, I think, is what’s behind that.

You know, you can control for all of these different class measures and still find persistent racial differences because social circles, even in the middle and upper class are still highly segregated. And that replicates then, you know, similar kinds of behaviors within those groups. The other underlying factor is, in fact, the racial wealth gap itself. Right? So that information that stems from family is informed by the wealth that you come from So whether, you know, your family is sitting around the table talking about, the stocks, and that stocks are going up and we’re doing really well this this term. Right. Or talking about, you know, whether there’s enough money to pay for soccer camp this summer. Those are very different conversations and based on very different wealth positions. And so because the racial wealth gap has been going on and persisted for so long there, that continues to inform these racial differences, even as there are increasingly more and more Black and Latinx middle class.

Siers-Poisson [00:15:06] So let’s dig in more on those racial differences. You referred to a couple in passing earlier, but I want to really kind of explore those. What are some of the areas where you see really pretty significant racial differences in those attitudes towards financial practices and priorities?

Rucks-Ahidiana [00:15:24] So I find similarities around information that seems to be coming from mass media. So a quick example of that, I find that Black, Latinx, and white respondents had a similar reaction to borrowing. So most reported that borrowing was neither good or bad. And this seems to acknowledge that borrowing has to happen for certain things. There was similar alignment also among their responses to different reasons to take on debt. So that aligned with these narratives in the media about good debt. So it’s good to borrow for college or build up your credit by taking out certain forms of debt. That’s positively reflected in the responses that I saw from Black and white respondents. Where I saw differences emerge were on really specific behaviors that that the media would probably very rarely say something about. Right. Maybe if they brought a financial expert on a talk show. Right, then that financial expert might say something, but it’s not something that would come up as regularly. And so these are things that I again believe are informed by family, social circles and past experiences explicitly.

These are things like the ideal time horizon for planning your finances, how long you think you should plan for financial decisions. Most Black and Latinx respondents thought financial planning should be done for the short term, which was through the next year. While most white respondents thought it should be done for the long term or for five years or more. So here we see racial differences that are likely due to differences in personal and familial economic circumstances, in part including racial differences in income and wealth holdings. Black and Latinx Americans are more likely to be lower income and more likely to have low-income family members. So even if they are middle class themselves, they may be financially supporting low-income family members and are more likely to be in that position than white Americans.

Siers-Poisson [00:17:28] And talking about those relationships within those Black and Latinx communities, there’s also evidence that those individuals and families are more likely to lend money within their circles as well. Is that right?

Rucks-Ahidiana [00:17:42] Yes. And this was done on a study of the racial wealth gap. Right. So there’s evidence that the connections that the Black middle class have to low-income family members influences their wealth holdings directly because they’re lending money to family and friends. So the higher likelihood that they have of lending money to family friends means they have less to invest, right? They have less to save. And that influences then their wealth holdings. So there is empirical evidence, right, that being middle class or upper class even and coming from a lower income background has implications for wealth holdings, not just through inheritance that you’re not getting money from family, but also that you’re financially supporting those family members. So there’s kind of this two-fold piece, because of the fact that Black and Latinx Americans are more likely to come from low income backgrounds. That means, again, that they’re more likely to not be getting inheritance and more likely to be supporting family members.

Siers-Poisson [00:18:46] And going back to a point you made earlier about risk aversion. It seems like that could have long term impacts on wealth accumulation as well.

Rucks-Ahidiana [00:18:58] Yes. And I would actually say that risk aversion to me is a very logical conclusion. So the risk aversion that you’re referring to is that Black and Latinx respondents are less willing to take on risk than white respondents with their finances. And this has implications for things like investing in the stock market or some kind of investment that would fluctuate without warning, without necessarily a logic behind it. But this makes a lot of sense, right? If you have only $2,000 of savings and you can leave that $2,000 in your savings account or you can put that $2,000 in stocks and risk losing it all or gain, right? That seems like a logical conclusion to say, you know, that’s a that’s a risky investment for my $2,000 because that’s all I have. If you have $50,000 in your savings account, putting $2,000 of that into a stock investment is a more logical conclusion. Right? So so yes. So we see these racial differences in risk aversion that are informed by financial position, but also, I think past experiences with financial institutions. There aren’t any studies that look at this directly. And my hope is that there will be some day. But risk aversion, I believe, is informed also by the historic experiences of Black and Latinx Americans have faced with financial institutions, so even a bank can feel like a risky place to put your money in some cases because of the history of discrimination and predatory lending, Black and Latinx people have experience in this country.

Siers-Poisson [00:20:43] Why would you trust institutions that have not served you well in the past? It makes sense, like you said.

Rucks-Ahidiana [00:20:50] Exactly.

Siers-Poisson [00:20:51] So, especially for lower income households, financial emergencies can be devastating and be a real setback. What were you able to learn about how people from different racial groups approached those situations?

Rucks-Ahidiana [00:21:04] Yeah. So the Survey of Consumer Finances asks about when you have a financial emergency, what do you do? And this is a really informative question. So Black and Latinx respondents were more likely to say that they would respond to a financial emergency by working more hours or taking another job. White respondents were more likely to say that they would use their savings. So you can directly see the racial wealth gap at play in their response to these questions. Black and Latinx respondents are not saying they would use their savings because they don’t have the same amount of savings to tap into. Right. So they would work more. They would take another job. Or they would figure out ways to increase their income where white Americans can, in the case of a financial emergency, like a sudden layoff or a huge health bill or health emergency that, you know, gives them a huge bill, they can turn to their savings and fall back on that cushion to address the situation.

Siers-Poisson [00:22:02] As we wrap up, what kinds of policy or societal implications do you see as possible thanks to your findings on how the financial tool kits of people differ by race. How can this information be put to use?

Rucks-Ahidiana [00:22:16] Yeah. So I think what’s most important for me coming out of the study is that it can be used to reframe how we talk about financial decision making and how we judge people’s decisions. So again, there’s often a logical reason that someone makes a decision to do something like cash their check in a check cashing establishment rather than depositing in the bank. Or to be wary of risky investments like stocks, as we just discussed. So being risk averse or using a check cashing establishment could be the right decision sometimes. So I think in general, what scholars and policymakers often do is scold that individual for making a “bad” financial decision, instead of understanding what informs the decision that the individual is making. So what I hope that the financial toolkit contributes to is a reframing of this conversation to be more understanding of the systemic, structural and cultural reasons that people make the financial decisions that they make. We should not and we cannot expect all Americans to make the same financial decisions as the white middle class. That’s just not the position that everyone is in. So I hope that the financial toolkit contributes to reframing this conversation and stepping back and thinking from the perspective of, you know, what are the structural and systemic constraints and barriers opportunities, right, that these different groups have faced and how the steps that influence how they’re making their decisions.

Siers-Poisson [00:23:51] Well. Professor Rucks-Ahidiana, thank you so much for spending time with us. It was a really interesting conversation.

Rucks-Ahidiana [00:23:57] Thank you so much for having me and your great questions. I really appreciate it.