Understanding the Racial Wealth Gap
Ever since the abolition of slavery in 1865, there has been a prevalent racial wealth gap in America. The abolition of slavery was supposed to begin an era of Black wealth in America, but systematic discrimination has made it challenging for Blacks in America to create wealth. There are three main factors driving the racial wealth gap in America, homeownership, household income, and education disparities.
Reason 1: Homeownership
White people are more likely to be homeowners than people of color. This is due to years of discrimination in lending and access to mortgages at an affordable rate.
Black Americans were targeted more specifically by subprime lenders during the housing crisis, resulting in increased foreclosures and defaults which effects still linger today.
Homeownership makes up a bulk of all personal wealth and is the key driver of net worth. Having been denied this privilege puts Black Americans significantly behind on the race to building wealth.
Reason 2: Household Income Disparities
Studies show that Black Americans still earn less even if they are equally educated and in the exact same role as their white counterparts. The median household income for White families is $70,642 compared to $41,692 for Black Americans. This is a large driver in saving and building wealth. One cannot even begin to think of saving if basic necessities are not met. Race is a stronger predictor of wealth and income than class. If you are born black, you have an 80% higher chance of being poor compared to your Caucasian counterparts.
Reason 3: Education Disparities
From lack of daycare options and underfunded public schools to skyrocketing college tuition rates, Black Americans are at an educational disadvantage. It is proven that education allows for higher income jobs, but that pipeline should begin in the early years of schooling. Lack of proper primary school education makes beating the odds and getting into one of the top colleges beyond challenging. This ultimately makes securing a high income job post graduation an even greater feat. Many Black Americans end up not attending college or graduating with significant student debt, which is yet another impediment towards building wealth. This stalls the ability to purchase a home, invest and save for the future.
Workplace discrimination is deeply ingrained in American culture, even when you do not realize it. Studies show that “white sounding” names are more likely to get calls back than “black sounding” names. Black Americans are more likely to experience unemployment and remain unemployed for longer than White Americans with the same education. The Black unemployment rate is 2x that of White Americans. Unemployment and underemployment make providing for basic necessities very challenging, which pushes Black Americans towards predatory lending and other asset draining activities, further hindering their ability to accumulate wealth.
Other reasons that may contribute to the racial wealth gap:
Communities of color are more likely to have family members in poverty compared to white families. Due to generations of financial instability, inheritances are rare in the Black American community. Blacks are less likely to receive monetary support from family members, which is very helpful for other races. Black Americans who choose to go to college may have to take on more student loans upon graduation compared to their white counterparts, which makes it harder to build wealth due to large debts. These inheritances allow for wealth increasing activities such as starting a business, home ownership and financial asset purchases. Successful Black American family members are often subject to “The Black Tax” which is providing financial support to friends or family. This limits resources and abilities to save and build wealth.
Ways to Build Wealth:
An increase in Black American homeownership will allow for increased net worths, as homes typically increase in value over time. Here are some ways to participate in the housing market:
Entrepreneurship provides strong wealth advantages for communities of color. The median net worth for business owners is 10x higher than that of the general population of Black Americans.
Black Americans are often unbanked or underbanked. They need:
Access to banks and lenders who offer low cost accounts and provide reasonable interest rates
Access to financial advisors to help navigate their money
How to Break the Cycle:
Grow Your Income: It is important to drive your income higher so you have additional cash to do things such as investing and purchasing a home. Here are ways to increase your earning:
Ask for a raise - Negotiate YOUR Worth
Start a side hustle
Develop additional skills and expertises that can be monetized
Invest in Yourself: You have to be willing to bet on yourself and put in the necessary resources to make your dreams happen. Ways to invest in yourself:
Acquire knowledge. Read books, podcasts, watch videos. Take an online class.
Seek professional advice. Reach out to your network, do not be afraid to pick someone’s brain.
Focus on Saving not Spending: Break the cycle of consumption and choose saving instead of spending.
Try to save roughly 10-20% of your income monthly, if this is possible. If not, start small and work your way up.
Open a new bank account and designate as your emergency fund. Make diligent contributions-- this is where your monthly savings can live.
Track your spending and work on cutting down unexpected spending.
How to Support:
Shop at local Black-owned businesses
Educate yourself
Beyond Broke explains the racial wealth gap and the policy changes that can help bridge the gap.
Explained | Netflix - This episode in Season 1 explains the wealth divide.
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