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 structural racism has made it challenging for Blacks in America to build and maintain wealth.
What is structural racism?
According to the Aspen Institute, structural racism is: “A system in which public policies, institutional practices, cultural representations, and other norms work in various, often reinforcing ways to perpetuate racial group inequity. It identifies dimensions of our history and culture that have allowed privileges associated with “whiteness” and disadvantages associated with “color” to endure and adapt over time. Structural racism is not something that a few people or institutions choose to practice. Instead, it has been a feature of the social, economic, and political systems in which we all exist.”
Structural racism shows up in our lives across institutions and society in the wealth gap, employment, housing discrimination, government surveillance, incarceration, drug arrests, immigration arrests, and infant mortality. While this blog will dive into some of the leading factors driving the racial wealth gap, it’s important to emphasize how pervasive structural racism is.
Three factors are driving the racial wealth gap in America that we’re going to dive into here: 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. Redlining is also a discriminatory practice that has served (and continues to serve) as an obstacle Black Americans face when it comes to purchasing a home and the valuation models used to depict home values. Also, Black Americans were targeted more specifically by subprime lenders during the housing crisis, resulting in increased foreclosures and defaults which still lingers today.
Homeownership makes up a significant portion of all personal wealth and is one of the key drivers of net worth. These obstacles have made it difficult for Black Americans to build wealth via homeownership.
Reason 2: Household Income Disparities
Studies show that Black Americans still earn less even if they are equally educated and in the 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 extra challenging. This ultimately makes securing a high-income job post-graduation an even greater feat. Many Black Americans end up graduating with significant student debt, which is yet another impediment towards building wealth.
According to the Center for American Progress, “the BPS (Beginning Postsecondary Students Longitudinal Study) data show that roughly one-fifth of borrowers in repayment at the end of the six-year tracking period were using IDR (Income-Driven Repayment Plan). While differences in the overall usage of IDR by race are small, one-third of Black or African American borrowers in repayment in 2017 with a bachelor’s degree were using IDR, a much higher rate than other borrowers with the same level of education.” This stalls the ability to purchase a home, invest, and save for the future.
Additionally, 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
We can't emphasize enough that that the racial wealth gap is a result of systemic discrimination. We know that closing the gap takes systemic and political change, and spreading our knowledge of financial literacy does not go far enough without addressing these structural changes. As a personal finance company with the #1 goal of spreading financial literacy to all, we have been called upon to produce actionable steps that any individual may be able to take to better their own personal situation. Below are some resources.
An increase in Black American homeownership will allow for increased net worths, as homes typically increase in value over time. Here are some resources that can be utilized:
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. According to a UNC study, “Business ownership has historically been a strong wealth builder for communities of color. Nationally, the median net worth of Black and Latinx business owners is more than ten times that of their peers who don’t own a business.”
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
Ways to Empower
It is important to drive income higher so that additional cash is available to do things such as investing and purchasing a home. Here are ways to increase earnings:
Ask for a raise - Negotiate YOUR Worth
Start a side hustle
Develop additional skills and expertises that can be monetized
Invest in Yourself
It is important to utilize the necessary resources to gain knowledge and in turn, make your dreams happen.. Here are some ways to get started:
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
What We Get Wrong About Closing the Racial Wealth Gap 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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137 Ways to Donate - Choose any organization which speaks closest to your heart.