For individuals of color, even personal finance can be a heartbreaking reminder of racial inequality.
Almost any way you slice it, White households have amassed more riches than their counterparts of color, leading to a racial wealth gap. White Americans hold eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic household, the Federal Reserve estimated in its 2019 Survey of Consumer Finances. White families also had the highest median level of wealth at $188,200, the survey found, compared with $24,100 for Black families and $36,100 for Hispanic families.
By the time White individuals reach their 60s, they’re expected to have accumulated $1.1 million more than Black Americans, according to an analysis from the Urban Institute.
Undeniably, individuals of color often end up growing less wealth because they earn significantly less than their White counterparts. White men’s median weekly earnings topped out at $429 in 2020, while Black men earned a median of $321 in a work week, according to data from the Bureau of Labor Statistics.
That all comes at a cost, affecting things like homeownership and educational attainment — the traditional pathways for building wealth. Along the way, prudent financial steps, from saving for emergencies and retirement to investing, are all the harder.
“For a person of color, you’d still have the same challenges that everyone else has: Live within your means, manage a budget, think about your own financial future and that of your family,” says Stephanie Yates, professor of accounting and finance at the University of Alabama at Birmingham. “The difference is, you have to do it in this context of, ‘OK, I may not always be treated fairly. Certain opportunities may not be available to me that were available to others.’ You’re just being held back at the starting line compared to maybe a counterpart who is not a person of color.”
Experts say pinpointing the wealth gap’s long-lasting prevalence in the U.S. is complicated. Yet, while there’s no one answer to eliminating the divide, individuals can still take steps to mitigate these inequalities. Here’s what you need to know about combating the racial wealth gap, according to experts, so you can meet your financial goals.
From slavery to redlining: Causes of the racial wealth gap
The racial wealth gap’s roots span hundreds of years’ worth of social and political events — from slavery, Jim Crow-era “Black Codes” and the Tulsa Race Massacre, to things like race-based life insurance, discriminatory GI bills and redlining. All have limited Black Americans’ opportunities to accumulate wealth.
Even worse, well-intentioned policies meant to bridge the divide have sometimes worsened the issue, Yates says. The Social Security Act of 1935, for example, excluded farm workers and domestic workers from obtaining benefits, jobs that included at least 60 percent of Black workers, according to the Social Security Administration.
“If you administer a relief system through a network that already has racial disparity, the end result is going to be more racial disparity,” Yates says. “You have to understand how we got here in order to figure out how to fix it.”
Generation after generation, Americans of color play a game of catch up
Those events all matter because they’ve set individuals of color further back for decades. That gap has thus been perpetuated for generations, as each individual tries to catch back up and boost their inheritance.
“The biggest drivers contributing to the racial wealth gap are starting debt loads out of college, having to help their families financially instead of their families helping them financially, and most of all, a lack of inheritance,” says Andrew Tudor, CFP, founder of Alchemist Wealth, which specializes in helping Black families eliminate the racial wealth gap. “The majority of my White clients have others in their families contributing to their finances starting in their 20s and 30s. For my Black clients, that is very, very rarely the case.”
Data also tells that story. Of the average Black and Hispanic households, just 10.1 percent and 7.2 percent, respectively, received an inheritance, according to the Fed. That compares with 30 percent of the average White household. Prospects look similarly bleak. Just 6 percent and 4.2 percent of Black and Hispanic households, respectively, are expecting to gain an inheritance, compared with 17.1 percent of Whites, the Fed also found.
Meanwhile, Black college graduates owe $25,000 more in student loans on average than White students and default at higher rates than their White counterparts, according to 2021 figures from EducationData.org.
Lamar Watson, CFP and founder of Washington, D.C.-based Dream Financial Planning, has seen remnants of this phenomenon in his own professional life. The first of his family to attend a four-year college, Watson said he was forced to finance his college education with student loans with little-to-no awareness of how much it would affect his future. During his first few years at work, he said he watched his more affluent colleagues purchase homes while he was still saddled with debt.
“My family didn’t have money to put me through college,” Watson says. “You have this education, but there was not a lot of wealth built up in the family, so now you owe $60,000 in student loans. With that lack of education, you just don’t have awareness of the impact that the student loans you take will have on you.”
Wealth gap perpetuates by affecting homeownership rates, financial security
Those phenomena could be what’s keeping minority homeownership rates so low — and the gap between Whites so wide. Just 44.6 percent of Black families and 47.5 percent of Hispanic families own a home, the lowest of any group, according to the Census Bureau. That compares with roughly 74 percent for Whites. Not only are individuals of color less likely to own homes, but their housing is often worth less, according to the Fed.
Other factors harder to quantify are at play, such as discrimination, differences in school quality or career opportunities, according to a 2017 analysis on the racial wage gap from the Federal Reserve Bank of San Francisco.
All of that results in financial insecurity and unpreparedness for major life events, from retiring to covering unexpected expenses. The typical White family has more than four times the liquid cash than the typical Black or Hispanic household, according to a 2020 Federal Reserve study.
Combating the racial wealth gap
Combating the racial wealth gap is no small task, and eliminating those disparities shouldn’t be left up to the individuals who endure it.
But experts say you should focus on what you can control: using the money you earn wisely and taking advantage of any tools that you have at your disposal, from workplace retirement accounts to robo-advisors and online banks for investment opportunities.
1. Increase your financial literacy through education
Another key prohibitor to minority households amassing wealth: accessibility to financial services. An estimated 13.8 percent of Black households were unbanked in 2019, along with 12.2 percent of Hispanic households, according to a 2019 Federal Deposit Insurance Corporation survey.
That could be because fewer banks are serving their areas. In majority-White counties, there are 41 financial institutions per every 100,000 people, compared with 27 in non-White majority neighborhoods, according to a 2019 McKinsey & Co. study.
Yet, it could also be because of skepticism. About 16.7 percent of unbanked Black households, for instance, cited a lack of trust in financial institutions as what was keeping them from opening an account.
“It’s difficult for a person who has been disadvantaged or mistreated to feel comfortable asking for a loan or asking for a credit card from someone who kind of looks like the people who have been mistreating them in the past,” Yates says. “The people who were disadvantaged have a difficult time trusting that something is going to be for their benefit. They don’t sign up for the programs and get involved and take advantage of what’s being offered.”
That’s where education and financial literacy comes in, an important part of combating wealth disparities. Start by exploring what online resources are out there to help you increase your personal finance knowledge. That could be through nonprofits, such as the National Endowment for Financial Education, training on social media sites such as LinkedIn or explanatory websites such as Napkin Finance and Bankrate.com. Learn the basics of building a budget, how interest rates are calculated and how deposits are federally insured by the FDIC.
The more knowledge you have, the more likely you are to also build your confidence, which could come in handy down the line — especially if you try to negotiate for a better rate with a lender.
“The education side for consumers and people of color is understanding why having a banking relationship is better than keeping money under your mattress and understanding what it means financially to go from surviving and getting through day-to-day to thriving and thinking about the future,” Yates says.
2. Automate your savings and don’t be afraid to start small
Wealth gaps can make saving money impossible, especially when individuals of color are contending with being paid less than their White counterparts.
Yet, experts say building a rainy day fund can help you build more financial confidence and security. The more cash you have stashed away in a savings account, the more likely you’ll avoid accumulating debt.
Don’t be afraid to start small. Any amount of cash that you stash away can go a long way. You may also want to consider automating your transfers to make the process easier for you, whether that involves taking money directly from your paycheck or out of your checking account.
Closely analyzing your cash flows and crafting a budget can also help you determine how much you have to save. You may also be able to eliminate non-essential expenses that can help free up more money to put back.
“Saving is one of the most important ways (to combat the racial wealth gap). Without it, there’s no wealth accumulation,” says Maria Alcantara, money coach and author of “Millennial Money Queens.” “Even if you start at 1 percent, that’s not going to grow into huge amounts, but it will help build the habit of saving, and if we start with little goals and we create that habit, that will quickly change your financial situation. Once you get confident and once you get empowered, you can grow your goals.”
3. Don’t shy away from investing
One consequence of the racial wealth gap: Many don’t jump on investing in the stock market, despite its track record for generating wealth and securing Americans a comfortable financial future.
Just 34 percent of Black households and 24 percent of Hispanic households reported owning stocks, compared with 61 percent of Whites, according to the Fed.
That might be turning a corner, with 29 percent of Black investors under 40 in a Charles Schwab survey reporting that they jumped into the market for the first time in 2020. But a Bankrate survey from March suggests that more work needs to be done, with 56 percent of investors and 41 percent of non-investors seeing the stock market as rigged.
You don’t need to be rich to invest. In fact, it might be easier for stock market newbies to kick-start their investments if they begin with a modest amount of cash, as a hard task for new investors is figuring out how the market moves. And because you’re building wealth, how much money you start with is less important than how much money you contribute to your account over time.
The presence of online brokerages, many of which charge no commissions for executing stock and ETF trades, has also made the process cheaper than ever.
With a long-term mindset and diversified asset allocation, a financial advisor can help you pick out a portfolio that’s right for your individual situation. And the good news is, there are all sorts of ways that you can invest for your individual risk appetite, whether it’s investing in historically safe certificates of deposit (CD) or higher-risk picks such as index funds.
“A lot of it stems from a lack of confidence,” says Dream Financial Planning’s Watson. “It’s all about showing them the benefits of trying not to jump in and out of the market, which is a destroyer of returns.”
4. Use technology to your advantage
Technology can be your best ally for combating the racial wealth gap in your own life. Historically, banks in predominantly Black neighborhoods have required a larger minimum balance to avoid certain service fees than those in White areas ($871 versus $626, according to McKinsey).
Being able to shop around for an online bank, where your savings will still be FDIC-insured, can help you find the right account for your individual situation, so you’re not resigned to banking costs specific to your area. You might also be able to secure a higher yield along the way.
Even when it comes to investing, technology is on your side, whether that be through using online brokerage accounts and robo-advisors or individual investing apps.
“If we leverage technology to help us meet our goals, they remove all the societal filters that prevent different races from achieving goals as the traditional financial system would,” Alcantara says.
5. Consider starting a business or side hustle
Sometimes communities of color might be interested in finding their own path toward financial freedom, particularly by starting their own business or a side hustle.
That became a side effect of the pandemic, with Black-owned business formation in 2020 surpassing that of White and Asian Americans. On average, 380 out of every 100,000 Black adults became new entrepreneurs, up from 240 in the prior two years, according to the Los Angeles Times that reported on a Kauffman Foundation annual study.
“You have more freedom and options the more money you can make,” Watson says. “And the more money you can save and invest, that’s going to put you and your family in the best position long term.”
6. Pursue an education, which can help you increase your earnings
Education has long been thought of as the path toward securing more wealth and opportunities. Data suggests that pursuing an education can at least boost the net earnings of individuals of color.
Black Americans with a master’s or higher degree, for example, earn twice as much as those who never completed high school, according to the Census Bureau. Earnings also increase by level of educational attainment.
That’s not to say it will entirely eliminate any wealth gaps. Among those who obtained advanced degrees, Black Americans earned 82.4 cents and Hispanic Americans made 90.1 cents per every dollar Whites made, according to a 2019 analysis from the left-leaning Economic Policy Institute. Taking into account the gender pay gap, the picture looks even worse for Black and Hispanic women.
Carefully calculate the costs of your desired college degree along with your expected salary and income data to make sure that the program you’re pursuing is right for your individual financial situation.
7. Plan for retirement
But even beyond salaries, sometimes high-skill positions can offer you valuable workplace benefits that aren’t always gleaned from looking at your salary information, such as the opportunity to invest in workplace retirement plans.
Black and Hispanic families are far less likely to have retirement accounts, Fed data shows. Even among middle-aged families, 65 percent of White families have at least one retirement account, compared to 44 percent of Black families and just 28 percent of Hispanic families.
That amounted to what some experts call a retirement crisis for individuals of color, with Black and Hispanic households also having a smaller amount of retirement savings compared to Whites. For working families that have money in their retirement accounts, the typical White family has about $50,000 saved, two and a half times the amount that typical Black or Hispanic families have saved, which have about $20,000 saved in retirement accounts, according to the Fed.
“You could have a history where people in your family have never saved for retirement or never retired,” Watson says.
That could be why wealth gaps between White and non-White families widen with age, Fed data shows. Meanwhile, one reason White families’ wealth is higher than that of minority communities is because they’re more likely to pass along an inheritance.
All of that demonstrates why securing a comfortable financial future is all the more important for combating the racial wealth gap.
The racial wealth gap is a complicated issue, and there’s no easy remedy or solution. Households of color may undoubtedly feel like the weight of the world is on their shoulders, once they consider that their decisions may end up affecting their descendants for generations. However, never underestimate the power of small steps.
“Develop valuable skill sets, know your value and be prepared to fight for it,” says Alchemist Wealth’s Tudor. “Expecting to save your entire family can also be a recipe for financial stress. Just like an airplane safety tutorial, we have to fully secure our mask before we can help another person, or we all suffocate.”
Even just taking financial action could increase your confidence with money, which might be half the battle, says Alcantara, drawing on her own experiences moving to Canada from Brazil as a child in 2001.
“Even when I’d gain the education, for me to have the confidence to negotiate, to want to go and start a business, to feel confident in a society where I am different, those are really big challenges. If you’re constantly worried about your money, it’s very hard for you to focus on anything else,” she says. “I like to focus on financial empowerment, so we don’t sit and wait for the government to fix these problems. We take courses and get the tools to go out there, increase your income, learn how to manage your money, so you’re not overwhelmed.”