Understanding and Addressing the Racial Gap

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Racial wealth disparity in the United States has complex and nuanced origins that are incredibly important discussions to have.  Not discounting this history, my hope is to advance a conversation, starting with understanding the racial wealth gap, moving to why it should be narrowed and ending with ideas that could materially improve the finances of communities of color.

First, I think it is important that I point out that we live in a capitalist society which I believe is an inherently good thing. Capitalism drives innovation and competition which result in largely positive macro forces. Since there is competition in our economic system, inequality is simply an unavoidable aspect of our society.

Then why write this you might ask?

Yes, inequality is and in all likelihood, will continue to be an inherent quality of our society but I don’t believe that race should have a high correlation to financial net worth. In my view, a person’s wealth should be directly correlated to the value that they produce rather than an arbitrary characteristic like the color of their skin.

Mind the Gap: Let’s define and understand the racial wealth gap

Financial net worth is a relatively easy calculation. It is the value of the assets you own minus the total liabilities that you are responsible for. Assets are things that have value like savings accounts, retirement plans, and other forms of owned property. Liabilities are financial commitments like auto debt, student loans and credit card debt among others.

According to the Federal Reserve Bank of St. Louis, in 2016, the typical white family had about $160,000 in measured net worth while the typical Hispanic family had about $21,000 in net worth and the typical black family had the least, at about $16,000 in net worth. Needless to say, the racial wealth gap is pronounced. Most of the financial net worth the average family in the United States is closely tied to homeownership. Unsurprisingly, the groups with the lowest rates of homeownership, also had the lowest net worth. Why? The factors are many but there are two main forces at play. First, homes are an example of an asset that increases in value as time goes on and secondly, for homes that have loans, a portion of the monthly payment goes to pay down the loan effectively acting as a piggy bank for the family who owns the home.

According to a 2016 study, people on opposite sides of the financial net worth spectrum lived on average 10-15 years longer than their peers with lower net worth — more than an entire decade! Not only is life expectancy highly correlated with net worth, but health, stress and personal satisfaction after the age of 55 are as well. A simple number in a bank account or on a spreadsheet should not determine all of these factors that so greatly impact our lives but it does. — A steadfast focus on building a strong financial net worth can become the building blocks for a longer life, better health and increased happiness. Now, the question is no longer why, but rather what and how. What is the roadmap to closing the racial wealth gap for communities of color and how can those ideas translate into specific circumstances?

Building Better

Financial net worth has two counterbalances; one side with assets and the other side with liabilities. In order to begin to close the racial wealth gap on an interpersonal level, I believe that the best first step is to learn. Prior to the Great Recession, a median non-white family was more likely to own a home but, a large portion of these loans were significantly sub-prime or predatory loans designed to maximize the number of loans available without much thought to protect the consumer. When the Great Recession hit, homeownership of non-white families dropped much faster than for white families. I strongly believe that if any family were to truly understand that their home loan was the one of the most dangerous style of loan, they would not have pivoted to better quality loans. The wide scale loss of homes in the Great Recession, for non-white families in particular, underscores the importance of protecting your net worth from dangerous forms of debt and understanding all aspects of your finances. From high rate auto loans to credit cards, it is incredibly important to understand the terms of your contract, the costs to service those debts and ensure that you have the ability to repay. (Restoration services can help you understand these obligations.)

  1. Make a plan! Figuring out your financial goals is an incredibly important step because your goals inform your journey to them.
  2. Building a portfolio of assets might sound challenging and maybe even impossible but, you have a powerful force working on your side: compound interest. When you buy appreciating assets, the gains that those assets produce compound on each other. I invite you to play around with a compound interest calculator to really begin to appreciate the scale that compound interest can deliver.
  3. Be patient. Rome was not built in a day, a month, a year or even a decade but knowledge paired with consistent progress paired and determination is a recipe for building financial net worth.

For many, building a portfolio of assets, learning about your finances, making a financial plan and carrying it out might sound challenging and maybe even impossible but, community organizations like Restoration are here to help you get started and help you along the way. Restoration’s mission is to pursue, “strategies to close gaps in family and community wealth to ensure all families in Central Brooklyn are prosperous and healthy.”

Financial net worth does not equal who you are or what you are worth but your finances are directly tied to the options and opportunities that you, your children and your children’s children will have so it is imperative to understand and manage this metric.

About the Author

Tyler Carlton is a junior at Boston College where he studying biology and chemistry.  This summer, Tyler interned at Restoration where we worked on a range of special projects, including hosting a webinar, How and Why to Start Investing: Lessons from a 19 year old.

Before the pandemic, Tyler did not have much experience in finance but, found enjoyment in research of all kinds. Once the pandemic rolled around in March, his plans to work with a research scientist and take courses over the summer were derailed; he found himself at home without much to do. As he was looking around for internship opportunities, he stumbled upon the TV personality Jim Cramer and heard, "Riches are made in recessions" and to believe that the world was ending was "betting against science." Tyler's curiosity spiked; he believed in science because he had an appreciation and understanding of it. Within 3 months, researching between 3 and sometimes 9 hours a day, Tyler racked up an impressive 201% return, beating the market's 40% return in the same time period. He says, "I spent almost 300 hours in the first couple months learning terms, strategies and listening to really smart people about investing. It was not easy... I believe anyone can do it but, only if they are willing to put in the time and effort to learn."