While the most effective solutions would likely require systemic change at the highest levels, a better understanding of how the wealth gap has formed — and the ways it has negatively impacted the Black community — can help individuals to use financial literacy to make a difference in their day-to-day lives.
The Racial Wealth Gap
Distribution of wealth has always been a major issue in the U.S., and there are few communities that have been impacted by its adverse effects more than the Black community.
According to the Brookings Institution, Black Americans would hold $12.68 trillion in household wealth if the nation’s wealth was distributed by population size. Instead, Black households held just $2.54 trillion in 2020.
The racial wealth gap that exists today has been buoyed by centuries of historical injustices. While slavery ended over 150 years ago, systemic inequality, employment discrimination and other key issues have persisted into modern times and helped build a massive barrier between Black Americans and access to wealth.
Closing the racial wealth gap in the U.S. is a complex issue with no one-size-fits-all solution, and there is only so much that can be done on an individual level. But expanding financial literacy, promoting education and providing a better understanding of what has led to the growth of the wealth gap can help to make a difference.
DID YOU KNOW?
The median white household’s net worth is 10 times the size of the median Black household’s net worth.Source: Brookings Institution
According to experts in the field, one way to combat the wealth gap is to begin talking more about it.
Lawrence Gonzalez, who is an auditor for the U.S. Department of Treasury Office of Inspector General in Washington D.C., says healthy conversations about personal finance often don’t exist in Black culture.
“People never wanted to discuss money, understand it or grow it,” Gonzalez told Annuity.org. “There’s almost a mysticism around it because not enough people understand the concepts.”
Raised in Port-au-Prince, Haiti with Brazilian roots, Gonzalez excelled at math at an early age. He came to the United States when he was 11 years old and graduated with a degree in accounting from the Florida State University.
After starting his career, Gonzalez wanted to give back to the Black community. In 2018, he started a financial literacy platform called the Neighborhood Finance Guy to share practical knowledge about eliminating debt and building personal wealth.
Gonzalez says leveraging experiences common to Black culture can help break down barriers to financial literacy.
“My friends love basketball, so I use that as a metaphor to explain investing,” he said. “You try to use anything to trigger an idea, a concept that clicks and stays with people.”
Drawing on family ties is another strategy.
“Remember what your parents and grandparents did. They were always performing financial literacy principals around you, from meal prepping to side hustles to buying in bulk at the grocery store,” Gonzalez said.
The Internet has also made financial information more readily available over the last 20 years. Mobile banking, investment apps and online resources have helped level the playing field, according to Gonzalez.
“This information is more accessible than ever,” he said. “Now it comes down to someone’s personal motivation to pursue it.”
How the Racial Wealth Gap Formed
The racial wealth gap that exists today can trace its origins all the way back to the end of the Civil War when slavery came to an end.
While millions of African Americans had secured freedom, barriers to ensure that they could not secure wealth along with it sprung up almost immediately.
According to NPR, a strategy had been formed by 1865 to help transfer much of the South’s wealth to newly freed slaves. Union General William T. Sherman devised a plan to redistribute around 400,000 acres of Southern land to African Americans.
Since land ownership was the primary form of wealth at the time, this action would have given millions of African Americans a chance to become immediate participants in the economy.
But, following Abraham Lincoln’s assassination, the plan was nixed, and the land remained in the control of white Americans.
For decades following the end of slavery, there was simply no meaningful avenue for African Americans to build up wealth. They had been denied access to land, laws remained in place restricting their rights and access to education was heavily limited.
While the wealth gap did begin to shrink from its pre-war state as African Americans first entered the workforce, a wide gap remained.
According to the Minneapolis Fed, real progress was strongly felt during World War II, when the wartime economic boom buoyed employment opportunities for Black workers.
The gap narrowed once again following the Civil Rights Movement when equal rights and new legislation led to new opportunities.
But since then, movement has been virtually stagnant, with the wealth gap actually increasing slightly from 1980 to 2020.
The Minneapolis Fed found that a major part of the issue was the fact that the easiest way to build wealth is to already possess it.
Once a family has money, that wealth can easily expand over time, creating virtually guaranteed growth for white Americans over generations and establishing a tough-to-break cycle for Black Americans.
Over many years, Black Americans have been denied access to education and high-paying jobs, meaning they have less wealth. Since they have less wealth, they continue through generations to have fewer opportunities to grow their finances.
White families that have held wealth over generations, meanwhile, see that money continue to expand over time, making it very difficult to close the gap.
What Is the Racial Gap in Financial Literacy?
In 2018, just one-third of Americans could correctly answer at least four out of five financial literacy questions on concepts such as mortgages, interest rates, inflation and risk, according to a 2018 study by the Financial Industry Regulatory Authority (FINRA).
The disparity is greatest among African Americans.
According to the 2022 TIAA Institute-GFLEC Personal Finance Index, African Americans answered an average of 37% of the study’s financial literacy questions correctly, whereas white Americans answered an average of 55% percent of questions correctly.
Similarly, 28% of African Americans answered over one-half of the questions correctly, compared to 60% of white Americans.
Other findings from the TIAA study include:
- A lack of financial resilience was more common among African Americans than white Americans.
- Insurance tends to be the greatest knowledge gap among African Americans, followed closely by comprehending risk, investing and identifying reliable sources of financial information.
- Debt management is the area of highest personal finance knowledge among African Americans.
- Among surveyed African Americans, financial literacy is greater among men, older individuals, those with more formal education and those with higher incomes.
Minority financial experts agree that strengthening financial literacy — the ability to use skills to effectively manage money and resources — can be the key for African Americans to achieve a lifetime of financial well-being.
Raising public awareness is important — but so is teaching students financial literacy in public schools.
Yet a patchwork of state laws, coupled with funding issues and limited training for teachers, has made financial literacy education in schools inconsistent at best and nonexistent at worst.
Twenty-three states required students to complete a personal finance course prior to high school graduation as of 2022, according to the Council for Economic Education. And 25 states require an economics course to graduate. Some of these states overlap.
However, the size and scope of mandated high school personal finance classes vary. Only six states require students to complete a semester-long, standalone class. Other states offer a shorter course or fold curriculum into a different class.