In today’s racially-charged social environment, it’s not uncommon to hear about the wealth gap between caucasians and people of color. Unfortunately, that gap is usually not explored in-depth, and the concept of wealth is often left as a vague notion. Wealth can mean savings, investments, income and more.
The gap exists across every one of those factors.
Thankfully, black Millennials are starting to bridge the savings gap. According to a recent study conducted by Ariel Investments, young African Americans currently represent the smallest savings gap between white and black people across any age bracket. Read on for more about the racial divide in wealth in the U.S. (For related reading, see: A Financial Advisor's Guide to Millennial Clients.)
How They Invest
Recent data show that more black people are expressing confidence in the stock market than ever before. Current figures indicate that 67% of black people ages 40 and younger who earn at least $50,000 a year invest in the stock market.
White people in that bracket invest at a rate of 73%. With only 7% difference between the two groups, it’s the lowest disparity found between all age brackets. While that may be a small victory to focus in on, it’s the strongest indicator that the financial gulf is narrowing.
The older the age groups, the bigger the disparity there is between the number of white and black Americans who invest. This trend shows that younger African-Americans are embracing the power of investment in building long-term wealth.
Is the Wealth Gap Closing?
Although black Millennials are making great strides, they still face challenges their white peers don’t have and the wealth gap is still more like a wealth canyon. But just how far apart are the two groups? (For related reading, see: Trends Challenging Financial Advisors.)
In 2010, the average white family had $265,000 in assets, while a black family from the same class had $28,500. Even though the percentages of black and white families earning between $50,000 and $75,000 a year are close together, the assets those families have remain worlds apart.
One of the many reasons for the wealth disparity lies is how the older generations help — or don’t help — their children. Much like many Eastern cultures, African American families embrace the idea that adult children should be sacrificing for their parents, not the other way around. According to a poll from Clark University, 80% of black parents expect their children to help support them. This contrasts heavily from white families, who continue to give their children money even when they’re earning well.
The more that black families rely on their children’s help, the more their children will drain their savings instead of using it to build wealth. Nowadays, whites are more likely to receive an inheritance from their families and when they do, they typically receive ten times more wealth than black families.
As more black Millennials continue to invest, they’ll likely teach the next generation how to do so. Wealth is typically built on the backs of previous generations, which is one reason white families have remained light years ahead. Teaching black children how to build and keep wealth is one strategy that may narrow the gap over time.
The Bottom Line
The racial divide in wealth can’t be boiled down to one factor, but the lack of generational wealth among black families is one of the most important. Financial success often comes down to what an investor can do with the advantages they’re given, and even the most savvy investor will have trouble growing wealth from nothing. Thankfully, black Millennials are setting up their future children and grandchildren to succeed in a way that was once almost impossible. By gifting inheritance to the next generation rather than accepting their charity, these young investors will be able to pass on a lifetime of smart financial decision making. (For related reading, see: Minorities and Investing: What Advisors Need to Know.)