One of the hallmarks of this country is an opportunity to become whatever you want to be. But if we look at the racial wealth gap, it unravels a historical narrative of unequal levels of opportunity that continue to impact us today.
The Brookings Institute noted that “At $171,000, the net worth of a typical white family is nearly ten times greater than that of a Black family ($17,150) in 2016.” Mehrsa Baradaran, the author of The Color of Money, puts it best when she states, “The wealth gap is where historic injustice breeds present sufferings.”
Looking at the racial wealth gap is like a cobweb. Each strand, or in this case, a reason for the racial wealth gap, can be overcome. But if you combine the strands—the reasons—it grows into a web. These strands are decades of voting, housing, job, and banking discrimination, to name a few, and years of this repeated pattern over generations creates a ripple effect that leads to racial wealth disparities today.
A Case Study: How The U.S. Systematically Prevented Black Veterans From Military Benefits In World War II.
Although there are many examples of how Black Americans were economically set back by the U.S., one tipping point in modern history is how lawmakers and business discrimination practices denied millions of WWII Black veterans access to GI bill benefits.
The post WWII GI Bill benefits included low-cost mortgages, educational grants, and low-cost loans to start a business, which are all key wealth building and wealth transfer vehicles.
Ira Katznelson, author of “When Affirmative Action Was White,” said, “there’s no greater instrument for widening an already huge wealth racial gap in postwar America than the GI Bill.”
Here are some examples of how Black veterans were negatively impacted during this time period:
- Housing discrimination left many Black veterans out of the suburban housing boom after WWII. In New York and northern New Jersey, there were about 67,000 post WWII GI Bill mortgages: non-white people made less than 100 of these mortgages.
- Black people, as well as other ethnic groups, were denied access to vocational training and college education. Even Black veterans who were lucky enough to get GI Bill education benefits faced Jim Crow laws that prevented many from going to college.
- No access to education benefits hampered many Black veterans from getting better paying jobs.
- Low paying jobs, combined with living in neighborhoods where schools had fewer resources, had its ripple effect. Their children, the baby boomer generation, were less prepared for college, and their parents couldn’t afford to send them to school.
Today, the lack of inherited generational wealth also means that:
- Fewer Black Americans are investing.
- More Black Americans have high amounts of student loan debt.
- More Black Americans have credit card debt, most of which have crippling interest rates.
While many of these issues require systemic changes to law, business, and legal practices, there are also tangible strategies Black Americans can adopt now to take charge of their finances:
1. Earn more than just a living wage.
Our ability to earn an income is one of the biggest wealth generation tools.
If you’re currently looking for employment, do not take the hiring manager’s word for what the salary is. Research the role on websites like Glassdoor, Salary.com, and even your potential employer’s website, to ensure you’re paid what you are worth.
Do not be afraid to negotiate your pay when you get an offer or even negotiate in your current role; No one will fight for you like you can fight for yourself.
Finally, earning a living wage also means taking advantage of all potential money streams: if you have a 401k plan with an employer match, make sure that at a minimum you are contributing enough to get the full match.
2. Focus on wealth building vs. wealth stripping behavior.
As a financial coach, most people I speak to learn about wealth building behavior from their parents, which means that many of us may need further education about how to build wealth.
Think of wealth-building behavior as increasing your net worth and wealth stripping behavior as decreasing your net worth.
For example, building your savings, investing, and paying off debt are all wealth-building behaviors. On the other hand, not paying off your credit balance in full is wealth stripping behavior. If you’re not sure where to start, Betterment offers excellent tools to help you build wealth:
A high-yield cash account for your savings.
A high-yield cash account is an incredibly important modern financial tool: Think of it as an alternative to a standard savings account with none of its common drawbacks like transfer limits, minimums, and fees.1
A goal-based investing approach aligned to your life goals.
If you don’t know the first thing about investing, or you don’t want to build your own portfolio, Betterment is for you. Depending on what you’re investing for and when you want your money, Betterment will recommend a portfolio specific to you.
And if you’re passionate about issues like the environment and social equity, you can choose from three different socially responsible investing portfolios that align with your values: Broad Impact, Climate Impact, and Social Impact.
3. Decide whether or not homeownership is for you.
I mentioned before that homeownership is considered a path to building wealth if done correctly.
Here are a couple of things you can do to begin your homeownership journey:
- Determine and stick to a budget: take a good look at your individual finances and spending preferences to determine the monthly payment range that you feel you can comfortably afford.
- Pull your credit reports and review for accuracy. Use credit monitoring tools to gauge your credit score.
- Research interest rates to estimate mortgage rates in your desired living area. This is important: Don’t be afraid to question an unusually high rate. Black and Latinx applicants are typically charged higher interest than their white counterparts. Websites like the Consumer Financial Protection Bureau and HUD offer a ton of information about the mortgage process and your rights.
- Learn about mortgage scams and how someone can take advantage of an extremely stressful experience, particularly for Black first time home buyers.
If you feel that you’ve experienced housing discrimination, file a complaint. Remaining silent only enables the discrimination to continue for yourself and others.
Individual change is second to systemic change.
It’s important to remember that the racial wealth gap is a systemic issue beyond any individual person’s actions: We can’t pretend to solve all racial economic inequality with these recommendations, but they’re a start.
The solution involves widespread efforts that protect the rights of Black Americans through legislative change and business practices, as well as becoming your own advocate.
1 For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance. While there is no minimum balance required to be maintained, the minimum amount to open the account is $10.
Betterment Cash Reserve
Betterment Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.
Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.