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Why the racial wealth gap exists, and what you can do about it

Three financial experts share how the racial wealth gap developed, why it still exists, and what each of us can do to reduce it and its effects.

America is a nation founded on the idea of individual liberty — and it’s also a nation founded on slave labor. This dissonance of racial ineqality shaped our country in ways that we are still working to process. Those ways include the large wealth gap between Black and white Americans that has continued to grow, thanks to decades of discriminatory laws and policies that have systemically kept Black Americans from accessing the same financial resources and opportunities as their white peers.

So what is the racial wealth gap exactly, and how much has economic inequality grown? What factors have contributed to the Black-white wealth gap, and why is this racial disparity still expanding? What can individuals do to work toward closing the racial wealth gap, and what solutions are being recommended at the policy level? We reached out to three financial experts to learn more about how racial wealth disparity developed, why it still exists, and what each of us can do to reduce it and its effects on the Black community.

In this article:

What is the racial wealth gap?

The racial wealth gap is the term used to describe the vast difference in wealth held by Black households and white households in the United States. To quote the Federal Reserve Bank of Cleveland: “In 2016, the average wealth of households with a head identifying as Black was $140,000, while the corresponding level for white-headed households was $901,000, nearly 6.5 times greater.” What goes into that massive racial disparity?

The wage gap

You might already be aware that there is a significant wage gap between Black and white Americans. The Bureau of Labor Statistics reports that Black men’s median earnings are 75.1% of white men’s median earnings, and Black women earn 85% of what white women earn. Wage disparity isn’t the only factor that contributes to the racial wealth gap — and to truly understand the difference between Black and white wealth in America, you have to understand all of the components that go into household wealth.

The asset gap

“There are barometers that economists typically use to measure aspects of wealth,” Lynnette Khalfani-Cox, CEO of financial education company The Money Coach and author of the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom, explains. “One is homeownership, two is consumption and three is stock ownership.”

The Urban Institute recently reported that the gap between Black and white homeownership rates is the highest it’s been in 50 years, with 71.9% of white Americans owning homes compared to 41.8% of Black Americans.  A 2017 Duke University study revealed that due to factors like less disposable income and restricted access to credit, Black households spend less than white households regardless of income level. The study notes that “Black households face unique constraints restricting their ability to acquire important goods and services.” And as with homeownership, there’s a gap in stock ownership; according to the Pew Research Center, 61% of white households own stocks compared to only 31% of Black households.

The financial literacy gap

There’s one more factor that needs to be considered, and that’s financial literacy. As the TIAA Institute reports: “On average, African-Americans answered 38% of the P-Fin Index [Personal Finance Index] questions correctly, with only 28% answering over one-half of index questions correctly. The analogous figures among whites were 55% and 62%, respectively.” George Nichols III, president and CEO of The American College of Financial Services, would like to see that financial literacy gap reduced or eliminated.

“If we’re not addressing how I manage money, if we’re not addressing the education and the knowledge transfer necessary for me to know how to manage money and how to grow money, then you put me in a box and I’m going to stay in that box because that’s all I know.”

—George Nichols III, president and CEO of The American College of Financial Services

Why does the racial wealth gap exist?

The racial wealth gap began with slavery, in which Black laborers worked for more than two centuries for zero compensation — and even after emancipation, received no payment for those generations of slave labor. The income gap continues because of laws and policies, some of which are still in place today, enacted to deliberately or systemically prevent Black Americans from building wealth. “The racial wealth divide is the result of decades of discrimination in wealth building, not some personal failing,” explains Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and co-editor of

Khalfani-Cox agrees. “There has been so much structural inequality, so much racism, and so much of a legacy of legalized boosts [for white Americans] and barriers [for Black Americans] that now, so many people mistakenly think that if African-Americans don’t have a certain amount of wealth, it’s because they haven’t tried hard enough.”

Some of these legalized barriers include redlining, a discriminatory practice established during the 1930s New Deal that limited the neighborhoods in which Black Americans could purchase houses. Other barriers include the Jim Crow laws established in the post-Civil War era, which  segregated and marginalized Black Americans for nearly a hundred years — and even though the Jim Crow laws were officially repealed during the Civil Rights Movement of the 1950s and 1960s, the legacy of segregation and marginalization continued.

Even when there aren’t specific laws in place to prevent Black Americans from building generational wealth, social and economic factors tend to hurt Black Americans more than white Americans. The Great Recession, for example, had a greater effect on the net worth of Black Americans. During the housing crisis, Black Americans were regularly offered subprime loans regardless of their credit score. More recently, minority-owned businesses have been less likely to receive coronavirus-related government aid from the CARES Act — and Black Americans (along with indigenous people) are at greater risk of becoming seriously ill and/or dying from COVID-19, in part because of economic factors such as the necessity of maintaining jobs that put them in greater contact with the public.

Currently, Black Americans are more likely to experience employment discrimination or be cut off from the kind of jobs that can help them build wealth; more likely to be targeted by police and incarcerated; less likely to have access to quality healthcare or even quality food. All of these factors and more continue to contribute to the racial wealth gap, which — as reports — is greater today than it was four decades ago.

As Khalfani-Cox puts it: “When you have, for centuries, disenfranchised people who have been marginalized in every way, shape, and fashion, from access to healthcare to redlining to school districts to being paid less than their white counterparts even if they have the same or more skills, it’s exhausting.”

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What are the biggest negative effects of the racial wealth gap?

The biggest negative effect of the racial wealth gap is the way it compounds upon itself. “Compound interest is such a phenomenal force,” says Khalfani-Cox. “Racism works the same way. Its effects are compounded.”

Many Black families have not been able to build the type of wealth that compounds over generations. They have not been able to buy the kinds of homes that increase in value over time, take advantage of the stock market or leave inheritances for their children. To quote the Economic Policy Institute: “White families are twice as likely to receive an inheritance as Black families, and that inheritance is nearly three times as much.” Meanwhile, Black Americans have been subject to the compounding effects of a racist society that views their lack of wealth as a lack of skills, drive or character.

“There is a misconception that those with substantial wealth have it because they worked harder, smarter and are more virtuous,” Collins explains. “Whites built middle-class wealth after WWII not because they had superior financial knowledge or saving discipline, but because of government-subsidized wealth-building programs.” The GI Bill, for example, helped many white Americans attend college — but the bill was deliberately structured in a way that prevented many Black veterans from accessing similar college educations.

“It’s not like Black people aren’t ambitious,” Nichols III says. “You have to ask: What barriers have been there to prevent us?” Until we all understand what barriers have been put in the way of Black Americans — and what boosts have been given to white Americans — we won’t be able to reverse the effects of the racial wealth gap and provide opportunities for what Khalfani-Cox describes as equity. “The conversation has to be about equity and not equality,” Khalfani-Cox told us. “People will say ‘I’m going to put you on an equal footing,’ and I’m going to say ‘Okay, but you had a 200-plus-year head start!’”

“Compound interest is such a phenomenal force. Racism works the same way. Its effects are compounded.”

—Lynnette Khalfani-Cox, CEO of The Money Coach

What solutions are being proposed to get rid of wealth inequality?

Several of the current policy proposals aimed at closing the racial wealth gap focus on some form of financial compensation. Baby bonds, for example, would provide new babies with an investment account initially funded by the federal government and allowed to grow over time. reports that baby bonds could reduce the racial wealth gap by “more than tenfold” even if these bonds were distributed to children of all races — and if you’re curious why that’s the case, remember the power of compound interest.

Another oft-mentioned solution involves reparations, or direct payments to Black Americans as restitution for centuries of slavery and other forms of racist economic policy. “We won’t get it right in this country until we have a true and proper reckoning,” Khalfani-Cox told us. “What does a reckoning mean? It means an acknowledgement of the problem. A true assessment of the harm that’s been done, until an apology is issued to Black America and descendants of slaves who were forcefully brought here and had to deal with that legacy for 400 years, and until reparations are made. Recompense has to be an issue.”

Other proposed solutions include the creation of a public banking option that would allow low-income families to establish and maintain bank accounts. Many private bank accounts come with account minimums and other requirements that make them inaccessible to low-income Americans, who then have to use expensive check-cashing services and other predatory financial options in order to access their own earnings.

It’s important to note that all of these solutions will take time to implement — and even longer before we’ll start to see the kinds of effects that could permanently close the racial wealth gap. “This is a long-term game that is going to take generations,” Nichols explains. “It took us 400 years to get to where we are today.”

How can individuals help close the racial wealth gap?

Closing the Black-white wealth gap will depend largely on policy decisions — but that doesn’t mean that each of us can’t do our part to educate ourselves, raise awareness and share knowledge.

“One thing individuals can do is to tell true stories of how advantage works, to describe the ways that family and government helped contribute to family wealth building,” says Collins, who is white. “I have an uncle [who is also white] who bought a farm in 1949 in Ohio with a 35-year, 1% fixed-rate mortgage. This program discriminated against Blacks. That was his ticket on the wealth-building train to the middle class. If such a mortgage program were available today to Black and brown people, we would narrow the racial homeownership gap.”

If you have benefited from these kinds of advantages, try to use what you have to benefit someone else. If you’re hiring a new employee, for example, see if you can let go of some of the assumptions and biases that might cause you to hire someone who “reminds you of yourself,” as Khalfani-Cox puts it. Nichols wants to see companies develop sponsorship programs that go beyond the typical mentorship program and help young Black workers develop the skills and tools they’ll need to become leaders and executives. “Mentorship is advice,” Nichols explains. “Sponsorship is ‘You are my responsibility to help you get where you’re going.’”

If you’d like to learn more about the history of racial disparity in the Black community and why it’s still growing, Netflix and Vox Media Studios put together a 15-minute explainer video that covers the history of the Black-white wealth gap from the beginnings of slavery to the present day. You might also want to read “What Is Owed” by Nikole Hannah-Jones, an in-depth look at the history of race in America and the importance of reparations that recently ran in The New York Times Magazine. If you want to take your reading even further, Khalfani-Cox recommends The Black Tax: The Cost of Being Black in America by Shawn D. Rochester.

Lastly, don’t forget that your vote counts. Electing local, state and federal officials committed to equality and equity for Black Americans can help eliminate discriminatory practices and/or help establish reparative policies — the kind of systemic change that will likely be required to close the racial wealth gap. You can also vote with your dollars, by supporting Black-owned businesses, authors, filmmakers and more. Remember that this work is going to take time — as Nichols told us, it might be generations before we see the results of today’s decisions — and that this kind of awareness and proactive decision-making is the work that lasts a lifetime.

But it’s work that’s worth doing — and it’s essential towards our progress as a nation. As Khalfani-Cox reminds us: “The wealth gap doesn’t just cost Black people. It costs America as a whole.”

“Whites built middle-class wealth after WWII not because they had superior financial knowledge or saving discipline, but because of government-subsidized wealth-building programs.”

—Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and co-editor of
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About Nicole Dieker

Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate,, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.

Read more by Nicole Dieker

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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

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