Compounding Inequality to Compounding Success: Bridging the Racial Wealth Gap
While racial inequality remains a complicated issue, at its core is economic inequality, but what do we do about it?
Figures compiled by the Brookings Institution in 2016 revealed that the average net worth of a white family ($171,000) was ten times that of a Black family ($17,150). Much has been written about possible reasons, including historical exclusion from higher-learning institutions and homeownership opportunities, as well as from entrepreneurship and other means of accumulating wealth. 2020 was a year of widespread outrage over social injustice, but also saw an influx of energy devoted to solving it, including grappling with this country’s complicated racial history — taking an honest look at why people of color are treated differently and why they don’t have the same opportunities as the white majority.
It’s vital, of course, to discuss this issue carefully. I believe there is a role for the government and public policy in addressing this racial wealth gap — including a gradual reallocation of resources from policing (i.e., treating the symptoms) to community development (i.e., addressing the root cause). However, it’s important to maintain a realistic view of how quickly public policy, if enacted, can effect change. While I think advocating for systemic change is an essential part of problem solving, it’s just a part; in the meantime, we need to do what we can as individuals.
Understanding the components of building wealth
It’s important that families sending young people into the world instill in them a blueprint for how to make educated wealth-building choices, and to have a clear sense of what success looks like. This means understanding the classic components of wealth, which traditionally have been homeownership, savings and investments, and, for some, entrepreneurship and business ownership. Of course, these things don’t come overnight: not for white people, and not for people of color. I recognize that it’s an extremely delicate request of the latter group… to ask for patience, but it’s important to recognize that that quality is vital to wealth building: most people don’t reach their maximum earning potential until their 50s, and those age 55 and older hold most of the wealth in this country.
An even more frustrating fact is that building wealth often isn’t done in a single lifetime. America is full of people who “bootstrapped” themselves from nothing, yes, but many depended on some form of wealth from a previous generation in order to build. A parent with robust savings is likely to help their child get through college with little or no debt, and one who buys a home can pass along that considerable asset, too, and so on. For people of color, it’s all about getting a ball rolling that many white Americans have had rolling for generations. But how do you do that?
Getting the most out of education
Many identify access to good education (or lack thereof) as one reason for the racial wealth gap, and increased access as a means to close it. A bachelor’s degree, for example, does unlock higher earning potential, but higher-than-ever tuition costs and student debt put a significant damper on this wealth-building potential. This problem is especially tough for students of color: Another sign of compounding inequality is that Black students are more likely to take out student loans — and more frequently struggle to repay them — than their white peers.
Again, there’s an opportunity here — to reduce this student loan burden through public policy, but in the meantime, I offer a pragmatic solution: to ensure that education pays dividends, it’s important for families of color to have serious conversations about educational and economic goals. One strategy I’ve discovered in my work promoting financial literacy is for high schoolers and college students to build a financial forecast and map out the lifestyle they want, including a career they’re interested in and its expected earnings. Confronting realistic numbers in this way can steer prospective students toward more practical education choices — spending a couple years at a community college as an alternative, for example, or perhaps choosing a good state school over a private university.
Investing in skills and connections
Just about every financial book you pick up advises that people start saving early for retirement. That is, of course, solid counsel, but I add the suggestion that young people essentially also “saving” skill sets, ones that offer career flexibility and increased opportunities down the road. Skills, like wealth, compound over time, so young people need to strategize which ones to build (and how), as well as consider how to build their personal brand and differentiate capabilities in ways that can leverage more income.
Expanding social networks is another key element of closing the racial wealth gap. Young people of color should open themselves to more people and reach out to groups they might not have typically considered. Expanding social networks allow more ambitious, hardworking and talented young professionals more opportunities to bump into each other and participate in high-return investment opportunities. Of course, expanding social networks is a two-way street: it’s not all on people of color. Small-to-medium businesses should continue to examine their hiring practices to ensure that teams more closely reflect the diversity of our society.
I also consider it vital for people of color to strategize ways to participate in business ownership, whether it’s in the form of employee options or shares, building a business from the ground up, participating as a partner or buying an existing enterprise — all can lead to next-level wealth generation.
On the start-up side, entrepreneurs of color would do well to connect with Black venture capitalists, as well as with private organizations such as the Toigo Foundation and government organizations like SCORE. Entrepreneurs can also engage with entrepreneurial, computer science and economics departments at historically black colleges and universities.
Building wealth for oneself and one’s community
The bottom line is that there’s no panacea for closing the racial wealth gap. It’s not just increasing homeownership, or access to education, or entrepreneurship and investment, and it’s not just increasing social programs. It’s all of the above. It’s about helping people understand how wealth has been created in the country and working backward to make sure they have the education and access to make it happen.
Over the next several decades, the United States is going to face increasing competition from rising economic powers. If we’re not letting all our citizens participate, we’re ceding competitive advantages, including our diverse range of perspectives and an economic system that prides itself on providing opportunity to those who play by the rules and work hard.
Although I hold out hope for public policy to help solve some of the inequality problems that the market can’t, I’m not going to wait, and neither should you.
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