The Racial Wealth Gap and Your Household Finances

Differences in work compensation for wage and salary workers throughout their career contribute to differences in wealth over the course of workers' lifetimes. Various factors, including barriers to education access, differences in social capital, and hiring discrimination led to diverging occupations among racial groups. A higher salary occupation increases income, which in turn increases an individual's access to other resources, such as education, healthcare, and training. A higher salary also increases an individual's ability to invest in other wealth building feedback loops. Positive feedback loops are continuing patterns of investment where the result of the investment, such as receiving a return on investment, reinforces the action. ³ Even in the same occupational categories, there are disparities in the average salary for Black employees compared to White employees. ⁴ In addition to differences in salary, many lower-wage occupations have limited employer-provided benefits, which offer financial resilience, support workforce readiness, and help build personal assets and wealth, such as retirement matching programs, company stock options, tuition assistance, and health insurance.

Nicole works as a cashier (the most common occupation for Black residents in D.C) ⁵ while Lauren works as a lawyer (the most common occupation for White residents in D.C). ⁶ If Nicole's annual salary as a cashier is $48,500 (the approximate median income for Black D.C. households in 2019), and Lauren's annual salary working as a lawyer is $155,600 (the approximate median income for White D.C. households in 2019), ^{iii 7} and they start out with equal wealth at age 20, the interactive graph below shows how their wealth will grow over time. Use the sliders to see the impact of changing Nicole and Lauren's salaries. The graph below does not include factors beyond Nicole and Lauren's annual salary. Later graphs will include the cumulative effects of cost of living and salary.

Cost of living expenses include costs such as housing, transportation, food, healthcare, education, clothing, and childcare. Housing costs accounted for 37.7% of the average DC area household income from 2019-2020. ⁸ Most D.C. residents rent their home, but gentrification (including external investments and new building projects) has increased property taxes in the city. Gentrification is defined as the “process in which a poor area (as of a city) experiences an influx of middle-class or wealthy people who renovate and rebuild homes and businesses and which often results in an increase in property values and the displacement of earlier, usually poorer residents.” ⁹ In D.C., 58% of Black families own their home compared to 78% of White families. ¹⁰ Black D.C. households on average have a lower income than White DC residents, making rent a larger portion of their household income, limiting income available to build wealth. Increasing rent costs affect many Black D.C. residents; 20% of residents in predominantly Black Wards 7 and 8 indicated they would most likely move in the next three years due to high rent prices. ¹¹ Homeownership contributes significantly to wealth. ¹² The racial differences in homeownership and home valuation further impact the racial wealth gap. ¹³ However, for the sake of this example, only renting was considered.

Based on 2019 data from the U.S. Bureau of Labor Statistics, U.S. households spend about $25,000 + 47% of their pre-tax income on living expenses. ¹⁴ Based on their respective salaries alone, this relationship between living expenses and income suggests Nicole's cost of living is approximately $47,800 and Lauren's cost of living is $98,100. Due to their salary differential, Lauren spends a smaller proportion of her income on living expenses. Use the sliders to see the impact of increasing or decreasing the cost of living expenses for the two women.

Gaps in employment contribute to differences in wealth growth between racial groups. Data from 2021 shows that Black U.S. residents are more likely to be unemployed than White residents. Nationally, unemployment rate of Black residents is 1.6 times that of White residents. This difference is even larger in Washington D.C., where Black individuals were four times more likely to be unemployed than White DC residents. ¹⁵ This disparity is higher compared to neighboring states due to racial segregation and the unique emphasis on white-collar federal employment in D.C. ¹⁶ White D.C. residents are more likely than Black D.C. residents to have access to high salary professional or social job networks, which can perpetuate racial inequalities in hiring practices because those with a more robust job network are more likely to be aware of job openings and are more likely to receive a social referral. ¹⁷

The duration of periods of unemployment also differs by race. In D.C. from 2021-2022, unemployed White residents had an average of 23.1 weeks unemployed while Black residents had an average of 26.8 weeks unemployed. ¹⁸ Nationally, gaps in employment lead to longer periods without income, and in periods of economic shock (such as a recession) Black families take longer to recover because Black workers are often “last hired” during economic recoveries. ^{19 20}

In this scenario, imagine that Nicole experiences 27 weeks of unemployment in a year, while Lauren experiences 23 weeks of unemployment in a year. During her period of unemployment, Lauren had access to extensive professional and social networks with connections in the legal profession. Her professional networks notified and referred her for high salary job openings, reducing her period of unemployment and income loss.

Use the sliders below to see how differing stretches of unemployment for Nicole and Lauren widen the net worth gap. If you check the “Equalize Lauren and Nicole's Income and Expenses” box, you can see the impacts of unemployment even if income and expenses are equal for the two women.

Inheritances contribute roughly 4 percent of annual U.S. household income (and are usually untaxed by the U.S. government). ²¹ According to data from the Federal Reserve Board, 26% of White U.S. families receive an inheritance, while only 8% of Black families do. Additionally, the average inheritance value for Black U.S. families is 35% that of White families. ²² The inherited wealth differential can have downstream effects, leaving Black families on average with fewer resources available for wealth building. These effects are passed along from generation to generation preserving historical wealth inequality.

If Lauren's inheritance is $100,000, according to the national average Nicole's inheritance is $35,000. For now, assume an equal rate of return on the inheritances. Use the sliders to see how changing the inheritance amounts for the two women impacts the wealth gap. The next section will discuss how different rates of return can further widen this gap.

Those with higher incomes and more accumulated wealth will have more money left after covering living expenses and can invest more, in turn earning larger returns on the larger principal. Larger return on investment increases the amount an individual or household can then further invest, continuing the wealth generating cycle. Some financial tools and services which offer higher returns on investments, such as high-interest savings or brokerage and advisory accounts, may require a minimum deposit, and/or market only to customers in a higher income bracket. Further, high-return investments carry greater risk of financial loss, especially in the short term, and the financial stability of people with lower income is more sensitive to that risk.

Homeownership can also be a key form of investment; for many families, their home is one of their largest assets and differential property value appreciation leads to exponential differences in wealth. Racial income disparity like that in Washington, D.C. results in higher rates of return on investment for White households compared to Black households. ²³ Housing value across the United States appreciates at different rates in White and Black neighborhoods. ²⁴ Additionally, Black families can face challenges to investing in home ownership due to housing discrimination and the ongoing impacts of segregation and redlining.

Furthermore, being underbanked or unbanked (having less or no access to banks) limits the ability of Black families to accumulate interest over time and their ability to accelerate wealth building through higher return financial investments. ²⁵ In the United States, the median amount in checking and savings was $425 for Black households vs. $7,000 for White households in 2019. ²⁶ On the other hand, White families are more likely to invest in the stock market and have riskier investments with higher rewards; ²⁷ in 2019 the median amount in brokerage accounts was $28,000 for White households versus $9,000 for Black households. ²⁸ In addition, some workers (typically in higher wage jobs) also have access to tax-advantaged financial assets through their employer. As discussed earlier, occupational segregation may mean that Black residents are less likely to have access to these assets than their White counterparts. For instance, in 2019 the median amount in retirement accounts was $50,000 for Black U.S. households versus $110,000 for White U.S. households. ²⁹ Building wealth through higher incomes, owning a home, growing savings and lower debt values provides cushion to absorb financial stocks (such as unexpected car or health expenditures), financial stressors or missteps.

Use the sliders below to see how a difference in the rate of return on assets affects Lauren and Nicole's net worth. In this model, the sliders only correspond to the interest Lauren and Nicole are earning on the average inheritance for Black ($35,000) and White ($100,000) families as noted in the previous graph. Since Lauren is invested in the stock market, her money grows at an average of 10%, ³⁰ while Nicole's interest earning savings account grows her money at a rate of 0.08%. ³¹ Other sources of wealth such as income are not included here, but these factors would further increase the difference in return on investment.

Debt can be cyclical. Debt earns interest, adding to the original amount owed, and some types of debt accrue interest more quickly than others. If a debt is not paid off, it will increase as interest and the amount owed will continue to accumulate over time. Sources of debt can include medical expenses, student loans, auto loans, and credit card charges. When debt has a high interest rate and/or an individual's income or life circumstances limit their ability to keep up with payments, credit scores can decline, leading to further increases in interest rates on loans. In D.C., communities of color are five times more likely to have debt in collections than White communities, ³² while White D.C. residents have lower median debt values, in addition to higher median income and home value. ³³

Banking access and policies can also impact debt. Nationally, Black residents can often experience lower banking access, higher banking fees, and a higher percentage of income required to deposit to avoid fees. ³⁴ Combined with distrust due to prior discriminatory and predatory practices, many Black residents may turn to short-term loan options rather than a bank. These short-term options, such as informal savings clubs, have higher fees and fewer consumer protections.

Student loans are a frequent form of debt, and Black D.C. households are more likely than White households to have student loan debt. ³⁵ Since 2006, undergraduate direct and federal subsidized student loan interest rates have ranged from 2.75% to 6.8%. ³⁶ When a student does not complete a college degree, it is more difficult to pay back the loans, which can lead to increased debt in early adulthood that can carry forward in life. Additionally, predatory student lending (including misleading students about promises for low tuition and job prospects/income expectations after graduation) has a disproportionate impact on minorities. ³⁷ Parental support is the greatest financial contribution to most students' educations at an annual national average of $11,862; ³⁸ however, parents with less accumulated wealth (due to the factors and feedback loops discussed on this page) sometimes cannot afford to contribute to higher education costs.

Assuming Nicole has a student loan debt of $23,400 and Lauren has a student loan debt of $16,000 (the 2016 average debts for Black versus White college graduates), ³⁹ you can position the sliders for their respective incomes to see how their debt burden changes over time. As an individual's income increases, they are able to pay off the debt faster, reducing the amount of interest accrued. You can also adjust the sliders for amount borrowed for each individual to see the impacts.

In this household finance dynamic model, we see that White D.C. residents start in a stronger financial position than Black D.C. residents, putting them in a better position to be able to continue building wealth over time. Because multiple factors (such as income, cost of living, employment security, inherited wealth, return on investments, interest on debt, and others not included in these graphs) influence the wealth gap, effective interventions to decrease the racial wealth gap must be highly coordinated to impact the existing systems. Isolated interventions, such as increasing salaries or employment or lowering costs, will not close the gap because disparities in each contributing factor compound. Although homeownership was not included in the factors considered, homeownership contributes significantly to household wealth.

This final model shows the cumulative effects of each of the factors discussed on this page over a 20-year period on Nicole and Lauren's net worth. Interest generates additive effects for both wealth building and debt so just as some individuals or families build wealth over time, others can sink further into a cycle of debt.

Models like these can be extended and enhanced with community input, survey data, and social science research. Thus, policymakers can evaluate the financial impact of proposed policies and interventions in their communities.