How Financial Capability and Asset Ownership Can Help People Weather Racial Wealth Inequity
Centuries of discriminatory policies and practices have entrenched America’s deep racial wealth divide. Despite gains in the previous three years, the median net worth of Black and Latino households in 2016 was only $3,400 and $6,300, respectively, compared with $140,500 for White households. This has tangible effects in communities across the country where people of color struggle to build enough of a savings cushion to weather a financial emergency, struggle to pay for postsecondary education and avoid crippling debt, and struggle to save enough for a downpayment on a home—the largest source of wealth for most Americans.
Prosperity Now has promoted policy recommendations that we believe will bridge the racial wealth divide, like turning the tax code right side up. But in the absence of sweeping policy change, we often grapple with the question of how we can best support individual households of color to overcome these hurdles and increase their wealth. There are few approaches to this.
Many nonprofits address the consequences of poverty at the household level by offering financial education. However, financial education typically focuses on knowledge alone, which studies show is insufficient, especially when access to safe and affordable savings accounts and credit is limited.
Other organizations focus on boosting income through workforce development and job readiness. While income is necessary to get by, it’s not enough to help households build wealth. Plus, many organizations fail to grasp the systemic issues and policy context affecting their clients.
So what works? Although research has not been conducted to demonstrate a direct connection between many financial capability services and increased wealth, financial coaching shows promise. Early studies find that coaching helps people increase their savings and improve their credit scores, which are precursors to building wealth. Anecdotally, we've heard many program staff say that financial coaching recognizes the dignity of individuals and helps boost their confidence, which is enough to make the program worthwhile.
Any program or service that focuses on savings and credit could be leveraged to support building wealth with thoughtful design. A large majority of the now-ended Assets for Independence (AFI) Program’s Individual Development Account (IDA) holders were people of color, who directly benefited from an infusion of government and local sources of funds that matched their savings for buying a home, starting a business and earning a degree.
Asset ownership programs like these are the most direct wealth-building strategies that can help households build financial security and climb the economic ladder. State and federal benefits can prevent the depletion of savings from expenses toward food, medical care and housing. But it’s important to remember that this is only effective for increasing wealth if limits aren't placed on the amount of savings that can be accumulated while receiving these benefits, and if individuals are able to direct at least part of their income to savings.
It's unlikely that any one program or service targeted at individual behavior will be able to make a dent in the racial wealth divide—especially when our tax code and policies are structured to help those with wealth maintain and increase their wealth. But if we can direct and coordinate our efforts across the nonprofit and municipal services sectors to ensure that people of color have access to wealth-building tools and consumer protections, perhaps we can see meaningful changes in wealth accumulation among households of color. What could an ecosystem look like in a city to best direct wealth-building support to those with the least amount of wealth?
We're interested in hearing your thoughts about how to coordinate and amplify services that support building wealth. To learn more about and stay engaged in our work focused on bridging the racial wealth divide, join the Racial Wealth Equity Network. And you can engage in a racial equity analysis with us in our Savings Network or Financial Coaching Network.