Money
The Racial Wealth Gap in America: Asset Types Held by Race
The Racial Wealth Gap
People of color have faced economic inequality for generations, and the recent wave of Black Lives Matter protests has renewed discussions on these disparities.
Compared to White families, other races have lower levels of income and net worth. They are also less likely to hold assets of any type. In fact, 19% of Black families have zero or negative net worth, while only 9% of White households have no wealth.
Today’s chart uses data from the U.S. Federal Reserve’s triennial Survey of Consumer Finances to highlight the racial wealth gap, and the proportion of households that own different kinds of assets by racial group.
Asset Types Held By Race
The financial profile between racial groups varies widely. Below is the percentage of U.S. families with each type of asset, according to the most recent survey from 2016.
White | Black | Hispanic | Other | |
---|---|---|---|---|
Primary Residence | 73% | 45% | 46% | 54% |
Vehicle | 90% | 73% | 80% | 80% |
Retirement Accounts | 60% | 34% | 30% | 48% |
Family-owned Business Equity | 15% | 7% | 6% | 13% |
Publicly-traded Stocks | 61% | 31% | 28% | 47% |
Vehicles are the most common asset across all racial groups, followed by a primary residence.
However, the level of equity—or home value less debts—families have in their houses differs by race. White families have equity of $215,800, whereas Black and Hispanic households have net housing wealth of $94,400 and $129,800 respectively.
In addition, White households are more likely to hold financial assets such as retirement accounts, family businesses, and stocks. These assets are instrumental in building wealth, and are prominent in the wealth composition of America’s richest families.
With fewer people of color holding these assets, they miss out on higher average returns than low-risk assets, as well as the power of compound interest. These portfolio differences are striking, but they are not the most important contributing factor in the racial wealth gap.
Demographic and Economic Variations
White households are also more likely to have demographic characteristics that are associated with wealth. According to the U.S. Federal Reserve, they are:
- Older, with more than half of households age 55 and up
- More highly educated, with 51% having some type of degree
- Less likely to have a single parent
- More likely to have received an inheritance
For example, 39% of White heads of households have a bachelor’s degree or higher, compared to 23% and 17% for Black and Hispanic household heads, respectively. However, education doesn’t fully explain the wealth inequities.
Enormous wealth disparities exist between families with the same education level. Even in cases where Black and Hispanic household heads have obtained a bachelor’s degree, their families’ median wealth of $68,000 and $78,000 respectively is still lower than the $98,000 median wealth for White families where the head has no bachelor’s degree.
After accounting for demographic factors, researchers still found there were considerable inequities. What, then, could be primarily responsible for the racial wealth gap?
The Income Gap
While previous research found that the wealth gap is “too big” to be explained by a difference in income, a recent study from the Federal Reserve Bank of Cleveland offers a new perspective. Focusing on White and Black U.S. households only, researchers analyzed the dynamics of wealth accumulation over time, as opposed to previous studies that considered short time periods.
They found that income inequality was the primary contributor to the racial wealth gap. According to the model, if Black and White households had earned the same labor income from 1962 onwards, the Black-to-White wealth ratio would have reached 0.9 by 2007.
Moving forward, the study concludes that policy changes will likely have a positive impact if they address issues contributing to income gaps. This includes reducing racial discrimination in the labor market, and creating programs, such as mentorships, that improve environments for specific racial subgroups.
Money
How Small Investments Make a Big Impact Over Time
Compound interest is a powerful force in building wealth. Here’s how it impacts even the most modest portfolio over the long-term.
How Small Investments Make a Big Impact Over Time
This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.
Time is an investor’s biggest ally, even if they start with just a modest portfolio.
The reason behind this is compounding interest, of course, thanks to its ability to magnify returns as interest earns interest on itself. With a fortune of $159 billion, Warren Buffett largely credits compound interest as a vital ingredient to his success—describing it like a snowball collecting snow as it rolls down a very long hill.
This graphic shows how compound interest can dramatically impact the value of an investor’s portfolio over longer periods of time, based on data from Investor.gov.
Why Compound Interest is a Powerful Force
Below, we show how investing $100 each month, with a 10% annual return starting at the age of 25 can generate outsized returns by simply staying the course:
Age | Total Contributions | Interest | Portfolio Value |
---|---|---|---|
25 | $1,300 | $10 | $1,310 |
30 | $7,300 | $2,136 | $9,436 |
35 | $13,300 | $9,223 | $22,523 |
40 | $19,300 | $24,299 | $43,599 |
45 | $25,300 | $52,243 | $77,543 |
50 | $31,300 | $100,910 | $132,210 |
55 | $37,300 | $182,952 | $220,252 |
60 | $43,300 | $318,743 | $362,043 |
65 | $49,300 | $541,101 | $590,401 |
70 | $55,300 | $902,872 | $958,172 |
75 | $61,300 | $1,489,172 | $1,550,472 |
Portfolio value is at end of each time period. All time periods are five years except for the first year (Age 25) which includes a $100 initial contribution. Interest is computed annually.
As we can see, the portfolio grows at a relatively slow pace over the first five years.
But as the portfolio continues to grow, the interest earned begins to exceed the contributions in under 15 years. That’s because interest is earned not only on the total contributions but on the accumulated interest itself. So by the age of 40, the total contributions are valued at $19,300 while the interest earned soars to $24,299.
Not only that, the interest earned soars to double the value of the investor’s contributions over the next five years—reaching $52,243 compared to the $25,300 in principal.
By the time the investor is 75, the power of compound interest becomes even more eye-opening. While the investor’s lifetime contributions totaled $61,300, the interest earned ballooned to 25 times that value, reaching $1,489,172.
In this way, it shows that investing consistently over time can benefit investors who stick it through stock market ups and downs.
The Two Key Ingredients to Growing Money
Generally speaking, building wealth involves two key pillars: time and rate of return.
Below, we show how these key factors can impact portfolios based on varying time horizons using a hypothetical example. Importantly, just a small difference in returns can make a huge impact on a portfolio’s end value:
Annual Return | Portfolio Value 25 Year Investment Horizon | Portfolio Value 75 Year Investment Horizon |
---|---|---|
5% | $57,611 | $911,868 |
8% | $88,412 | $4,835,188 |
12% | $161,701 | $49,611,684 |
With this in mind, it’s important to take into account investment fees which can erode the value of your investments.
Even the difference of 1% in investment fees adds up over time, especially over the long run. Say an investor paid 1% in fees, and had an after-fee return of 9%. If they had a $100 starting investment, contributed monthly over a 25-year time span, their portfolio would be worth over $102,000 at the end of the period.
By comparison, a 10% return would have made over $119,000. In other words, they lost roughly $17,000 on their investment because of fees.
Another important factor to keep in mind is inflation. In order to preserve the value of your portfolio, its important to choose investments that beat inflation, which has historically averaged around 3.3%.
For perspective, since 1974 the S&P 500 has returned 12.5% on average annually (including reinvested dividends), 10-Year U.S. Treasury bonds have returned 6.6%, while real estate has averaged 5.6%. As we can see, each of these have outperformed inflation over longer horizons, with varying degrees of risk and return.
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