Start Saving Early, Or Start Falling Behind

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New America Foundation
By: Justin King
June 16, 2011

The gap in wealth accumulation between Blacks and Whites is a familiar statistic. Recently, researchers at Brandeis University announced that the racial wealth gap quadrupled from $20,000 to $95,000 between 1984 and 2007. There are a number of historic causes that one could point to for creating and exacerbating the gap, but the increase in recent years is disturbing. It's important to keep in mind the ways that the tax code benefits those that are already wealthy more so than those who are striving toward wealth.

Recent research finds that the racial wealth gap begins early, a finding that potentially contributes to the widening gap over time. Terri Friedline and William Elliott, both Research Fellows here at New America, published a new study looking at savings accounts held by young adults ages 17 to 23 and their median amount saved among separate samples of Whites and Blacks. Friedline and Elliott asked two main questions: (1) Who has savings accounts among Whites and Blacks and how much do they have saved? and; (2) Does having savings accounts at an earlier point in time predict having savings accounts as young adults? They find that by young adulthood, the access gap between Whites and Blacks is large. 90% of Whites have savings accounts compared to 64% of Blacks. The gap for the median amount saved is $780. By young adulthood, Whites have accumulated $800 compared to $20 saved by Blacks. You read that correctly. In addition, White young adults are three times more likely to have savings accounts when they have savings accounts as adolescents, meaning that Whites are significantly more likely to continue to save once they gain access to financial institutions.

These findings shed light on young adults' access to financial institutions and potential to accumulate wealth through savings. Gaining access to financial institutions early may be especially important for helping young adults weather difficult situations given their high unemployment rates, low incomes, and debt from college loans. Moreover, a young adult who has $20 saved may consider their options to develop their human capital (like attending college) or to start out on their own (like moving out of their parents' house) very differently compared to a young adult with $800 saved. $800 could go a long way towards buying college books or renting a first apartment. Helping young adults to open savings accounts and accumulate wealth may help make some of these options seem feasible.

Improving access to savings may also be a start toward reducing the racial wealth gap. According to Friedline and Elliott, when young adults have access to savings early in life, they are more likely to have savings later in life and, at least descriptively speaking, they also have more saved. Promoting access to good and reliable financial services - whether it's through supporting programs like Bank On, enacting a policy like the Saver's Bonus, or encouraging savings in GEAR UP - might be a productive approach to reducing the racial wealth gap in the long run. One thing seems certain (and remains a guiding principle of our work) the sooner you start, the better.

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This page contains a single entry by CFED published on June 17, 2011 3:38 PM.

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