Financial security suggests that a household has wealth to weather an economic shock, such as a job loss or a health emergency. Wealth is often defined as a person’s net worth or the sum of the value of a person’s assets, as well debts. The presence of debt can also signify financial insecurity. Unexpected loss of income, health emergencies, and other debt crises are all components of financial insecurity and have the power to undermine an individual’s economic success, personal power, and autonomy. Access to medical care, home loans and small-business loans, and the capacity to build savings are key components of financial security. Improved financial security positively influences families’ and individuals’ capacity to weather economic shocks, invest in physical health, and build more sustainable wealth.
Evidence of the Relationship between Predictor and Related Outcomes
- Having even a small amount of savings (between $250 to $749) reduced the likelihood of a family experiencing housing instability, and low-income families with moderately sized savings (between $2,000 to $4,999) are more financially resilient (i.e., less likely to experience a hardship after an income disruption) than middle-income families with no savings (McKernan et al. 2016).
- Families with no or low amounts of wealth are vulnerable to economic shocks, which may result in missed payments and more reliance on public benefits (McKernan et al. 2016). People with limited financial resources also report poorer health and have a higher risk of disease (Woolf et al. 2015).
- Spilerman (2000) highlights some of the benefits of wealth versus earnings, including that (1) wealth eliminates the trade-off between leisure and work, (2) income from wealth does not decline with work stoppage, (3) wealth can be enjoyed without necessarily being consumed (such as by owning a home, with the exception of association fees, mortgage payments, property taxes, and maintenance costs), (4) wealth is taxed at lower rates than labor-market income, and (5) in an economic crisis, the wealth principal can be consumed.This review article also discusses the challenges of measuring wealth, data sources with wealth measures, trends in wealth and stratification, and the evidence connecting wealth to intergenerational wealth transfers and inheritance and their role in socioeconomic inequality.
- McKernan and colleagues (2017) found that as of 2016, white family wealth was seven times greater than Black family wealth and five times greater than Hispanic family wealth. These figures are similar to where they were in the 1960s, and at certain more recent points, the disparity is even greater (McKernan et al. 2017). These racial wealth disparities are also present when looking at age, specifically how different races accumulate wealth over their lifetimes. In their 30s, white individuals have an average of $147,000 more in wealth than Black individuals, or three times more. By their 60s, white individuals have over $1.1 million more in wealth than Black individuals, or seven times more (McKernan et al. 2017).
- Higher levels of wealth have been linked to improved health (Woolf et al. 2015; Pollack et al. 2013; Schiller, Lucas, and Peregoy 2012, table 21). Pollack and colleagues (2013) found that being in the lowest quartile of wealth was correlated with three to five times higher chances of poor or fair health levels for older Hispanic people and both younger and older Black and white people.
- Beyond wealth, one in five Americans struggles to meet medical costs, but Black Americans continue to be hit the hardest (Neighmond 2013). National Public Radio conducted a poll that found that 24 percent of Black families say that they have had difficulties paying for necessary prescription medications (Neighmond 2013).McKernan (2017) reports that nearly one in three Black Americans ages 18 to 64 have past-due medical bills. Beyond the immediate difficulties of paying off these bills, past-due medical bills can end up on an individual’s credit report and lower their score, which can create barriers to securing a loan (McKernan 2017).
- Having access to credit can be incredibly valuable to families who need to cover short-term or emergency expenses until the next paycheck arrives. However, nearly one in five Americans do not have a credit file and thus have no access to safe, affordable credit. People with poor credit (i.e., with a subprime credit score or no credit file) have limited options for financial products and are charged the highest interest rates when they need to borrow money. This affects economic success because an inability to borrow hinders their ability to have money for emergencies, to save, to start a business, or to pursue opportunities like getting a higher-education degree or owning a home (Elliott and Lowitz 2018). For the 27 percent of Americans in the credit system with subprime credit, 86 percent have an average of $1,360 in delinquent debt that would need to be repaid for them to achieve prime credit. This type of debt can take up a large portion of one’s income, and if these individuals try to take out a loan, they only qualify for the loans with the highest interest rates (Elliott and Lowitz 2018).
- The COVID-19 pandemic has illuminated many inequalities facing vulnerable populations. In 2020, people living in majority-Native communities (i.e., where 60 percent or more of the population identifies as American Indian or Alaska Native) faced consistently high rates and levels of delinquent debt, and 46.4 percent of those individuals had subprime credit, 2.5 times higher than in majority-white communities (Martinchek and Carther 2021). An Urban Institute analysis of credit bureau data found that in October 2020, Native American communities had the highest share of loans from alternative financial services (i.e., short-term unsecure loans, such as payday loans) at 14.4 percent; the Black community share was 9.2 percent, and the Hispanic and white community shares were 6.5 percent and 4 percent, respectively (Martinchek et al. 2022).
- A report from Stanford’s Center on Longevity on financial security and homeownership notes that the average net worth for individuals born in the early 1980s is less than $10,000 today, which significantly restricts their capacity to afford the down payment on a home. Despite increasingly strict lending regulations, debt burdens fall most strongly on less-educated and lower-income individuals. Comparing individuals at the age of 30 across generations (i.e., comparing those born from 1957 to 1964 with those born from 1980 to 1984), the mortgage-to-income ratio increased from 1.06 to 2.24 for those with less education and from 2.3 to 4.1 for the lowest income quartile (Streeter, Sims, and Deevy 2018, 10).
- Streeter, Sims, and Deevy (2018) report that the percentage of white Americans able to purchase a home by age 30 is significantly greater than that of Hispanic Americans and nearly twice that of Black Americans, and these trends persist over time. For the third quarter of 2021, the homeownership rate for Black people in the US is 44 percent compared with 74 percent for white people (US Dept of Commerce 2022).
- Black and Hispanic borrowers are more likely to be rejected when they apply for a loan in the mortgage market, a trend that has not changed over the past 40 years. When approved, these subgroups are also more likely to receive a high-cost mortgage. (Quillian et al. 2020). In 2015, the loan denial rates for Black and Hispanic prospective borrowers were 27.4 percent and 19.2 percent, respectively, compared with 10.9 percent for white prospective borrowers and 10.8 percent for Asian prospective borrowers. In the same year, mortgage rates were at 6 percent or more for 23 percent of Black and 18 percent of Hispanic homeowners compared with 13 percent of white and 6 percent of Asian homeowners (Desilver and Bialik 2017).
How Investments Can Influence the Predictor at State or Local Levels
Although a lack of wealth hampers the mobility of all people, disparities in wealth across race and ethnic lines indicate that Black, Hispanic, and American Indian/Alaska Native people have lower wealth holdings than white people. Thus, policies to increase wealth may have larger impacts if focused on those populations. Supporting financial institutions owned by Black people or other people of color can help ensure that Black, Hispanic, and Native American people have improved chances of security home and business loans. Neal, Choi, and Walsh (2020) report that at the end of 2018, there were 149 minority depository institutions (out of 5,400 insured financial institutions); minority depository institutions are defined by the Federal Deposit Insurance Corporation as any depository institution where 51 percent or more of the stock is owned by one or more “socially and economically disadvantaged individuals.” Of those 149 minority depository institutions, 23 (15 percent) were designated as Black, 73 (49 percent) were designated as Asian American, 35 (23 percent) were designated as Hispanic, and 18 (12 percent) were designated American Indian/Alaska Native. Historically, Black-owned banks would support the economic life of the communities they serve, which are predominantly Black communities. Black-owned banks focus their lending on small businesses, nonprofits and faith-based institutions, and Black homebuyers. Additionally, Black-owned banks tend to tolerate higher risk to serve their communities, and during the 2008 housing crisis and Great Recession, they increased their services to Black borrowers (Neal, Choi, and Walsh 2020). Some politicians have introduced legislation to help minority-owned depository institutions, such as the Ensuring Diversity in Community Banking Act, which would allow banks owned by people of color to be certified as community development financial institutions (CDFIs), meaning they would have access to CDFI Fund programs that offer many mechanisms to increase capital for community investments (Neal, Choi, and Walsh, 2020). Support for Native-owned financial institutions or Tribal Chartered Banks would create a new banking system regulated by an independent tribally appointed governing body. Tribal Chartered Banks would allow tribal nations to provide direct capital investments into reservation businesses, housing, and infrastructure, and to set their own lending terms that are based on tribal needs and conditions over bank shareholder demands (Guedel and Colbert 2016).
Increasing numbers of studies have attempted to analyze the relationship between the location of payday lenders and Black communities. Black adults are more likely than white adults to say they live within a mile of a payday lender or a pawn shop. This is particularly concerning because payday lenders and pawn shops are an extremely high-cost way to borrow money (Williams 2020). Additional research has shown that in Mississippi, Black communities in all regions have less access to traditional banks, meaning that fewer banks reside in areas with large Black populations (Brevoort and Wolken 2009).
Increasing financial knowledge of residents can help stabilize their collective financial security. Studies have found that financially knowledgeable, nonelderly people are less likely to have past-due medical debt (Braga, McKernan, and Karas 2017). Financial education mandates were implemented in public schools in several states in 2007. Brown and colleagues (2014) examined three of those states (Georgia, Idaho, and Texas) and compared them to geographically homogenous bordering states without the education mandate. They find that students exposed to financial education mandates had higher credit scores (29 points higher in Georgia, 7 points higher in Idaho, and 13points higher in Texas) and lower financial delinquency rates through age 22 than those in the states without the mandate (Brown et al. 2014).
The primary reference is marked with an asterisk.
Braga, Breno, Signe-Mary McKernan, and Andrew Karas. 2017. “Is Financial Knowledge Associated with Past-Due Medical Debt?” Washington, DC: Urban Institute.
Brevoort, Kenneth P., and John D. Wolken. 2009. “Does Distance Matter in Banking?” In The Changing Geography of Banking and Finance, edited by Albert Zazzaro, Michele Fratianni, and Pietro Alessandrini. Boston: Springer.
Brown, Alexandra, J. Michael Collins, Maximilian Schmeiser, and Carly Urban. 2014. “State Mandated Financial Education and the Credit Behavior of Young Adults.” Finance and Economics Discussion Working Paper 2014- 68. Washington, DC: Federal Reserve Board.
Desilver, Drew, and Kristen Bialik. 2017. “Blacks and Hispanics Face Extra Challenges in Getting Home Loans.” Washington, DC: Pew Research Center.
Elliott, Diana, and Ricki Granetz Lowitz. 2018. “What Is the Cost of Poor Credit?” Washington, DC: Urban Institute.
Guedel, W. Gregory, and J. D. Colbert. 2016. “Capital, Inequality, and Self-Determination: Creating a Sovereign Financial System for Native American Nations.” American Indian Law Review 41 (1).
Martinchek, Kassandra, and Alexander Carther. 2021. “Native Communities Face Sustained Challenges to Building Financial Resilience.” Urban Wire, February 25.
Martinchek, Kassandra, Alex Carther, Breno Braga, Caleb Quakenbush, and Signe-Mary McKernan. 2022. “Credit Health during the COVID-19 Pandemic.” Washington, DC: Urban Institute.
McKernan, Signe-Mary, Caroline Ratcliffe, Breno Braga, and Emma Cancian Kalish. 2016. “Thriving Residents, Thriving Cities: Family Financial Security Matters for Cities.” Washington, DC: Urban Institute
McKernan, Signe-Mary, Caroline Ratcliffe, C. Eugene Steuerle, Caleb Quakenbush, and Emma Kalish. 2017. “Nine Charts about Wealth Inequality in America (Updated).” Washington, DC: Urban Institute.
Neighmond, Patti. 2013. “African-Americans Remain Hardest Hit by Medical Bills.” National Public Radio, June 10.
Pollack, Craig Evan, Catherine Cubbin, Ayesha Sania, Mark Hayward, Donna Vallone, Brian Flaherty, and Paula A. Braveman. 2013. “Do Wealth Disparities Contribute to Health Disparities within Racial/Ethnic Groups?” Journal of Epidemiology and Community Health 67 (5): 439–45.
Quillian, Lincoln, John J. Lee, and Brandon Honoré. 2020. “Racial Discrimination in the U.S. Housing and Mortgage Lending Markets: A Quantitative Review of Trends, 1976–2016.” Race and Social Problems 12: 13–28.
Schiller, Jeannine S., Jacqueline W. Lucas, and Jennifer A. Peregoy. 2012. Summary Health Statistics for U.S. Adults: National Health Interview Survey, 2011. Atlanta: Centers for Disease Control and Prevention.
*Spilerman, Seymour. 2000. “Wealth and Stratification Processes.” American Review of Sociology 26 (a): 497–524.
Streeter, Jialu, Tamera Sims, and Martha Deevy. 2018. “Generational Shifts in Life Course Trajectories: Implications for Homeownership by Age 30.” In Sightlines Special Report: Seeing Our Way to Financial Security in the Age of Increased Longevity, edited by the Sightlines Project. Stanford, CA: Stanford Center on Longevity.
US Dept of Commerce. 2022. “Quarterly Residential Vacancies and Homeownership, Fourth Quarter 2021.” US Census Bureau, February 22.
Williams, Claire. 2020. “‘It’s What We Call Reverse Redlining’: Measuring the Proximity of Payday Lenders, Pawn Shops to Black Adults.” Morning Consult, July 23.
Woolf, Steven H., Laudan Aron, Lisa Dubay, Sarah M. Simon, Emily Zimmerman, and Kim X. Lux. 2015. “How are Income and Wealth Linked to Health and Longevity?” Washington, DC, and Richmond, VA: Urban Institute and Center on Society and Health.
Related outcome: Strong financial health; good physical health
Mobility principles engaged: Economic success; power and autonomy