Economists' Outlook

Housing stats and analysis from NAR's research experts.

Building Financial Wellness

Financial behavior is a very important topic that needs to be discussed in schools and in communities. This blog will look at the buying power of the population and the spending behavior by race/ethnicity, as well as explores the psychology of spending money and making financial decisions. What ethnic groups are making which financial choices, and why? How do these choices impact the ability to build wealth? This blog also looks at ways to avoid making emotional financial choices and go over a few principles to achieve financial wellness.

Buying Power and Wealth Distribution Across Racial Groups

Let’s look at the income and wealth across racial groups. One measure of income is buying power. Cambridge dictionary defines buying power as the ability of a person, group or company to buy things or the total amount of money they have available to spend. One interesting thing jumps out is how some ethnic groups have a lot of buying power compared to their share of the population, and how that does not translate into long term wealth. One might think that buying power translates into increasing wealth over time, but data across racial groups show this is not the case. Therefore, this must have something to do with spending and saving decisions on the money a person earns.

As the chart below shows, Blacks and Hispanics have a lower share of buying power relative to their share of the population, according to a study by The Catalyst. Hispanics account for 18.3% of the population but only 10.4% of total buying power. Blacks make up 13.4% of the population but only account for 8.8% of income. Whites have the largest share of buying power but this is also slightly below their share of the total population. Native Americans’ share of buying power is also less than their share of the population. The only racial group that has a larger share of buying relative to their share of the population are Asians, who make up 5.8% of the population but account for 6.8% of buying power.

Bar chart: Share of Population vs Share of Buying Power in 2018
Table: Ethnicity and Buying Power in 2018

This chart shows Blacks have the lowest median household income, while Asians have the highest median income. This trend has been consistent since 1989.

Bar chart: Median Family Incomes by Race in 2019

Blacks have lower median household wealth compared to Whites and Hispanics, as shown in this chart from Forbes which shows the disparity in median wealth. For the Black community to have the third-highest buying power and come in last in wealth speaks to a lack of income, financial literacy and in some cases, bias in credit approval.

Line graph: Racial Wealth Inequality is Rampant in the U.S. 1983-2024

Let’s take a look at how buying power connects to homeownership by looking at first-time homebuyers by ethnicity. Citylab produced a report on first-time homebuyers that stated,” the share of households identifying as Asian and other has increased from 1997 to 2017, from 5 percent to 11 percent—the largest gain among all races.” “The study found that 2.3 percent of all Asian/other households were first-time homebuyers, compared to just 1.5 percent of white households.” “Hispanics, the second-fastest-growing group in the U.S., also saw gains. In 2017, they made up 14 percent of all first-time homebuyers, up from 10 percent in 1997. Among all Hispanic households, 1.5 percent are first-time homeowners.” “Meanwhile, black households, made up just 9 percent of first-time homebuyers in 2017, compared to 14 percent in 1997. The first-time home-buying rate among black households in 2017 is the lowest of all races, at just 1 percent.” Is there a real solution that can be had to bridge these gaps across racial groups? Are there some policies that can be put in place to help bring some balance to income and wealth levels?

Impact of Spending Decisions: Spending and Wealth

One reason for wealth inequality is due to spending decisions and constraints. In The Atlantic, an article about how Blacks and Whites spend differently shares some interesting perspectives. “The differences in how families spend go beyond earnings. For instance, rich white families spend more on entertainment and groceries than rich black families.” When it comes to income levels “black families at all income levels spend more on things that require a long-term contract, such as electricity and heating services, than white families at corresponding income levels. Blacks don’t just tend to earn less than Whites. Even when they earn as much, they seem to still have less access to goods and services than their White peers do. When it comes to Blacks’ long term spending, “Long-term contracts for goods like electricity, water, gas, and some types of insurance can require additional fees, or deposits from those with low credit scores, which can disproportionately impact low-income and minority customers across all income levels.” So, this speaks to a difference in access to resources and choices.

The University of Georgia produced a study on Minority groups driving the U.S. economy.

Let Us Look at How Some Minorities Are Spending Their Money

Where Hispanics Spend More

Where Hispanics Spend Less

  • groceries
  • clothing
  • cellphone services
  • car insurance
  • tobacco
  • health care
  • entertainment
  • furniture
  • personal insurance

Where Blacks Spend More

Where Blacks Spend Less

  • natural gas
  • electricity
  • shoes
  • phone services
  • new cars
  • furniture
  • health care
  • education
  • pensions

Where Asians Spend More

Where Asians Spend Less

  • dining out
  • housing
  • public transportation
  • education
  • clothing
  • utilities
  • used cars
  • cash contributions
  • health care
  • entertainment

Building Financial Wellness

Here are some proactive things that can be done to work toward financial wellness. There are four factors that support financial wellness.

  • How to save properly
  • How to control your cost of living
  • How to borrow effectively
  • Diversify your finances

How to Save Properly

First, let’s look at two important words that are keys to financial wellness.

Saving: Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash.

Investing: Investing is defined as the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Many Americans have trouble saving a percentage of their income due to debt and high expenses. Wage growth will not always be the key to saving more money. A key way to save would be to postpone purchases and to ask whether a purchase is necessary. Anticipation of buying is the height of the emotional rush of wanting to purchase something. Consider if you would rather have the cash in hand versus buying whatever the item is.  How much work will you have to put in to afford your purchase? If you were offering your time for money how many hours will it cost you? What will be the future value of your money? The answers to these questions will help shape how to go about a saving strategy.

A suggestion: put your money in a separate account and to start saving based on your new choices. Watch that money grow. As an example, if a person buys Starbucks and spends $5 a day and instead puts that money into the account, that will add up to $25 a week. Compare that to spending $10-14 on a cup of coffee versus making your own every day to lower your weekly expenses. Most of us break out spending money once we receive our salary, donate some of it and then last but not least we may save or invest the remainder. Some of us save or pay ourselves 10% of our income. There are some other concepts where some will save $5 a day which will be approximately $150 a month saving which will total $1,800 a year. This amount saved monthly over time will definitely grow into a substantial amount. Analyze your budget look at all of your expenses versus what you earn. Look at the areas where you can alter your finances for the better. Can you lower your car insurance or phone bill? Can you lower your credit card payments and can you cut back on eating out if that is where some of your money goes? If there are areas you can cut back on expenses those could be opportunities to reinvest those funds. These are just a few methods that can be taken to start a plan of saving.

How to Control the Cost of Living

Controlling the cost of living circles back to budgeting. It’s been said that spending 30% of your pre-taxed income on housing is a burden. If you are going to buy a home or rent, you need to break down all of the costs. You have your mortgage/rent, utilities, travel expenses, cable, and WIFI if you need it and then budget for food. This calculation needs to be done first to see where your funds fit. Once you have figured out where your income falls then you can start to find ways to lower how much of your income goes to housing. Some people may need to downsize and move from a two-bedroom to a one-bedroom or from a house to an apartment. Some of us may need to consider having roommates or renting out space in our homes to be on the right side of this equation. Living within your means will work best for most and prevent piling up debt. Financial literacy is a lifestyle as opposed to a skill we benefit from making it a way of life.

How to Borrow Effectively

The main factor that goes into borrowing is credit. Credit will determine if a person will be approved or denied for a loan. Taking a look at the Mortgage Market Activity and Trends report from 2018 we can see that Whites have the lowest denial rates while Blacks have the highest denial rates which have been consistent from 2004 to 2018.  For comparison, in 2018 Whites denial rates were 7.9%, Asians 10.2%, Hispanics 13.1% and Blacks 17.4%. When we look into the details of why the denial rates are higher for Blacks we can see that they are mainly rejected due to credit history. Asians had the lowest denial rate based on credit history.

Tables: Home Purchase and Refinance Loan Denial Rates and Reasons

There are several options for using credit or debt to build wealth. Most homeowners have taken a loan to buy a home and as long as there are time and equity on your side it’s a good investment.  There are even some people who have purchased homes by using a credit card. To do so obviously a person would need to have good credit to have access to enough funds. But the principle here is if you take out a loan it should be based on a future benefit a person can count on. If you are going to borrow money you want to make sure that you are able to recoup the money borrowed plus some to offset the risk. To borrow is risky and make sure you can pay back your loan. Make sure you have money to also pay the interest. Real estate is a basic principle on how to borrow in order to gain more money. Credit is the power to spend. There is good debt and bad debt. School loans would be considered bad debt mainly because the loans must always be repaid. There is no way out of it. Can the debt you create put money back into your pocket? Debt used to buy an asset is good debt. Bad debt and or liability takes money out of your pocket. An asset puts money in your pocket. Pick more assets and fewer liabilities.

Diversify Your Finances

It is very important to diversify your money and let your money work for you. Some people believe it is not wise to put all of your eggs in one basket and diversifying would be putting your eggs in several baskets. Or some may not want to put all of their money in all one stock or bond. There are many fund sharing opportunities, online stores, some use yard sales and opportunities to invest in things they can call on the future. Some individuals look to stocks, ROTH IRA’s, CDs or ETFs to establish long term investments. Have or create multiple sources of income. Some individuals opening online stores selling products. You can also increase your output as an employee and as an individual. Some investors will buy rental properties or use Air BnB as an option. Your income is considered profits after expenses. Organize your finances and having a budget is key. Spending more than you make will not allow you to invest or save. Own a home you know you can afford. Goal setting is an important aspect of your finances. Building savings is key and having an emergency fund is very helpful to all who are able to have one.

Behavioral finance is key to understand why and how choices are made. There are social and emotional influences as well as biases and or ignorance.  Understanding why you spend your money will likely help an individual to make better choices. We must learn how to invest and it’s impossible to harvest when there are no seeds planted. Some communities make choices based on their peers. If they see their peers opening up businesses and investments then it makes it real for them to do so. We need to evaluate what we spend less on and see if that should be an area we need to spend more on. Likewise, we need to see what we spend more on and see if we need to do so or cut back. We cannot undervalue education and reading more books making investing in yourself paramount. Some communities focus on circulating their own money so it stays in their communities longer.

In conclusion, we all need to find a way to create and increase cash flow. Pooling resources for the benefit of future investment is a very strategic plan because you can gain more with more than one investor. Group economics has been practiced for many years and will be one of the ways that all races can pool their ideas and recourses. It is something that many cultures have benefited from and the cultures who have not should learn to apply it. Group economics is a collection of individuals who have a common economic concentration. It starts with improving your knowledge of finance and business. Opening and supporting businesses to help your community. Offering your community a service they can benefit from. Being able to employ your community and continue to build and maintain relationships will be key to long term success and leading change.