African-Americans And Latinos Forced To Rely More Heavily On Family And Friends To Handle Financial Shocks

Households of color often find themselves in a tighter financial bind than is the case for white households. Black, Latino, many Asian households as well as households of other and multiple races and ethnicities tend to have fewer savings, while they face greater financial risks from unemployment, health emergencies, and widespread discrimination, among others. Squeezed by fewer economic resources and greater financial needs, households of color more frequently than white households have to turn to family and friends for financial assistance. Yet, informal financial support hampers wealth building in communities of color in the present and over time because the need for it is so widespread and occurs frequently during people’s lifetimes.

The recent episode of heightened inflation serves to illustrate this more widespread reliance on family and friends to deal with higher costs. The U.S. Household Pulse Survey has asked respondents which changes they have made to cope with the recent increases in prices since July 2022. One possible answer, out of a total of 19, was to “ask family/friends for help.” Other answers include shopping at stores with lower prices, switching from brand names to generic products, delaying major purchases, driving less, going out less, cancelling subscriptions, not attending events, borrowing money, skipping health care and saving, to name some of the most widespread. In the second half of 2022, Black and Latino households as well as households of other or multiple races and ethnicities indicated that they have or would ask family to friends for help than was the case for white households. To be specific, 16.7% of Black households, 15.5% of Latino households and 18.6% of households of other or multiple races or ethnicities gave that answer, compared to 10.9% of white households and 10.0% of Asian households. Importantly, these gaps in using informal financial support by race and ethnicity are larger than all or almost all other gaps in possible coping mechanisms. This was the largest gap of any coping mechanism between Black and white households and the second largest gap between Latino households and white households and households of other and multiple races and ethnicities and white households (see figure below). Put differently, households of color’s coping mechanisms often looked more like those of white households in other aspects, except when it comes to using informal financial support.

This racial gap in informal financial support persists over time and shows up in many data sets. Importantly, it is a key mechanism, by which racial wealth inequality persists. My colleague and co-author, Dania Francis and I, have documented the greater reliance on informal financial support in communities of color during the pandemic. We find that Black and Latino households, in particular, were more likely to borrow money from family and friends to pay for current expenses. Importantly, households of color are in more dire financial circumstances than white households, when they borrow money from family and friends. This again reflects the more widespread lack of economic resources – incomes and wealth – in communities of color than among white households. Moreover, the need for this informal financial support occurs more widely across the age spectrum among households of color than among white households. Reflecting this more widespread need for informal financial support, we also find that Black and Latino households regularly provide informal financial support to more people at the same time and to a wider range of recipients. That is, people of color do not just support mainly adult children, as is the case for white families, but also parents, grandparents, siblings, other relatives and friends. Informal financial support is the pressure valve in communities of color where financial needs are greater and financial resources fewer.

We also analyzed the link between informal financial support and retirement savings with several key conclusions. First, households that provide financial support to family and friends, regardless of race or ethnicity, tend to have more retirement savings than those who do not. Otherwise, it would be more difficult to provide that support. Second, Black households also contribute more to their retirement accounts when they provide assistance to friends and families, while this is not the case for white households. Households of other or multiple races and ethnicities are also more likely to participate in a retirement plan at work when they provide financial assistance to family and friends, which again is not the case for white households. Basically, many households of color self-insure against this financial risks, likely knowing that they will need to help their families and friends again in the future. Third, reflecting the greater financial need to help out family and friends, who struggle financially when facing unforeseen emergencies, we also find that Black households have more and larger outstanding loans in their 401(k) accounts than is the case for white households in a similar situation. The persistent financial needs in people of color’s kinship networks poses a financial risk to Black savers in particular, which requires additional liquidity. This additional liquidity, though, then also means lower rates of return and consequently fewer savings over time. A few years ago, I dubbed this interfamily linkage of financial needs and risks “the misery multiplier” since the financial needs of one family spread to others and do so not just once, but repeatedly over a lifetime.

Households of color often have to find ways to handle financial emergencies that significantly differ from those available to white households. White households have had generations to build up wealth, often because of the violent and systematic exploitation of Black people and other people of color. Households of color also face more systemic economic risks, which is just a technical way of saying that structural racism exists and persists in many key aspects of daily lives. These risks also make it harder to save for the future, but actually require more savings for families to deal with them. Many households of color then have to rely on each other to bridge the gap between greater needs and fewer resources. But, this reliance on family and friends ultimately contributes to the persistence of the racial wealth gap not just over years, but across generations.