Building wealth, even in the season of giving

America is a highly competitive and acquisitive society, but every year with the coming of Christmas people demonstrate a more humane spirit. There is a generous desire to lavish expensive gifts on loved ones. However, a recent report from the Pew Research Center indicates that a better strategy for African Americans would be to spend more moderately, and focus on building wealth. The Great Recession has widened the racial wealth gap.

For most people, the determinant of wealth is an individual’s level of consumer consumption. A Bentley or a high-end Mercedes-Benz is more than a very comfortable ride, it is also a status symbol. Conspicuous consumption indicates for many people business or professional success. It proclaims to others that those capable of paying the substantial bills have succeeded and have risen to the top.

Every now and then there is an obituary about someone who lived modestly but left a multimillion dollar estate, much to the surprise of those who knew him. Building wealth is so important for black progress that it is wiser to build assets than to fritter away funds that could be profitably invested.

One difficulty of beginning the process is that people often cannot distinguish between a consumer expenditure and an investment. Someone might assert that he has invested in a new Cadillac, but that is hardly an asset that returns dividends. In fact, the owner will have to pay higher excise taxes, more insurance and substantial interest on the car note. A car is technically an asset, but it is not one that will increase in value.

The recent Pew Research report indicated that the difference between the wealth of blacks and whites has increased since the Great Recession. In 2007, whites had 10 times the median household net worth of blacks. By 2013 that gap had grown to 13 times. The median black household net worth was only $11,000 compared to $141,900 for white households.

One’s net worth is calculated by determining the value of all assets minus the amount of debts. Assets would include real estate, stocks and bonds, savings, personal property and, indeed, automobiles. Debts would be mortgages, amounts due on credit cards and personal loans. The remaining balance is the net worth, the value of one’s wealth.

A trivial net worth places blacks in a very precarious financial position. Emergency situations arise all the time and families with no cash reserves are unable to meet their financial obligations. A problem like the unexpected loss of a job, illness or an accident could lead to homelessness. Even without an emergency the absence of wealth frustrates future plans such as buying a house or financing higher education for one’s children. And most critically, the absence of wealth eliminates provision for retirement.

The expansion of the racial wealth gap did not result from the profligacy of minorities. The income of minorities fell 9 percent between 2010 and 2013, while white income fell by only 1 percent. During that period median black household wealth dropped 33.7 percent, from $16,600 in 2010 to $11,000 in 2013. The decline in real estate values in black neighborhoods was responsible for some of the loss in wealth.

Recovery will not be easy for blacks. According to the Pew report, the wealth gap between all upper- and middle-class households is the greatest in 30 years. For many black households it will be like starting over. People will need extraordinary discipline to resist the advertising inducement to spend on consumption rather than on an investment plan.

You can still have a merry Christmas without increasing your load of debt.