When you see someone struggling financially, it may not be because they’re “bad with money.” They simply may not have had access to certain financial privileges growing up — such as parents who helped pay for college. Here’s a closer look at what financial privilege is and how it works.

Financial privilege is a term used to describe the advantages people have in society because of their economic status.

For instance, people who come from wealthy families are more likely to have access to financial resources others can’t access — such as the ability to graduate from college debt-free or to get help starting a business.

Financial privilege plays a huge role in determining your financial reality, and it’s important to understand what it is and how it works.

What Is Financial Privilege?

Financial privilege — also known as economic privilege, money privilege, or rich privilege — means having a level of wealth that gives you advantages others may not have.

Think about it: Did you or anyone you know have wealthy family members growing up? Maybe your best friend got an inheritance from their grandma or a fancy new car when they turned 16?

These are examples of having financial privilege, and they make for a major head start in life.

The Funnel of Financial Privilege

Financial privilege doesn’t exist in a silo. If your parents are wealthy enough to help with one area of your finances, there’s a good chance they will help in other areas too.

This is referred to as ‘the funnel of privilege’ — and this study from Zillow illustrates just how the funnel works. Zillow’s study found that:

  • Of all Millennials who graduated college, 61% had parents who helped cover the cost.
  • Of those Millennials whose parents helped pay for college, 12% became homeowners.
  • Of those who are homeowners, 3% had parents who also helped cover the down payment on their home.

When you come from a wealthy family, you’re more likely to get ahead in life because they can help you:

  • Pay for college.
  • Afford a higher down payment on a home.
  • Bankroll your dream wedding.
  • Fund your new business idea.
  • Avoid costly mistakes by teaching you how to budget, save, manage debt, and invest from a young age.

All of this help frees up more money you can use to save and invest. And in some cases, it all culminates into generational wealth when your family is able to pass on their money to you via an inheritance.

Financial Privilege in America: A Closer Look at the Racial Wealth Gap

America is a nation of haves and have-nots. And when it comes to the racial wealth gap, sadly, the haves are overwhelmingly white while the have-nots are disproportionately people of color.

According to a recent study, the median wealth for white households is $188,200 — compared to $24,100 for Black households and $36,100 for Hispanic households.

To put that in perspective, that means that the typical white family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family.

And it’s not just a matter of income. Even when you compare families with similar incomes, whites have far more wealth than Blacks or Hispanics.

This gap is the result of centuries of discrimination and exclusion in housing, education, and employment opportunities. And it makes it a lot harder for people of color to gain access to financial privilege.

How Financial Privilege Affects Your Life: A Story

Financial privilege influences every facet of your life — from your ability to build wealth down to how you’re perceived by your peers.

Here’s a quick story to explain.

Backstory

Meet Ted and Kate. They both graduated from the same college with the same degree. They also got hired at the same company working the same job.

On the surface, Ted and Kate are on identical financial playing fields. But dig a little deeper and their actual financial circumstances are dramatically different.

For one, Ted was lucky enough to graduate debt-free. His parents started saving for his education when he was born. He also moved back in with his parents after graduation, allowing him to live rent-free. (You can learn more about the financial benefits of that living arrangement here.)

Kate, on the other hand, comes from a lower-middle-class family. Kate’s family couldn’t help with college, so she graduated with $40,000 in student loan debt. (Her payments are around $400 a month.) She also has to rent an apartment near her new job, which costs $1,400 a month.

Read more: Student Loan Debt: Understanding the National Crisis

A Closer Look at Their Budgets

Ted’s parents helped coach him through the salary negotiation process, and his starting salary at his new job is $50,000. After taxes, Ted brings home around $3,000 a month. He lives on $1,000 and saves the other $2,000.

Kate’s starting salary is around $45,000. Unlike Ted, Kate didn’t know how to negotiate — or even that she could — so she took the first salary she was offered.

Kate brings home around $2,800 after taxes — $1,800 goes straight to rent and student loan payments. The other $1,000 goes to living expenses, leaving her unable to save the recommended 20% of her income.

One Year Later

A year later, while at work, Ted mentions to Kate that he’s about to buy his first home.

Kate cringes a bit inside. How can Ted already be buying his first home? I’m still living off Ramen noodles.

To Kate, Ted’s new financial milestone is yet another reminder of how bad she is with money. She tells him she’ll be lucky to buy a house within the next decade. Little does she know, Ted had an invisible upper hand.

To add to this…

The funnel of financial privilege tells us that because of Ted’s parents’ wealth, they’re also more likely to help him cover the down payment on his home, pay for his future wedding (which will likely be quite expensive), and maybe even fund any entrepreneurial adventures he wants to set out on.

Why Ted and Kate Should Check their Financial Privilege

If Ted never talks openly and honestly about his financial privilege with others, Kate (and everyone else in Ted’s circle) may continue to believe they all just “suck at money” compared to him.

As a result, this can affect Ted’s friends in a number of ways:

  • They may feel anxious or stressed about their finances, which can lead to problems sleeping or concentrating.
  • They may feel ashamed or embarrassed about their situation, which can damage their self-esteem.
  • Their lack of confidence may cause them to miss out on professional or financial opportunities that would allow them to earn more money.
  • They may take on more debt or overspend because they mistakenly think they’re doomed to be bad with money forever.

On the other hand, Ted’s delusion that he’s a financial genius and that the Kates of the world are fiscally irresponsible may lead to a number of interpersonal, financial, and ethical problems for him too.

  • Ted’s ignorance about his own financial privilege could lead him to make insensitive or offensive comments that alienate Kate and those around him.
  • He may overspend or take on more risk than he should because he believes he can’t lose.
  • He may have no empathy or urge to help those with less privilege than him.

How To Check Your Financial Privilege

Financial privilege exists on a spectrum — but it’s something we all may have to varying degrees. Reflecting on our respective levels of financial privilege (or lack thereof) can benefit everyone on the financial spectrum.

In Kate’s situation, she’d realize that her financial circumstances aren’t a reflection of her personal worth. And Ted would understand that his privileged position doesn’t make him superior to others. Rather than feeling competitive or judgmental, they could support each other and work together to find solutions to their shared financial challenges.

So, what factors should you consider when evaluating your own financial privilege?

  • Your family background: If your family has a history of wealth and social status, or if you have access to high-paying jobs or lucrative business opportunities due to your social connections, this gives you significant advantages over others.
  • Your location: Living in an affluent neighborhood — or even in a developed nation like the U.S. — can provide you with opportunities people in other parts of the world don’t have.
  • Your race and ethnicity: People of color have historically faced greater economic disadvantages than white people due to institutionalized racism. When evaluating your financial privilege, consider how your skin color may have impacted your (or your family’s) ability to succeed financially.
  • Your gender: The gender wage gap still exists — and many women still earn less than men across the board.
  • Your sexual orientation and gender identity: Everything from housing to healthcare can be challenging to find — and more expensive — for the LGBTQ+ community, who need to seek out welcoming spaces, typically in more urban (pricier) settings.

What Should You Do if You Have Financial Privilege?

Having financial privilege doesn’t mean you’ve never struggled in life. It just means your money has unlocked certain resources that may not be available to others — such as better education, a higher-paying job, nicer housing, or even healthier foods.

Once you’ve assessed your own level of financial privilege, you can begin to think about ways to use it for good. For example, you can:

  • Be honest with your friends about how much financial privilege you have. When possible, acknowledge how your financial privilege has made certain aspects of your life “easier” than it may be for others.
  • Be generous when you can. If you have financial privilege, look for ways to share it with others — whether it’s picking up the tab at dinner or coaching someone through a job negotiation.
  • Amplify the voices of marginalized groups in your workplace, college, or community. Listen to the perspectives of people who may not have the same level of financial privilege as you, and work to dismantle systemic barriers that prevent marginalized groups from achieving equality.

Summary

Financial privilege affects your life in ways that may be quite obvious — e.g., your debt levels and savings account balance — and in ways that are more subtle, like how your peers relate to and communicate with you. Understanding and acknowledging your level of privilege relative to those around you can enrich you and your broader community, both financially and psychologically.

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About the author

Cassidy Horton
Total Articles: 26
Cassidy Horton is a freelance personal finance copywriter at cassidyhorton.com. She's a bonafide adventurer, cat lover, and money nerd who's passionate about helping people find financial freedom. Follow Cassidy on LinkedIn to see what she's up to next.