ORIGINAL ARTICLE Financial Shocks, Liquid Assets, and Material Hardship in Low- and Moderate-Income Households: Differences by Race Mathieu Despard 1 & Michal Grinstein-Weiss 1 & Shenyang Guo 1 & Samuel Taylor 1 & Blair Russell 2 Received: 17 November 2017 /Revised: 15 June 2018 /Accepted: 8 July 2018 /Published online: 8 August 2018 # Springer Nature Switzerland AG 2018 Abstract Low- and moderate-income (LMI) households need financial assets to help cope with income and expenditure shocks. Prior research identifies racial differences in wealth and wealth effects. We examined whether these gaps and effects exist for liquid financial assets. Using group invariance tests in structural equation modeling, we assessed the relationship between financial shocks and material hardship, as mediated by liquid financial assets and moderated by race/ethnicity among a sample of LMI tax filers (N = 7544). Though most study participants were employed (71%), average income was only $18,055 and average liquid financial assets was $4701. Black households had $2774 less in liquid financial assets compared to white households (p < .001) after controlling for income and other factors. Model fit for the final moderated mediation model was excellent (RMSEA = 0.026, 90% C. I. [0.020, 0.033], CFI = 0.977). The mediating effect of liquid financial assets was 10.4% for white, but only 3.6 and 4.4% for black and Latino households, respectively. That is, the proportion of the relationship between shocks and hardship mediated by liquid financial assets varied by race/ethnicity. Policies aimed at helping LMI households build emergency savings such as tax refund savings matches may be less likely to benefit black and Latino households than white households, suggesting the need for other policies to address this form of the racial wealth gap. Keywords Low- and moderate-income households . Liquid assets . Financial shocks . Material hardship . Race . Ethnicity Introduction Negative financial shocks, such as loss of income due to re- duced work hours or unexpected large expenses, are common occurrences in low- and moderate-income (LMI) households (Abbi 2012; Acs et al. 2009; Morduch and Schneider 2017). The consequences of such shocks may include LMI house- holds forgoing necessary consumption (Despard et al. 2018; McKernan et al. 2009; Pew Charitable Trusts 2015a) or taking on high-interest rate debt to smooth consumption through the period of the emergency (Pew Charitable Trusts 2012). Liquid financial assets play an important role in helping households cope with financial shocks, making it less likely that these shocks result in material hardship (Despard et al. 2018; Collins and Gjertson 2013; Gjertson 2016; McKernan et al. 2009). Our prior study confirms that liquid assets medi- ate the relationship between financial shocks (emergency) and material hardship in LMI households, where 90.5% of the effect of financial shocks on material hardship is direct, and 9.5% of this effect is indirect via assets (Despard et al. 2018). However, the role that liquid financial assets play with respect to financial shocks and material hardship may not be similar for all LMI households. Racial disparities exist concerning the incidence of, responses to, and consequences of financial shocks (Pew Charitable Trusts 2015a, 2017), liq- uid financial assets (Haveman and Wolff 2005 ; Pew Charitable Trusts 2015b), and incidence of and risk for mate- rial hardship (Beverly 2001; Sullivan et al. 2008; Pilkauskas et al. 2012). These variables—financial shocks, liquid assets, and material hardship—may be related in different ways among LMI households based on race and ethnicity. In this study, we build on our prior study to address the following research question: is the mediating role of assets in the relationship between financial shocks and material hard- ship moderated by race among LMI households? We answer this question using data from a two-wave 2013 Household * Mathieu Despard mdespard@wustl.edu 1 Washington University, St. Louis, MO, USA 2 U.S. Department of Housing and Urban Development, New York, NY, USA Journal of Economics, Race, and Policy (2018) 1:205–216 https://doi.org/10.1007/s41996-018-0011-y