Many Black Americans are facing an uphill battle when it comes to building wealth. I had hope during my research I would have discovered that the Black Wealth Gap was closing over the years. I was surprised to find that the gap has widened as Black households were significantly impacted economically as they faced more financial emergencies during the COVID-19 pandemic than White households. Huge wealth disparities existed between Black and White households in America long before the COVID-19 pandemic, but the current financial strain has proven to be disproportionate to Black families, and it may take years for recovery, especially when one falls behind on their bills.
Job losses were greater for people of color, many of whom lacked emergency savings to cushion the financial blow. With Black workers concentrated in low-wage frontline jobs that could not be done remotely, they were exposed to the virus which exasperated the situation. The median annual wage for Black workers is approximately 30%, or $10,000, lower than that of white workers—a figure with enormous implications for household economic security, consumption, and the ability to build wealth.
According to the McKinsey Global Institute, 3.5 million of the country’s Black households have a negative net worth due to debt. In addition, Black households generally start with less family wealth. The McKinsey report estimated a $330 billion disparity between Black and White families in the annual flow of new wealth, with 60% of that coming from inheritances. This lack of generational wealth has caused Black children to be at a disadvantaged starting point historically in life.
Since basic financial fundamentals are not taught in most schools, many Black families are not exposed to the concepts of budgeting, saving, and investing until much later in life. This lack of financial education and participation in the stock market prevent many Black families from attaining wealth and closing the gap.
What can be done within the Black community? Let’s begin with increasing our financial knowledge by reading books, simply having financial conversations within our circles, or with a financial professional to help avoid mistakes and to make better decisions. The next biggest step is to forget about the Joneses and start saving and paying oneself first, regardless of the amount of income. A 2020 Pew Research Center survey found almost three-quarters, or 73%, of Black adults do not have enough emergency savings to cover three months of expenses. However, the tide can change when you automatically transfer a set amount, as little as $5.00, to a savings account every time you get paid. You would be surprised to see how pennies eventually become dollars, perhaps hundreds of thousands of dollars.
Once you build up that emergency fund, you can put money into the stock market to achieve a higher return. Take advantage of your company’s retirement plan, like a 401(k), especially if your employer provides a matching contribution. Start investing as early as you can so that your earnings can earn money known as compound interest. Do not be afraid to take some risks. The stock market’s history over the past 200 years has shown that it has not only consistently outpaced inflation, but it has given the best returns over the years against any other type of investment. If you are not invested in the market, especially over the past 12 years, you simply missed the power of the market. However, it’s not too late to get in with a long-term strategy.
Buy a home! Home ownership is not just a place to live, but it is an investment that builds equity over time. If managed properly, this equity can be used to purchase additional real estate for passive rental income. Wealth can also be accomplished with business ownership. Before you quit your job, make sure you have a five-year plan and enough savings to pay your bills for the first one to two years while you build your business.
Finally, think of future generations. It requires making sacrifices because wealth is not built overnight. Get rich quick schemes do not work. There are too many examples of how that process turned out for everyone who took the easy way out. Black Americans as with everyone else must cut back on expenses and debt to save and invest consistently each month. Also, we need to have the proper life insurance in place to break the cycle for our heirs. Ask yourself, “What are you willing to sacrifice today for a better tomorrow, not just for yourself but for generations to come?” We must be wealthy in our minds before it will show in our wallets.
If you do not know where to begin the conversation, please contact me to schedule a free 15-minute consultation at firstname.lastname@example.org. Knowledge is power when it is applied.