Black and brown communities often miss opportunities for wealth creation due to limited financial literacy.
It's common to assume that everyone has the same opportunities, but not all individuals grow up with equal income, access, or privilege. Acknowledging our differences, particularly in how we manage money, is crucial since many haven't received financial education in their formative years.
Many financial concepts remain unfamiliar to communities of color, creating hurdles to building generational wealth. Let's explore some of these challenges and their broader implications.
Generational Wealth Explained
Lawrence Delva-Gonzalez, an Auditor and Financial Literacy Educator, emphasizes that if you’ve never seen wealth or financial stability, you may not believe it’s attainable. “The primary challenges are psychological,” he notes. “Without positive examples, it’s easy to feel wealth isn’t meant for you.”
A study from the Global Financial Literacy Excellence Center reveals that African Americans generally have lower financial literacy compared to white individuals. Surveyed participants indicated feeling less prepared for unexpected expenses, highlighting knowledge gaps in areas like compounding risk, insurance, and investing.
This issue goes beyond mere statistics.
Delva-Gonzalez points out that white individuals are more likely to benefit from 'generational wealth transfers' that contribute to educational costs, mortgages, and more. An estimated $68 trillion is being passed down from retirees to Millennials, yet many Black Millennials may not see a share of it, while their white counterparts might inherit substantial sums.
While people across all backgrounds typically learn financial skills through experience, individuals of color often lack the safety net of affluent parents or inherited wealth to cushion financial mistakes. One misstep can have lasting effects on their financial journey.
Key Financial Principles Often Overlooked
Delva-Gonzalez asserts that many people of color don't receive early education on personal finance. Unless they acquire this knowledge through college or from peers, they may only start learning once they enter the workforce. Fortunately, a wealth of resources is now available online.
“With the rise of consumer technology, Fintech has transformed investing,” he explains. “This is where many Black and brown communities fall short. The tools are on our devices, and knowledge is readily accessible online.”
If you're unsure where to begin, Delva-Gonzalez suggests several strategies.
- Assess Your Wealth Regularly. Start by taking stock of your financial situation, even if you believe it's minimal. Consider using budgeting apps like YouNeedABudget (YNAB) or Empower to monitor your income and expenses. This process may take time, but it helps clarify your financial habits and identify areas for improvement.
- Avoid Excessive Credit Card Debt. Compounding debt can severely impact financial health. “Many people underestimate how crippling credit card debt can be,” says Delva-Gonzalez. Limit your spending to what you can pay off monthly.
- Cut Down on Unnecessary Expenses. While basic needs are essential, the costs can be inflated. For instance, you may require a vehicle, but opting for a more affordable or used model can be cost-effective. “Choosing budget-friendly options can lead to significant savings,” he notes. Aim to keep housing costs to around 30% of your income whenever possible.
- Start Saving and Investing, No Matter How Small. Even those living paycheck-to-paycheck can set aside small amounts. Saving just $1 or $5 regularly can accumulate over time. “On average, households save 10 cents of every dollar,” Delva-Gonzalez states. “Investing $100 weekly for 40 years can potentially make you a millionaire through index ETFs.”
- Adopt a Long-Term Mindset. Current financial decisions can impact your future significantly. “Many millionaires achieve success through their 401(k) plans or home ownership,” he explains. A single person can contribute up to $30,000 tax-deferred annually into their 401(k) or IRA, while couples can contribute up to $60,000.
- Seek Ways to Increase Income. The TIAA Institute-GFLEC study shows that in 2016, the median income for African American households was $35,400, compared to $61,200 for white households. Cutting costs has its limits, so consider strategies to boost your income. Negotiate your salary and don’t hesitate to ask for higher pay in current or prospective jobs. This approach can help close racial and gender wealth disparities. Now is a favorable time to seek better employment opportunities.
