As we celebrate the strong history and accomplishments of Black and African American communities during Black History Month, it’s an opportune time to discuss proactive ways to help solve one of the biggest challenges faced by those communities — the racial wealth gap.
While the Covid-19 pandemic brought financial challenges for many Americans, African Americans and people of color faced more financial emergencies with fewer economic resources, resulting in a renewed focus on the gap that exists in wealth and financial preparedness between races.
According to The Brookings Institution, there is a 10-to-1 wealth gap in the U.S. between a typical white family and a typical Black family. This widening gap has an obvious negative impact on Black and African American communities, as well as placing constraints on the U.S. economy as a whole, according to a report from McKinsey Global Institute.
Specifically, significant disparities exist between white and Black families in terms of income, homeownership and student loan debt. This contributes to the shortfall in generational wealth, or wealth that’s passed down from one generation to the next, among Black and African Americans.
The good news is that there are many actionable steps Black and African Americans can take to start a path to generational wealth and help close the racial wealth gap.
Start a small emergency fund. Having a small emergency fund can help ensure someone doesn’t need to take on debt to cover unexpected expenses. Unfortunately, nearly 75% of Black adults don’t have enough emergency savings to cover three months of expenses, an April 2020 Pew Research Center survey found.
During the pandemic, many Americans coped with possible job losses or impacts to their income. Others faced difficult decisions about whether to take time off from their job to care for children while schools moved to virtual learning. And because many Black Americans lacked the savings that allowed them choices, they were forced to take on more debt as a result of lost income. A good rule of thumb is to save three to six months of earnings to cover unexpected expenses.
Consider homeownership. For decades, middle-income families in the U.S. have relied on homeownership as a strategy to build wealth. According to The Brookings Institute, Black Americans are far less likely to buy their own homes than white Americans with similar incomes. And when they do buy a home, it’s often of lower value in an area that experiences a lower level of price appreciation. Homeownership can play an important role in the toolbox of building wealth. Do your research, know your budget and work with a trusted real estate agent.
Leverage life insurance. Putting an appropriate life insurance policy in place can protect loved ones in the event of premature death. Permanent life insurance policies offer a death benefit that will pay out as long as the policy remains in place. Whole life and universal life insurance accumulate cash value, which can be accessed at any time throughout one’s life.
Invest in the stock market. Start investing as soon as you can so your earnings have more time to grow. According to Federal Reserve data from 2019, only 33.5% of African Americans had money in the stock market compared to more than 60% of white Americans. Historically, African Americans have been more cautious with their investments. If it aligns with your risk tolerance, consider investing more in stocks that typically have higher growth potential than conservative vehicles like CDs and bonds.
Find a financial planner you trust. Northwestern Mutual research has found that fewer Black, indigenous people and people of color work with a financial adviser than the general population; a third of those surveyed say they haven’t considered working with one. However, among Black Americans who have a financial plan, most agree that an established plan helps achieve financial success. Regardless of income level or socioeconomic status, working with a financial planner will help someone think strategically about what they want to accomplish and help set them on the path to achieve their financial goals.
Get educated. Financial education is vital to improving financial wellness. A lack of financial education makes it difficult for people to plan for their financial futures. Ask your employer if they offer a financial wellness program or look into financial literacy programs offered by community organizations to learn how to take charge of your finances.
It’s also important for Black professionals to seek and provide mentorship and internship opportunities help young Black men and women access information, training and resources. Don’t hesitate to reach out to your employer about formal or informal mentorship opportunities within your company. And if you’re in a position to be that trusted voice, consider serving as a mentor and help out when you can.
Leo Tucker is managing partner at Northwestern Mutual.
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