It is no secret that the average black family has less wealth than their counterparts. Researchers often study and report that the financial well-being of African Americans lags that of the U.S. population. Knowing and understanding there is a problem is the initial step in fixing it, and while not a cure-all, increasing financial literacy can lead to improved financial wellness regardless of income level. Awareness of your financial situation coupled with having a targeted financial plan that underscores financial literacy is a road map for long-term wealth building and financial success.
Financial literacy is not arduous. It means having the knowledge and resources that enables sound financial decision making and effective management of personal finances. Moreover, improved financial literacy contributes to improved financial well-being.
Build Financial Foundations
Begin with the basics. Understanding your financial foundation starts with recognizing the flow of money in your household and how to make it work for you.
Look at your credit; there is no shortage of free apps to help. Strong credit is a key component in managing your cost of living because it allows you to decrease your daily living expenses. Said differently, good credit equals lower interest rates on the debts you choose to take on. As a side note, it is financially wise to be choosy about what you finance. Keeping debt low and living below your means is the ticket to building greater personal wealth. Warren Buffet is a great example of someone who lives modestly and uses his money to build wealth versus keeping up with the Kardashians. A considerable benefit to increasing financial literacy and understanding the power of your credit is how to make it work for you, not against you.
Many of our financial foundations are laid in our adolescence, learned from our parents’ financial habits. We are taught things like all debt is bad, which I’m here to tell you is a financial fallacy. All debt is not bad debt. Leverage can be a powerful tool when used appropriately for building wealth. A home mortgage, for example, is a type of good debt that is considered a primary wealth building instrument. A home is an appreciating asset that can be passed down generationally and over time its increased value or equity is considered part of your wealth portfolio. Conversely, oftentimes people learn that they should pay off a mortgage as soon as possible and considering the double-digit interest rates of the past this was wise, but it is now an outdated practice. Each month you’ll pay down a portion of loan, which helps build equity aka prosperity, versus paying rent, which is building someone else’s wealth. Having a strong credit score makes borrowers attractive to lenders and eligible for reduced interest rates, which in turn decreases the long-term cost of home ownership, allowing for the retention of wealth-building assets. With interest rates being at an all-time low, now is a great time to consider homeownership!
Learn How Your Cash Flows
Another fundamental component in increasing financial expertise is understanding and managing cash flow. This is your after-tax take-home pay, the money that is available to save or spend. Your money is part of the family and has a role to play like everyone else; it must do its part. It is necessary for your money to know its responsibilities so that it can work effectively. Net take-home pay can be divided between expenses and savings.
Make it a rule to pay yourself first, like a bill. No, I don’t mean like treating yourself to a manicure. Instead, I mean investing in yourself and your future, such as saving a percentage of each paycheck for retirement. Hopefully, you can save pre-tax to a qualified retirement account. If not, there are other options that may lower taxable income. I recommend setting aside 6-12 months’ worth of living expenses in a high yield savings account for your “crisis funds.” Then use additional money to invest for retirement. Building wealth should not be viewed through a “get rich quick” lens as it is an intentional act that takes time and determination.
It’s O.K. To Get Help
A client once told me that having an advisor felt like having a personal counselor, which agreeably it should. There are a lot of events that will happen throughout life – some good, some bad, some expected and others unexpected that will derail your plans and at times your peace of mind. There is one thing that I always guarantee investors: the market will go up, it will go down and back up again and it will usually happen at the most inconvenient times.
As an investor, you must know where you are comfortable with investing and set up a strategy based on your appetite for risk. There is no one size fits all. What worked for your parents may not work for you and vice versa because your needs and time horizons are different. Likewise, what is appropriate when you are younger may not be suitable in your advanced years. Having a customized financial plan that grows with your situation is important in helping navigate the twists and turns that will arise and life comes at you and there is no shame in getting help with something that impacts literally everything in life.
My colleagues and I recently launched a website to help our peers in their 20s and 30s to learn financial basics and take charge of their financial future. Check it out at youngmoneysmartmoney.com – if there is a topic we didn’t cover, feel free to submit a message on our website and we’d be happy to help!