Why is there such a significant gap in investing experience between black and white families, and how can we fix it?
2020 has been a transformational year for America so far, and it’s only June. COVID-19, going into our third month of lock-down, police brutality, unnecessary deaths, riots… There’s a lot of fear and uncertainty in the air. Being on a writing platform, it’s hard to ignore these things. I see a lot of white people apologizing and throwing their hands up. I see a lot of black people being honest about their daily fears, and reading them is heartbreaking. I see a lot of much-needed education and empathy. I also see frustration on both sides, and see an uncomfortable divide. When problems like this arise, it can be easy to feel like you can’t really do anything about it. I’m torn between trying to find the right words, and feeling like I should just keep my mouth shut.
I’ve settled on discussing an area today that my experience from working in the financial industry can help, at least I hope it can. The wealth gap between black people and white people in America.
What is wealth?
Before we dive into the “wealth gap”, I want to define wealth, at least what it means to me. Having wealth is having more than enough money, usually in the form of savings and investment accounts. Sure, wealth can also apply to having an abundance of other things, material possessions or love and happiness. But we’re focusing on the money in this post. Apologies if this is offensive to some, but "wealth" is also one of those words that just seems to ooze “old, white man”. I say this as someone who used to work in the “wealth industry” and even had a title of “wealth advisor”. Within the industry, you guessed it, there are a lot of wealthy, white men. Those adjectives describe the majority of advisors, the majority of clients, and of the target clients. According to this, only 3.5% of Certified Financial Planners are people of color, and only 15-20% are female. Could that be a large factor playing into the wealth gap? I would guess yes.
When I first started in the “wealth industry” as a receptionist, I did NOT feel wealthy. I never even considered using that word to describe myself.
Problem number one. Categorizing yourself as unwealthy.
If you feel "unwealthy", chances are you might feel like building wealth is impossible. This is where having the right mindset with your money is crucial, because the stock market is a great wealth-building tool for everyone, not just the "already wealthy".
The next hurdle is actually starting. The biggest part of this hurdle is again- mindset, and getting in the frame of mind to actually open and fund your accounts, instead of just putting it on tomorrow's to-do list. If that’s something you’re struggling with, open this post about how to start investing in another tab to save for later.
Because of the good old internet, financial advice is more accessible than ever. It’s available to everyone, regardless of your skin color. But, I’ve learned that having access to the information is only part of the equation, especially when it’s an area that is often associated with discomfort, like money often is. Your mindset and background with money will hugely influence your decision of what you do with this information. If you’re someone that feels unwealthy now, and feels behind with investing, before you read any further- tell yourself that you can do it, and that it’s worth it. Then tell yourself why it’s worth it. If you were a wealthy person, how would that change how you feel? Would it eliminate stress? Would it enable you to be more generous? Would it give you a better quality of life?
The more specific you get with your 'why' behind building your wealth, the easier it will be to start saving for your future.
How to decrease the wealth gap between white people and people of color
We’re going to look at some uncomfortable investing statistics based on the 2016 Survey of Consumer Finances. and I’m going to do my best to address them. Yahoo Finance also went into these topics, but I didn’t see any helpful recommendations of how to actually fix the problem.
Full disclosure, I’m a white, female millennial who didn’t know a damn thing about the stock market four years ago. I don’t know what your skin color, gender, age or experience with investing is, but, neither does the stock market. This means that even though there is a huge gap in black stock owners vs. white stock owners, we can absolutely work towards changing that.
“Has direct stock holdings”
White people 17.5%
Black people 4.7%
If you don’t have any stock holdings, the first question you should ask yourself is, why? Is it because “stock holdings” sounds so foreign and jargony, that it’s easy to tune out? Does your brain automatically filter it into the ‘does not apply’, section, like how mine used to? Has anyone ever sat you down and discussed the importance of investing for your future with you?
Well, this is me, having that talk with you now. Saving for your future is important. It’s crucial. It’s empowering. Accumulating wealth through investing is something everyone should have the experience of, because investing is a wonderful tool that can help you for the rest of your life. If you haven't started yet, I promise it’s not as complicated as you think. Go here for my 5 steps to getting started.
“Median $ amount in stocks”
White people $51,000
Black people $12,000
So not only are less black people invested in the stock market, but they also have less invested. This is where turning investing for your future into a habit is crucial. If you’re enrolled in a 401k or 403b, make sure your deposit comes out of your paycheck automatically. Consider upping your percentage. I recommend at least 5%, but the more the better- especially if there is some kind of employer match involved.
If you don’t have a 401k or 403b, you have to be a little more disciplined and set up auto deposits for yourself, within an IRA. (If you need to learn more about investing outside of an employer plan like a 401k or 403b, read this). Setting up automatic deposits to your traditional or Roth IRA is simple, you just need your bank account number and routing number, and then you can link whatever account you wish to transfer from. You can set recurring deposits for monthly, weekly, etc. I'd suggest scheduling your deposit for right after you get paid. If you're new to investing and feeling stretched financially, know that there's nothing wrong with starting small. Start with $50 a paycheck, and see if you can increase it as time goes on.
“Median Net Worth”
White people: $171,000
Black people: $17,600
Based on the other two jarring statistics, this one is probably the most uncomfortable, yet it’s the least surprising when you take into account the previous stats and consider that most of net worth is derived from investments. Keep in mind, your net worth has nothing to do with your income. Your net worth is the accumulation of all of your assets, so if you have a high income but spend it all, you will have a low net worth.
One of the best ways to build your net worth is through saving and investing in the market. Since a much smaller percentage of black families are using these tools, it means that their net worth's will unfortunately be lower too. How do we fix that? By investing, consistently.
Invest like your future depends on it, because… it does. Conquering investing is important for everyone who is making money, because there will be a point in everyone’s life where we are no longer going to be fit enough to work for a paycheck. When that time comes, we will need to be in a place financially to be able to replace our paychecks. The sooner you start building your investments, the better equipped they will be to replace your income one day. The sooner you understand investing, the more time you have on your side.
If you figure this out early, and have the beautiful gift of time (I’m looking at you, Gen Y and Z) then even more doors open. Once you see how much time can do for you, you aren’t limited to simply “replacing your paycheck”. If you make it a goal to, you can seriously create some wealth. And with that wealth, you can create your dream life. You can retire early. You can be financially independent. You can be the change in your family, one that creates a large enough net worth to pass on to future generations after you leave.
The answer for decreasing the wealth gap is simple- if you aren’t utilizing investment accounts and the stock market to increase your wealth, you need to start.
This is where our mind starts making up excuses, the most common one being “I don’t make enough.”
I also used to make that excuse, and I know how limiting it can feel. But investing for yourself is more accessible and affordable than it ever has been. An account can be opened online within 10 minutes, most places offer free trading, and you can decide how much or how little you want to put away. If you think you don’t make enough, start by transferring over just $50 a month. Once you strengthen your saving habit, you’ll be able to save more in no time.
When I write for Friend of Finance, the people I’m writing for are those who are trying to learn about finances and investing. People who are brand new or relatively new to this money game, fed up with feeling broke, and who are looking for some industry insight. As someone who used to be in the gender minority of the industry, I hope I’m a safe place for minorities to ask questions. I learned that many people are afraid or embarrassed to ask “what the heck does that even mean?” So if you have questions, please, ask.
If you want to continue this discussion with me, if you think I'm missing something important, or if you need help with anything, please feel free to email me here. I’m open, and I’m listening.
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