With an increase in Black unemployment and a loss of many Black businesses, the pandemic has negatively impacted the racial wealth gap.
While the pandemic did spark a huge surge of Black entrepreneurship, between February and April of 2020, Black business ownership declined more than 40 percent, according to a report by the House Committee on Small Business Committee. Income loss was felt by 44 percent of Black workers since March 2020, compared to 27 percent of white workers.
This all has exacerbated the wealth gap.
Although Black Americans comprise 13 percent of the U.S. population, they hold just 4 percent of the nation’s household wealth, Fast Company reported. The typical white family has a net worth of $171,000, about 10 times more than for a Black family ($17,150), as of 2016.
A new report from the Aspen Institute identified conditions that low- and middle-income families need to meet to start generating wealth.
1.Creating Financial Stability is a Must
Financial stability is vital to building wealth, according to Ida Rademacher, executive director of financial security at the Aspen Institute. Founded in 1949, the Institute describes itself as a “global nonprofit organization committed to realizing a free, just, and equitable society.”
Figure out your wealth by calculating the value of your assets, which would include your car, home, investments in a brokerage account. Then subtract your debts, which includes your mortgage, student loans, medical bills.
To increase your wealth, pay down your debts. This can be done by two proven methods — the avalanche method or the snowball method.
“The avalanche method is the better method for saving money in the long term. This method focuses on paying off balances with the highest interest rates first,” said personal finance educator Andrew Lokenauth to Finurah. Lokenauth is founder of Fluent in Finance, a finance education platform
After you pay off the highest-interest debt, you then pay the next highest-interest debt, and so on.
“Based on math, the debt avalanche method is the best strategy that uses money as a tool because it will save you money due to paying less interest in the grand scheme of things. Mathematically, it makes sense to pay off debt first that charges a 21 percent interest rate, over debt that only charges a 4 percent interest rate to borrow money,” Lokenauth pointed out.
The other method is called snowball. “This method focuses on paying off debt with the smallest balances first to get them out of the way quickly. The snowball method can feel more empowering, and, for many, staying motivated is very important,” said Lokenauth.
2. Build an Emergency Fund
Typically, emergency funds equal a savings of three to six months’ worth of expenses. Since this might not be possible for all households, the Aspen Institute report suggests saving money leftover after you’ve made your debt payments and set aside living expenses. Put that money in a checking, savings or high-yield savings account.
3. Invest for Wealth Building
Once a family has control of their debt and is building up their emergency savings, it’s best to use the leftover money to invest, says Rademacher.
“Having investable money is the first condition to building wealth while having access to affordable assets is the second. These assets may be real estate, post-secondary education, or financial assets like stocks or index funds,” CNBC reported.
Investing 15 to 20 percent of your annual income for retirement or other purposes is usually recommended. If that amount is not possible still invest, just with a smaller amount, like 3 percent. Continue to increase the amount over time.
4. Grow Your Money Beyond Investing
Once you have your finances in order, now is the time to consider making more substantial investments, such as buying a home. This will help in your wealth-building process.
5. Protect Your Wealth
Through wealth protection, families can maintain their wealth over time; but wealth protection is often harder for Black households.
“There’s a history of real wealth restricting stripping policies that have hurt families,” Rademacher told CNBC.
That includes housing policies such as redlining. Using redlining, banks denied mortgages to Black people in urban areas and prevented them from buying a home in specific neighborhoods.
Researchers at the Aspen Institute support the following wealth-protection solutions:
- mortgage forbearance, which is when the mortgage lender lets you pause or reduce your mortgage payments for a limited time
- property tax circuit breakers, which is any property tax relief that limits or reduces taxes for individuals
- limiting the percentage of income you spend on property tax
- having emergency savings