Recent data from credible reports reveal alarming wealth gaps between African-American and White populations in the United States. These statistics indicate that:
- for every $13 of wealth that Whites have, African Americans have $1;
- the median wealth of African-American households, is $11,400; $141,000 for Whites;
- 48% of African Americans own a home, compared to 75% of Whites;
- the largest portion of African-American wealth is in residential real estate;
- African Americans are conservative investors, investing a higher portion of funds in insurance, savings bonds and certificates of deposit;
- African Americans have higher debt loads, including car loans, credit card debt, and student loans;
- Lower credit scores than other groups;
- Lower savings for emergencies;
- Greater utilization of alternative credit, i.e. payday lending and title loans; and
- Lower retirement savings participation to employer/employee contribution plans (401k and 403(b)), and more frequent withdrawals from these accounts.
These factors have a tremendous impact on the ability to creation wealth. We must change our financial decision-making to close the wealth gap. This can only happen by becoming financially literate. Financial literacy helps individuals to make informed and sound financial decisions regarding: the use of credit, establishing and accomplishing financial goals, saving and investing, risk management (insurance) retirement and tax planning. Mismanagement of credit leads to a drainage of individual or household incomes, and limits saving and investing.
Moreover, leading financial studies indicate that individuals and households whose level of financial literacy is highest have the greatest amount of wealth and economic security. Additionally, increasing the financial literacy of African Americans could also help eliminate socioeconomic problems negatively impacting communities.
African Americans generate billions of dollars through income each year. Much of this income is used for consumer consumption that limits the ability to save. Data shows that the African-American population is culturally programmed to spend a greater portion of their income on consumer items and invest less than other demographic groups. Moreover, a large portion of this money is also lost by participating in non-traditional borrowing and entering into transactions without understanding the nature of these transactions and their limited value. Unfortunately, without financial education, this pattern of spending and mismanagement of financial resources may continue from one generation to the next.
The following steps are needed to close the wealth gap:
- Develop a personal budget that identifies all income and expenses;
- Decrease credit limits on charge cards;
- Establish limits on the price paid for major and non-major purchases;
- Maintain a small cash balance in your checking account;
- Avoid keeping large sums of cash in your pocket;
- Establish spending limits for entertainment/recreational activities; and
- Avoid social pressures to buy to impress others.
It is vital to engage in long-term financial planning and develop a savings plan that includes:
- Increasing savings to 7-10% of your income, including contributions to your retirement plan;
- Developing a financial safety-net for illness, emergencies or job loss;
- Making investments that yield long-term growth of assets;
- Purchasing a home; and
- Starting an early savings plan for college education (529 or state college savings plans).
Remember, money is a powerful tool to sustain and create wealth for you and your family. For information about SFEPD and our “Financial Success” newsletter, visit www.sfepd.org.