This article was originally published here.
To end Black History Month, it may be beneficial to take a step back to understand how racial disparities in the United States have wreaked havoc on black and brown families and their financial lives. According to research published in 2016, the gap between black and white families was tenfold. The average net worth of a white family came in at just over $171,000; black families amassed a menial $17,150 on average.
This clear difference has grown over many years, thanks in part to systems built to keep minority populations at a steep disadvantage. However, black families can work toward breaking through this wealth gap by building and maintaining generational wealth.
Here is how to do that.
What is Generational Wealth?
Put simply, generational wealth is an individual or family’s net worth that is passed down through generations. While this looks different from one family to the next, generational wealth is what (still) sets apart white and black populations in terms of financial stability and growth. Black individuals are less likely to have generational wealth to pass on to their children, grandchildren, or great-grandchildren for darkly-rooted reasons. These include a long history of mortgage discrimination, employment bias, and fewer opportunities for financial growth across the board.
Even with an understanding of these issues, it can be hard to know where to start when thinking about building generational wealth. Let’s begin with how to think about the concept.
It Starts with Mindset
First and foremost, building and then maintaining generational wealth is not possible without the right thinking behind it. Unlike most who may think about their short and long-term goals, people who want to create generational wealth need to look beyond themselves and their immediate needs. Think past paying down debt, or building emergency savings, or having enough to retire comfortably.
If you really want generational wealth, you will need to think about the dollars you can set aside or assets you can purchase that won’t be touched for any of these shorter-term objectives. Remember, generational wealth is about creating financial stability for several generations – it takes a long-term mindset to accomplish that.
Understand Investing and Passive Income
Once you’ve got the right mindset, it’s time to get into the nitty-gritty of building generational wealth. For many, this starts with investing for the long-term. We aren’t talking about retirement investing, although that is an important topic all on its own. We are instead focusing on investing in a way that builds upon itself for generations to come. Investments that are structured correctly, whether focused on growth, dividends, or a combination of the two, can produce passive income for a family and their heirs for several years. This doesn’t happen overnight, but investing can be a great place to begin a passive income journey.
Investing may seem like a scary move, particularly when the news is filled with doomsday headlines about recessions and market volatility. Fortunately, if your goal for investing is long-term, these short-lived headlines won’t matter much to your portfolio. Not sure where to start? Consider sitting down with a professional wealth manager or advisor to determine what investment options are available to you, how much you can comfortably start setting aside, and how to get started.
Buy a Home and Keep It
Not everyone wants to jump on the homeownership bandwagon. However, when we are talking about building generational wealth, this can be one smart way to do it. With a typical home purchase, the buyer takes out a loan for 15, 20, or 30 years to buy the property, but they may not stay in the home for that length of time. Instead, they take out a new mortgage on a new property, after selling the first, and start the clock all over again. While moving on and moving up in terms of housing by selling a property is a fair financial decision for most, those thinking about generational wealth may look at this a bit differently.
Instead of planning your exit seven to ten years after purchasing a home, consider keeping the property as a rental. This could make it more challenging to move on to the next house, especially if you were planning to utilize the equity in the home for the purchase. However, this is where mindset comes in. Think about how you can structure your homeownership to meet not only your needs but the needs of generations to come. Set aside extra for this homeownership strategy from the start so that you are ready when the time comes with the savings you need.
Get Your Estate Plan in Order
One often overlooked aspect of maintaining generational wealth is a solid estate plan. It is common to think a basic will covers all the bases. Unfortunately, that is not always reality. For those who want their wealth to last over several generations, an estate plan that is reviewed regularly is a must.
Estate planning means sitting down with an estate planning attorney to consider options for a will, a trust, and other estate planning strategies relevant to your financial situation. However, it also involves taking the right steps to preserve wealth now. This could be in combination with a financial or tax advisor to ensure you are making the most of what you have each year, and setting up your heirs for financial success down the road.
Consider Insurance Needs
Finally, if setting aside hundreds or thousands extra each month or year is not an option right now, consider using insurance to cover that gap. Insurance leverages your dollars up significantly, giving you hundreds of thousands of dollars worth of coverage for your beneficiaries. Life insurance can be a self-fulfilling generational wealth-building plan, without you having to come up with the dollars on your own.
It may also be beneficial to consider other forms of insurance, too, all meant to keep more money in your pocket. Having the appropriate disability insurance during your working years protects each paycheck you earn. Similarly, having the right long-term care insurance helps keep your estate intact for the next generation. Consider how these financial tools may provide crucial assistance when you need it most, and add them to your plan if needed.
Final Thoughts
The wealth gap between black and white families is not going away soon. That reality is based on centuries of systematic disparities and injustices imposed on black and brown people that are not easily undone. However, black families have an opportunity to forge their own path toward wealth for future generations. It starts with having the right mindset for the long-term and then making strategic financial moves. From investing and owning real estate to planning for a transfer of wealth through an estate plan, each of these steps moves the needle in building lasting generational wealth.
Want to discuss generational wealth? Get in touch with us today.
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