Barry Simmons – It’s been a tough year for many of us, no doubt. The emotional and financial toll of the pandemic, followed by a full-blown recession, hurt many U.S. families.
Even though it may not seem this way now, the economic disruption and the ongoing uncertainty we’ve faced this year also taught us a few valuable lessons when it comes to building multigenerational wealth. And reflecting on those lessons today may help us be better prepared for the next time the unexpected happens.
Not being able to build on the financial knowledge of their parents and grandparents, many first-generation wealth builders grew up unaware of money management strategies. Today, we have made strides in acquiring wealth, plus building the knowledge base necessary for smart money management techniques. So it’s essential that we share that knowledge, by openly talking to our family and loved ones about our finances—even if it may seem uncomfortable at first.
For instance, you can ask your parents what would they have done differently in terms of budgeting, saving, or investing. Or you could start by explaining the basic financial concepts to your children. This communication can help ensure that the financial knowledge you acquire today gets passed on to generations to come. And of course, there are almost unlimited resources available for continually educating yourself and others about building multigenerational wealth, including various financial publications, apps, or free courses.
In the past months, we were forced to take a long and hard look at our spending. For those of us that were able to keep jobs, we had a chance to reevaluate our spending priorities and assess what our needs are. But it shouldn’t take a pandemic to force us to reassess our budget, including any outstanding debt.
To take a fresh look, make sure you have a clear view on how much money comes in and out monthly, starting with how much debt you have. Having to pay—and especially fall behind on—high interest debt like credit cards, for instance, can have long-term implications on your financial wellness.
Already, studies show that Black households are far more likely to be burdened by credit card debt. This increases the risk of potentially missing a few payments and negatively impacting your credit, which in turn can affect what you pay for different types of insurance, or hurt your chances of qualifying for a mortgage, for instance. So try budgeting within your means and, when you can, set aside an emergency fund.
Prioritize emergency fund and automate savings
Despite income gains for Black families in the U.S., their wealth is still on average about one-tenth that of white families. Most American households don’t have cash set aside to cover sudden shocks, such as job loss or emergency repairs. The prolonged impacts of the pandemic—including the health crisis, heightened unemployment, and market uncertainty—underline the importance of being ready for lengthy financial shocks.
We hope that the worst of the pandemic is behind us, but to be ready for whatever may come next, try prioritizing the creation of an emergency fund that would cover three to six months of your expenses. Setting aside even $25-$50 of each paycheck will eventually get you to where you need to be. And in order to stay on track, try automating this process.
Once you have a solid emergency fund, keep at it: continue saving, with your retirement in mind. About 60% of white families have at least one retirement account, while just 34% of Black families do. If you have an employee-sponsored 401(k), aim to contribute at least the amount that your employer matches, if any. You can then slowly build up to contributing 15% of your annual income toward retirement. You’ll thank the power of compounding over time.
There is no way around investing
Black investors have a tendency to be more risk-averse. Many may prefer saving, instead of investing, while others often prioritize other expenses—including caring for family and loved ones—and as a result may have less money to invest. But the fact remains: history has shown that the best way to build multigenerational wealth is to get invested, invest consistently, and stay invested.
And you don’t need to start big: buy $200 worth of an investment, such as an ETF or mutual fund, and watch the price movements. Get used to the ups and down, and continue dipping your toe further. You have to be in it—and I mean for the long-haul—to win it. And the longer you delay, the less likely you are to meet your financial goals. If you start investing at 35, instead of 25 for instance, you could end up with roughly half the amount by the time you are 65. Talking to a financial adviser can also help you properly evaluate the risks versus rewards of investing.
Bottom line: 2020 is almost gone, but some of its money lessons should stick, especially if you want to be able to create multigenerational wealth. Regardless of where you are in your financial journey, you should think about whether or not your strategy is positioned to withstand potential adversities. This starts with creating a solid budget, investing (and staying invested), and building up your retirement savings.
Speak with a J.P. Morgan Advisor and create a personalized strategy.
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