The racial wealth gap offers a striking example of an area where there has been little progress over time.
According to the Federal Reserve’s 2019 Survey of Consumer Finances, the median net worth of Black families was $24,100 compared with the median net worth of $188,200 for
white families. These numbers illustrate the long-term effect and economic impact that several hundred years of systemic racism can produce.
Retirement savings and homeownership are two asset areas where the racial wealth gap is most pronounced. T. Rowe Price’s 2021 Parents, Kids & Money Survey found that only 40% of Black families have money saved for retirement, compared with 62% of white families. The survey also found that only 54% of Black families own their own homes, compared with 87% of white families. Additionally, white parents are more likely to benefit from intergenerational wealth as family contributions help toward home purchases and higher education costs.
However, one bright spot free of racial disparities is the percentage of families having money conversations with their kids. T. Rowe Price’s research has found that kids whose parents regularly discuss money with them are more likely to develop strong financial capabilities in adulthood. Of Black parents, 63% regularly discuss saving with their kids, compared with 58% of white parents.
While most families have a multitude of competing financial priorities, saving even small amounts can have a huge impact on the ability to cover future expenditures, build wealth, and prepare future generations. T. Rowe Price recommends these six tips to help Black families build wealth and plan for future goals.
1. Take control of your everyday finances
Maintaining a budget can provide a framework to track your income and expenses and to help you determine ways to accommodate your savings goals. Developing a budget can be
empowering—providing you with the information you need to make saving and spending decisions. As a first step, evaluate what percentage of your income goes toward bills and basic needs like housing, versus discretionary expenses, and identify areas where you can cut costs.
If you have credit card debt, consider developing a plan to eliminate your credit card debt, starting with any high interest credit cards.
Additionally, T. Rowe Price recommends that everyone have an emergency reserve large enough to cover three to six months’ living expenses. If you’re starting from scratch, aim to fully fund an emergency account within two to three years.
2. Smart homeownership is critical
Housing will most likely be one of the biggest expenditures and should ideally consume no more than 35% of your monthly pay.
Homeownership can be a powerful wealth-building tool and is worth consideration if your location and income are relatively stable. In addition to building equity with each mortgage payment, homeownership also offers more long-term certainty of your housing costs.
3. Get retirement on track
Time can be your friend when it comes to saving for retirement. The younger you start and the sooner you get on track, the more flexibility you’ll have later. If you’re getting a late start, that’s OK. It’s never too late to course-correct. There may be other ways to fund competing financial goals, such as a college education. But outside of Social Security and a pension, the main way to fund retirement is to invest in a diversified portfolio of stocks and bonds using a tax-advantaged retirement account.
T. Rowe Price recommends saving 15% of your salary, which includes any match from your employer, for retirement. If that isn’t feasible, aim to save at least enough to receive any company match from your employer, or 6% if your employer doesn’t offer a match. Then increase your contributions 1% to 2% each year until you reach 15%. If your employer doesn’t offer a retirement plan, open an IRA account on your own.
Check in regularly to make sure your retirement savings are on track. Not sure how much you will need to retire? Visit T. Rowe Price’s Retirement Income Calculator.
4. Consider a Roth account
Different retirement accounts offer different tax benefits. The contributions made to Roth IRAs and Roth 401(k) accounts do not lower today’s taxable income, but withdrawals from them are tax-free after age 59½ if you have held the account for at least five years.
Generally, the reverse is true for Traditional IRAs and 401(k)s. Investors get a tax break when making their contributions, but in retirement withdrawals are considered taxable income.
T. Rowe Price’s research shows that, for many investors, the benefits of tomorrow’s tax-free retirement withdrawals with a Roth IRA outweigh the benefits of today’s tax deduction with a Traditional IRA. Roth contributions can be a good choice if you don’t expect your tax rate to decrease in retirement.
5. Save what you can for your kid’s college in a 529 education account
Because saving for college in advance can cut out-of-pocket costs significantly, it’s smart to save for college in a 529 plan.
Every family has unique goals and budgets. Even small amounts can add up and help fund an education. Parents can get the whole family involved by putting portions of monetary gifts toward college savings. When friends and family ask for gift ideas, suggest that they give to your child’s college savings plan.
You may think that it doesn’t matter if you save for college in a savings account or 529 plan. T. Rowe Price’s 2021 Parents, Kids & Money Survey found that more parents are using a regular savings account to save for college rather than a 529 plan. But 529 plans offer investment options that can help your money grow and provide federal tax benefits and flexibility for college savings that aren’t available with any other kind of account.
6. Avoid drowning in student loan debt
When it comes time to decide where to go to college, remember that different schools come with different price tags, and cost should be an important consideration when selecting a school. “The best school at any cost” mindset can be dangerous, since student loan repayments eat into money needed for recent graduates’ living expenses and saving.
For many families, student loans enter the conversation when determining how to pay for college, especially among Black families. The T. Rowe Price 2021 Parents, Kids & Money Survey found that more Black parents carry student loan debt than white parents (34% versus 16%). It’s important to be realistic in these conversations about what your family can afford in the long term.
Strive to limit debt to federal student loans, as opposed to private loans or parent loans. In addition to limiting the potential debt burden, using federal loans can give you more flexible repayment options.
Each family experiences unique challenges and has different financial situations. While it might only be realistic to take a handful of moves, taking small steps today can aid in creating a stronger financial future.
Whatever your financial priorities are today, be sure to involve the kids in the house in money discussions about saving, spending, borrowing, and investing. Understanding how money works and the importance of saving for future goals will help them develop
financial capabilities in adulthood. For tips and lessons on having money conversations with kids, visit MoneyConfidentKids.com.
_______________________sponsored by T. Rowe Price_______________________