In “Fixing the Racial Wealth Gap,” Rodney A. Brooks notes that the net worth of the average white family is $171,000 while the net worth of an average Black family is $17,150, according to the Brookings Institute.
It’s a stark figure — one that Brooks, a lifelong financial journalist and regular U.S. News contributor, traces back to the earliest days of U.S. history and approaches head on in his book, released this year. While addressing the systemic elements perpetuating and, in fact, worsening the racial wealth gap in this country, Brooks takes readers step-by-step through how a Black individual or family can harness financial literacy and planning resources to cut into that existing gap.
These include creating a mindset change to embrace financial risk-taking and encourage investing, making a plan for retirement that isn’t overly dependent upon Social Security, and finding mentorship and support among your community.
Brooks spoke with U.S. News about his approach to personal finance, how the pandemic has worsened the racial wealth gap in this country and how to find a path forward.
Questions and answers have been edited for length and clarity.
What inspired you to center this personal finance book on how Black families can build generational wealth?
For years people have been telling me you need to do a book that focuses on financial planning for African Americans. There is a difference — the finances are so different, and so are some of the habits. For instance, the average White family has an average wealth of $171,000, and the average Black family has an average wealth of $17,000. That’s a ten times difference. The rate of Black homeownership is 43%, which is basically where it was ever since the Housing Act in the 60s. The average White homeownership is 73%. African Americans have more debt and worse credit. So those are among the reasons I decided I wanted to write the book.
And it was difficult to write about finances and talk about the problems African Americans face when it comes to their own personal finances without talking about why they are where they are, in terms of the history and the discrimination from all levels of government and financial institutions.
You mention an old saying in your book: “When America catches the flu, Black people catch pneumonia.” What can you share about how African Americans have been economically affected by the coronavirus pandemic?
All of the experts said the pandemic made things worse, increasing the wealth gap. As bad as it was, it’s hard to imagine it even getting worse. A lot of people work from home during the pandemic, and minorities and people of color are in many of these service jobs that not only didn’t allow them to work from home but also exposed them to the risk of COVID.
I talked to the president of a local hotel union about six or eight months ago, and he said 90% of his members were out of work. The Capital Hilton in downtown Washington just reopened a couple of months ago, they had been shut down since the pandemic started. That was one of the reasons why the pandemic had a large impact, but you look at the number of women who left jobs, who had to because schools shut down, day cares shut down, and women, especially Black women, have not returned to the workforce.
How does debt, alongside income, work to perpetuate the wealth gap?
African American students come out of college with an average of $25,000 more in debt than white students — they take out more loans and they start jobs at lower salaries. Within four years, a large number have already defaulted. And then debt is related to credit, and African Americans have, on average, lower credit scores for some of the historical reasons I mention in the book, such as lower wages.
Without good credit, it’s hard to get a decent apartment. When it comes to car loans and home mortgages, credit plays into that and African Ameicans end up with higher interest rates. I compare someone who bought a car for the average price at 2% vs. 10%, and it’s so many thousands of dollars over the years and the monthly payment is higher as well.
Lower credit scores mean higher payments, and that in turn means more debt.
A number of proposals have been made over the years in an attempt to improve the racial wealth gap. Which of these approaches stand out to you and what strategies can Black individuals and families apply to their own lives to build generational wealth?
I’m a strong proponent of financial planning, and many people think they don’t make enough to get a financial planner — that you need $1 million to have a financial planner — but that’s not true. You can learn things you did not know, and financial literacy is a big part of that. Financial literacy classes in high school, in community centers and in churches on financial literacy will encourage people to learn how to do things correctly when it comes to finances.
One of the big things I talk about is talking to your children. I don’t know a lot of African Americans who had discussions about finance at the dinner table. It’s almost a taboo subject. You’re entering the early stages of college or after college, and there’s a lot you don’t know about compound interest, saving, retirement or simple things like investing in stocks.
The wealth gap is not just not improving, but it’s getting worse. Projections say by 2043, the average net worth of Black families will be down to zero. A combination of improving financial literacy and on a larger scale some major policy changes, possibly that help African Americans and other people of color gain homeownership — a huge part of wealth and the wealth gap, as well as saving and investing. Black Americans are notoriously conservative in their investments. If you don’t have a lot of money, you’re not willing to risk it, so that contributes.
[Read: 5 First-Time Homebuyer Mistakes]
Federal governments and state governments were complicit in the racism and discrimination that caused these gaps in the first place. Federal policy changes that would encourage homeownership and then things like baby bonds, so that when a baby is born, $1,000 is placed in that baby’s name and $1,000 is added each year depending on your income so that by the time you got to 18 or 21, you have enough to pay for college tuition or a downpayment on a house.
How can owning a home have such a significant long-term effect on generational wealth?
Inheritance is almost nothing for Black families, and it plays into white wealth and the wealth gap. Part of that is transfering homes. Every generation is starting from scratch again. Even if they get to that home, if they don’t leave it to their children, then their children will again start out with no assets. Homeownership is an important part of cutting this wealth gap because it would help you pass on generational wealth.
Another way to do that is life insurance. African Americans are cyclically not investing enough in life insurance, and that’s a fairly easy way to leave some generational wealth.
What is the single most important takeaway from this book you’d like readers to leave with?
Financial literacy can mean a lot, and part of financial literacy is going out and finding a financial advisor. Most people don’t have one; they go it alone. There are financial advisors that charge a percentage, but the easiest thing is to find a fee-only advisor to map out your financial future. Have a plan for reducing debt, increasing your credit score and saving. Before you even think about saving, start saving for an emergency so you won’t have to raid your 401(k) to pay for a car repair. First, create that emergency fund, then start saving, even if it’s $10 a month. As long as you’re constantly increasing it, you’ll be amazed at the power of compound interest.
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Q&A: Rodney A. Brooks on Fixing the Racial Wealth Gap originally appeared on usnews.com