Experts Share Tips on Overcoming the Disparity in Generational Wealth

No matter where you are on your financial journey, it’s not too late to start building generational wealth through investing.
Feb 16, 2022

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You've probably heard about the wealth gap and generational wealth, but here's a number for you: There's a $200 billion annual gap between Black and white recipients of inheritances, according to a 2021 McKinsey Global Institute report, The Economic State of Black America. According to the report, Black families are also less likely to receive an inheritance.

But Black financial advisors say there are ways to change the situation. They offer suggestions on how to start investing now to build wealth for future generations.

What is generational wealth?

When assets are passed down across multiple generations, that's often referred to as generational wealth. What type of assets? Think property, a Roth IRA account, a 401(k), life insurance, stocks and bonds, or anything else that has monetary value.

How to start building generational wealth through investing

Investing is one way to build wealth, but not everyone has the resources or confidence to do so.

A 2021 Wells Fargo/Gallup Investor and Retirement Optimism Index survey found that Black investors' risk tolerance is below average. Of the Black investors who responded to the survey, 54% said they are most comfortable taking on "only a little risk" compared with 47% of all investors.

Systemic racism and long-standing economic disparities are also barriers to entering the financial system, says Ayesha Selden, a Philadelphia-based certified financial planner, economic activist and entrepreneur.

"Most of us didn't grow up in homes where wealth was talked about. Investments, mutual funds, stocks weren't talked about. How do you pick a stock?" Selden says.

If fear is something that's holding you back, exploring your money mindset and implementing some of the strategies below may be helpful.

Understand the resources available to you

Chelsea Ransom-Cooper, a New York City-based CFP and managing partner of Zenith Wealth Partners, suggests you start your journey by learning what tools are available and then choosing which work best for you.

For example, if you have a workplace retirement plan, you might have access to a 401(k), and if you're an entrepreneur, it might be a SIMPLE IRA.

Ransom-Cooper says that understanding these retirement plans isn't always the easiest feat.

"There's a learning curve for these things. I think traditionally — unfortunately — Black people have always been kind of last to learn about these things, where we see white families have been using these for decades,” she says.

"Now, I think millennials and Gen Z are really educating themselves on what these resources and these tools are, and how they can be impactful for their own financial journey."

Use your employer benefits

Malik S. Lee, CFP and founder of Felton & Peel Wealth Management in Atlanta, says company retirement plans are "low-hanging fruit." According to Lee, 401(k)s are a simple way to get started, no matter what your financial situation is.

"If you are a beginner to building wealth or you are living paycheck to paycheck, saving via your 401(k) is the most efficient way to save because your money is going in pre-tax," he says.

And, he says, don't forget to get the company match.

"If your job is going to match you dollar for dollar up to, let's say 5%, that's a 100% guaranteed rate of return."

Come up with an investing strategy

Once you know what vehicles you want to use, it's time to develop an investing strategy. To do this, Ransom-Cooper says people should figure out what their goals are and whether they want to take an active or passive approach toward investing.

Determine whether you want to learn how to invest in stocks and research different companies, or if you would instead prefer to use a robo-advisor and let an algorithm do the research and investing for you, Ransom-Cooper says.

Another critical piece is knowing what drives you to build generational wealth, she says.

"I can give clients a financial plan, but if it doesn't actually motivate them and it's not aligned with their core values and their interests, it's not actually going to work," she says.

Be consistent

Having a strategy will get you on the road to generational wealth, but you need consistency to keep you there, Lee says.

He suggests deciding how often you're going to contribute to your investing goals and automating contributions to your investments or retirement accounts.

Being consistent might be challenging if you have other financial responsibilities, such as taking care of your family.

Of the investors surveyed by Gallup, 69% of Black investors provided "significant or routine financial help" to at least one friend or family member in the past few years, compared with 57% of U.S. investors as a whole.

Selden says people sometimes feel financially responsible for loved ones, especially if they're the first person in the family to earn a decent income, but that leaves them with less to put toward their investment goals.

"Our priorities should be three things, and those three things should be self, family, community — in that order," she says.

Have an estate plan in place

All of the hard work put into investing can be threatened without an estate plan.

"I'm talking about making sure your beneficiaries are right, making sure things are titled correctly, [and] making sure documentation is in place," Lee says.

Taking these steps will ensure the assets you leave behind are easily accessible, and heirs aren't racking up legal fees trying to gain access, Lee says.

After you've dedicated time and resources to building wealth, you can share the knowledge with your loved ones.

Ransom-Cooper says young Black investors are doing just that.

"We talk about lifting as you climb, but they're also lifting up to their parents and to their older family members trying to educate them on the tools that are available."

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