For several months, many of our communities have been calling for an end to racial injustice in this country. In my profession, I have seen racial inequality extend to wealth and money. For example, the income of black families is only half of that of white families. A typical black family has a net worth of around $17,000. That’s data from 2016. That’s roughly 1/10 of the $170,000 accumulated by a white household according to federal research. Are you looking for productive ways to help the fight against racial inequality? Here are three tips on how to bridge the racial wealth gap through your financial choices!
1. Switch to socially responsible funds to bridge the racial wealth gap.
If you own a basket of stocks in your 401(k) or in your IRA through a mutual fund or an ETF, most likely you own Private Prison Companies like CoreCivic and GEO Group, which one can argue is helping promote racial injustice in this country by promoting mass incarceration. We all know that one in three black males will go to prison in their lifetime compared to one in seventeen for white men. These socially responsible funds will choose companies that have a commitment to local communities and have a commitment to higher labor standards. So when you do this, just make sure you are choosing low-cost funds, so as not to sacrifice your financial return.
2. Donate your money or your time to non-profits who provide financial coaching to low to moderate-income communities, which are often people of color.
For example, in Maryland, where I currently live, Cash Campaign of Maryland is a non-profit that provides tax preparation, assistance, and financial coaching to low-income communities in Baltimore and other parts of Maryland. There’s also the Catholic Charities’ Financial Stability Network, where I personally volunteer. They provide financial coaching to low-income communities, particularly in DC, Buncombe County, and PG County in Maryland. They help people with their budgeting, how to increase their credit score, and in general, how to help them make better financial decisions. You don’t need to be a CPA or a CFA to volunteer with this financial stability network. You just have to be financially savvy and have a good grip on the concept of your finances.
3. Tell your friends about the value of financial planning.
Now, it sounds like a sales pitch because I’m a financial planner, but let me share with you the data. Data like this is one reason that I got into this profession. In 2014, a study was published in the journal of financial planning. It’s an academic journal. They followed around 12,000 Americans over a period of 14-15 years. The study showed that those who had a comprehensive financial plan in place were able to build up to four times more wealth compared to those who had no financial plan. So that can potentially mean ending up with $500,000 by the time you retire or $2 million. It’s a big difference for a lot of people. Another study that was conducted by the Vanguard Group in 2016 showed that a financial advisor can potentially provide up to three percentage points in value. What that means is if you have, for example, $200,000 in retirement savings in your IRA, the value of a financial planner can be potentially up to 3% of that. So potentially $6,000. And that can be done through constructing a low-cost investment portfolio, rebalancing, (selling bonds when they’re higher and buying stocks when they’re low), tax efficiency, and also behavioral coaching.
Just make sure when you’re looking for financial advisors that you look for a fiduciary financial advisor. Fiduciary financial advisors are required to act in your best interest. The reason I mention this is because you might be surprised that less than 10% of financial advisors in this country are actually fiduciaries. We hope to see more financial advisors signing a fiduciary oath in the future.
If you would like to extend your fight to end racial injustice and to bridge the racial wealth gap in the United States, you can do these three things that I mentioned. Switch to socially responsible funds, donate your time and your money to nonprofits that provide financial coaching to low-income communities, and tell your friends about the value of financial planning. If you like this blog, make sure you check out our other video and blog on Fossil Fuel Free Investing. It’s very much the same line of values-based investing. We also talk about whether or not doing socially responsible funds can positively or negatively impact your potential financial return.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.