The general population, otherwise known as the 99%, have a love/hate relationship with wealth. They resent those who have it but spend their lives attempting to get it for themselves, all the while self-sabotaging that effort in ways that are avoidable if they knew the rules of the rich. Yes, the rich have rules. The reason most individuals, and certainly the majority of Black Americans, never accumulate any substantial savings is because they do not understand the nature of money and how it works. Much of this lack of understanding and lack of access to financial education comes down to systemic racism that has been passed down from generation to generation within the black community. Most Black Americans, throughout American history, were shut out of our financial system, thereby not gaining the access or opportunity to accumulate wealth or an understanding of money that could have been passed down through the generations. Well, the time to start is now. More generational wealth means more societal influence and less vulnerability to the ills of civil rights infringements. In short, wealth equals life. Our very survival depends upon it.
The Wealthy Have A Different Mindset
Earning a lot of money does not make you wealthy. You will never out-earn your lack of financial education or your bad money habits. It is like trying to out-exercise your lack of nutritional knowledge or your bad eating habits; it is exhausting to take two steps forward and three steps back, not to mention futile. Being wealthy is much more about your financial behaviors and your financial intelligence quotient than it is about how much income you earn. Wealth is also not an aesthetic pursuit. Driving an expensive car, buying a house you cannot afford, and wearing high-end fashion labels doesn't make you wealthy. In fact, for most folks who have not yet attained enough steady wealth to afford those things comfortably, it can surely make you go broke.
Let's take a look at a well-known billionaire. Sir Richard Branson has a current estimated net worth of $4.3 billion, accumulated from his Virgin brand and an additional portfolio of assets. As with many wealthy people, the wealth they have accumulated is not an accident. If you took all that money away from him, he would still retain the same knowledge and behavioral patterns that made him wealthy in the first place. He would still understand how to raise capital, develop and scale businesses, and invest his money with wisdom. If he had to begin today from ground zero, I am quite sure he would have a large net worth, once again, in less than five years' time.
Conversely, an individual who has poor money habits and wins the lottery still does not understand how money works or the behaviors needed to grow and sustain wealth. There is a good chance he or she will be flat broke in less than five years. Although they were gifted a giant windfall, they were not rich, because they did not know the rules of the wealthy. Ever wonder why so many professional athletes and recording artists have gained enormous riches only to then lose it all?
To bring this lesson home, a person who earns $100,000 per year and spends $100,000 per year will prosper far less than a person who earns $40,000 per year and spends only $20,000 per year. The latter person is on the path towards building wealth, whereas the prior person is spinning his or her wheels and making no progress towards achieving wealth. In fact, bankruptcy could be in his or her future if there is an abrupt loss of income. You now have the idea. Wealth is the result of applied knowledge, discipline, behavioral patterns, and time, more than it is about a specific income. The higher the income, the more opportunities to save and invest, but behavior, values and discipline are the ultimate deciding factors.
Flash Does Not Equal Cash – It Mostly Equals Broke
Now let's take a look at Black American money habits and the value we have brought to this country's economy. In recent decades, Black Americans' value to corporations has largely been in the volume of goods they consume, which is greater than the average American. With a handful of exceptions, we have traditionally been consumers rather than creators.
According to the Selig Center for Economic Growth at the University of Georgia, “black buying power will rise from $1.3 trillion in 2017 up to $1.54 trillion by 2022. This estimate for 2022 reflects a 5.4% increase over a five-year estimate and reaching $1.46 trillion by 2021. The 108% increase in black buying power between 2000 and 2017 outperformed the 87% rise in white buying power and the 97% increase in total buying power (all races combined) during the same time period.”
Based on anecdotal evidence that I have observed, Black Americans are the largest consumers. We have been emotionally conditioned to believe that acquiring material things makes us wealthy, rather than producing, saving, and investing. Great for corporations, bad for black wealth.
If you look at money as energy and the exchange of energy, that is a lot of energy that is being freely handed over by black people in this country. Black people have been all too eager to relinquish their resources, aka their wealth building tools, in exchange for the next newest, greatest thing being marketed to them. Things like shoes, clothes, leased luxury cars, handbags and other flashy accoutrements will never make you wealthy because they are not income-producing assets.
The wealthy are not consumers. Yes, we all consume to some degree, but the wealthy are measured and strategic with how, when, and why they make a purchase. Their bank accounts' bottom line is far more important to them than the visual appearance of wealth. Once they have obtained some wealth and they do decide to make purchases within the luxury market, it is measured and typically amounts to a small percentage of their total net worth. The ultra-wealthy (think multi-millionaires or billionaires) do have the ability to purchase the highest-end luxury items that amount to a small percentage of their total net worth.
We Now Know That Aesthetics Do Not Equal Wealth. How is Wealth Really Defined?
The longer you can go without working and still have the ability to meet your financial obligations and retain your current lifestyle, the wealthier you are. Could you go one month, three months, six months, a year, without working? Or do you need that next paycheck to make ends meet and keep your creditors at bay? The wealthy always save and invest a portion of their income, because they know that money equals freedom. Money also equals the ability to make more money. This is when your money starts to work for you, rather than the other way around.
Wealthy and Poor People Focus Their Attention on Different Types of Money
There are 3 types of money. Earned money is the result of performing a job (you are exchanging your time, labor and energy for money), portfolio money is the result of money generated from income already earned that is now gaining value from individual stocks or bonds, or a diversified investment portfolio. Passive money is income that is earned from real estate, intellectual property/royalties, or multi-level marketing businesses with a workforce actively selling underneath you. With the last two types of income, portfolio income and passive income, you are essentially getting paid over and over for work that has already been done, or income that has already been earned. You have income-producing assets. Our people need more of the second and third types of money.
"Work and Spend" is a paradigm that is no longer sustainable for us. First, you only get compensated when you work, and there are a fixed number of hours in the day and a fixed amount of energy you can output to perform that work. That means there is a cap on how much money you can make through earned income. We exchange our energy for money. You only have so much energy. Earned W2 income through an employer is also heavily taxed. Your salary or wages are taxed by the federal government, your state's government (with a handful of exceptions) and social security. When all is said and done, you are lucky if you hold onto 50% to 60% of the money you have worked for. Then, if you overspend what you do bring home in a misguided effort to obtain the aesthetics of the wealthy, you are forfeiting any real power and keeping yourself on a hamster wheel. This disparity in how money is seen and utilized is why poor and middle-class individuals attempt to get rich by working more and working harder.
Wealthy individuals on the other hand focus on the other two types of money: portfolio money and passive income money. These forms of income are not dependent upon the number of hours in a day or your personal energy output, so they grow indefinitely, and are taxed less. According to Forbes, The current long-term capital gains tax rate ranges from 0% - 20%. Short-term capital gains tax is higher, though short-term investment losses can be deducted from your total tax liability for the year, offsetting and any gains you earn. Point being, a person who is solely dependent upon a W2 salaried income who makes at least $50,000 per year is in the 22% tax bracket, higher than a wealthy person's capital gains income tax bracket. If you earn $100,000 in exchange for your work, you find yourself in the 25% tax bracket. You are earning less than the wealthy and paying more of a percentage of your income to Uncle Sam.
It is important for Black Americans to understand that if you invest some money for 13 months you will pay less on that investment income in the form of capital gains tax than you will on your earned salaried income. The more that pyramid flips in the favor of investment income or passive income, the less tax you will pay.
"The Borrower is Slave to the Lender" - Proverbs 22:7
As Black Americans, we are a spiritual people and always have been. It is ironic that one of the most repeated and taught bible verses about the borrower being slave to the lender has largely fallen on deaf ears in our community. Proverbs 22:7 clearly states that "the borrower is slave to the lender." Yet, many of us have chosen to continue to enslave ourselves in the form of credit card debt, government assistance and subprime interest rate loans that prevent us from building any real wealth and keep us beholden to a system that has marginalized us. As a Black American man, I have made the conscious choice to structure my finances to be a lender and not a borrower.
Here is what you need to know. You will want to set a goal of building strong credit that you use sparingly, and only for the purpose of generating income-producing assets. For example, you can purchase a car with financing once you have saved enough money to put down a minimum of 20% on the car at signing. The car's total purchase price should be no more than 15% of your total household income. Endless payments at high-interest rates will leave you spinning your wheels and are to be avoided. We are talking about a certified car with a transparent warranty that you can purchase with a solid down payment, pay off within one year, and then drive for 4-5 years with no monthly payment. As you make your monthly payments over the course of one year you will also watch your credit score skyrocket. At the end of that year, you now own an asset, free and clear. The car payment that no longer exists can now be invested into a high interest yielding Roth IRA mutual fund, or, if you lack a liquid emergency fund in a savings account, you can start applying it towards that. Now you are working towards building wealth. Although a car is a depreciating asset, not having a monthly car payment is a wealth-building asset, as is the trade-in value or sale value of that car.
A home is another potential wealth-producing asset since homeownership allows you to bypass rent payments that do not build equity. If held onto until the market is favorable for sellers, you can likely sell this asset for a profit. You can also rent it out to a qualified tenant at a modest monthly profit to earn yourself some rental income. If you are not yet able to purchase a home, your rent should be no higher than 25% of your total household income, so that you can work towards homeownership, or invest in other income-producing assets.
Strong credit can also be used to leverage borrowed money into net profit so that you are not servicing the debt of that borrowed money. The gross profits generated through leveraging that borrowed money is servicing the debt, while you pocket the net profits leveraged from that debt.
The beautiful thing about earning asset-based income is that it does not require your physical presence like a job does. Employment is trading time for money with little leverage. Borrowing at high-interest rates and making indefinite payments on debt also offers no financial leverage to our community.
When you strategically borrow money to acquire income-producing assets, rather than for the sake of consumerism, you make money off of the difference between the borrowed line of credit and the profit you earn by leveraging that borrowed line of credit. If I get a $10 million credit line from the bank and they are charging me $1 million in interest per year, but I can leverage that $10 million in credit to earn myself $3 million per year, I am earning a net profit of $2 million per year, while my income-producing asset is servicing the debt, not me.
Let's scale the example to a more down to earth number. If you borrowed $30,000 from the bank to either invest in an existing business, improve upon your home or start a business, and your interest rate is 5%. You are paying $1,500 in yearly interest on that loan. If you clear a profit of $3,000 in your first year, you have achieved a net profit of $1,500 (better than you could get from many traditional bank account), and the other half of your gross profit is servicing the debt for you until that debt is paid off. You have now leveraged debt into passive or portfolio income, or equity income if you are actively working that business.
Leverage is described in the dictionary as "the mechanical advantage or power gained by using a lever, or the power of action." Leverage merely compounds ones' strength and effectiveness. The ability to be paid for work that you do not do, is the result of leverage. It engages a multiplier effect as an asset develops in value.
The most important thing you will ever hear about building wealth is this: getting wealthy is not easy, but it is simple. It is not easy, because it requires the ability to delay gratification, however, the rules are quite simple. The second most important thing you will hear about building wealth is: there is no excuse to not save and invest. The third thing is not as readily known, but also important: banks always win, and the strategy I have adopted with my own finances is that I always prefer to position myself as a "bank." In other words, whether I am investing my own money or I borrow money to invest, I position myself as the lender in some capacity because the lender always wins.
How Do I Borrow or Lend Money as a Banker or Creditor if I Am Not (Yet) Wealthy?
If you are not wealthy (yet), the best approach is to leverage your creativity, intelligence, and your network. Pool your resources and partner with people to accomplish the same end, and you would hire someone to form your own company and structure your group deal. People would put in what they can afford and get their pro rata share based on the amount of their investment; whether real estate, small business, stock portfolio, or into a currently undervalued asset with a high potential for growth. My personal belief is to position yourself as the creditor in whatever you invest your money into. You are still considered to be an investor, but you are not investing in equity, you are loaning out money as a creditor so that you stay in first position to collect, no matter the outcome.
In my opinion, like it or not, the fate of your finances, your retirement, and ultimately your ability to establish generational wealth comes down to your commitment to the concepts laid out above. Purchase less than you can afford (and definitely not more than you can afford), shun consumerism for its own sake, avoid unsecured/credit card debt, save and invest in portfolio and/or passive streams of income, and only borrow money to leverage into income-producing assets.
It is time for us to win with money.
Written By: Solomon Ali, Private Equity Investor