We Need to Talk About the Benjamin's
Wealth building for disadvantaged communities needs to be front-and-center of the work of the nonprofit sector.
Greetings, Talking About Money Community, nice to see you here. 🙋🏽♀️
In this post I want to continue our conversation about wealth. I’ve been thinking a lot about wealth recently, after reading both We All Should Be Millionaires by Rachel Rogers and The Color of Money: Black Banks and the Racial Wealth Gap by Mehrsa Baradaran. If you haven’t read them yet, please do.
I believe that everything we do, specifically in financial capability and generally in the nonprofit sector, should be in service of building wealth among our clients. Not short-term income, but rather long-term wealth. Dollars-and-cents wealth. Wealth-that-you-can-leverage-to-build-more wealth. Wealth-to-leave-to-your-heirs wealth.
Too often as nonprofit professionals we operate in the role of problem solvers. At first glance this is a good thing, as clients have problems, and they need to be solved. But I challenge the nonprofit sector to set its sights on achieving long-lasting solutions on behalf of its clients, with building wealth being first and foremost among them.
You might be thinking to yourself, “how exactly does wealth creation happen?” I am glad you asked. Here are three ways to consider:
1. Own a home
Your clients can build wealth through home ownership. While this is not a quick fix (and really, nothing is), the time and effort is takes to purchase a home will lead to enhanced long-term financial security. Home values normally rise around 4% per year (an exception being the Covid pandemic, which caused an all-time high 18% year-over-year home value increase in September 2021). While home ownership alone won’t necessarily make your client rich, having a paid-off home in retirement will ease cash flow burdens in years.
What does it take for your clients to own their home? Lenders assess mortgage applicants on “The Four C’s”: Capacity, Capital, Credit, and Collateral.
Capacity shows that you have enough documented income to successfully make your mortgage payments each month. Your client needs a job, preferably one that is steady and well-paying. Not any job is going to cut it. Your client needs to seek out the highest paying job they can find given their skill set. And they want to look for attributes such as a predictable schedule, paid time off, health insurance, and a retirement plan.
Capital shows that you’ve got the money required for down payment and closing costs. This could come in at around 10% (or more) of the purchase price. Once the home has been bought, your client needs to maintain their savings rate to pay for maintenance and repairs (Rule of thumb: always have 1% of the purchase price of your home sitting in a savings account, ready to pay for the water heater that breaks on a Sunday night in February).
Credit shows that you have a positive track record in repaying your debt. In a perfect world your client can access credit at an affordable interest rate, needs only to borrow small amounts for things like cars and college, and has enough income to easily make their payments.
Collateral is what the lender will come after if you cannot pay your mortgage, namely, your home. Your client should keep in mind multiple factors when shopping for a home, including the affordability of the home and the stability of the neighborhood.
2. Invest in a retirement plan
Your client can build wealth through participating in a retirement plan. Have you heard of “401(k) millionaires”? These are people who have contributed enough money into their retirement plans – and earned even more through the magic of compound interest – to become millionaires. Over the past 30 years, the stock market has averaged a 10% annual gain. While not a vehicle to generate wealth quickly, the stock market is your client’s best bet for generating wealth over the long haul.
What are the different retirement plans out there and how can your client participate?
401(k), 403(b), and 457 are retirement plans sponsors by your client’s employer (for-profit, non-profit, and government, respectively). Your client chooses to have a portion of their paycheck transferred to their account on a pre-tax basis. If you client is lucky, their boss will provide a match to their contribution. This money is then invested in different investment funds among those offered by the employer’s 401(k) vendor. In 2022 your client can contribute up to $20,500 into their retirement plan, and can start taking withdrawals once they reach 59 ½ years old.
Traditional IRA is a retirement account that is owned and funded by your client, bypassing the need to get it from their employer. Your client chooses which broker to do business with, and thereby has more choice in investment funds. Traditional IRAs are tax-differed, meaning that your client can write off their annual contributions on their federal taxes, and instead pay taxes at the time that they withdraw them (after age 59 ½). 2022 contribution limits are $6,000.
Roth IRA is similar to a traditional IRA, except with respect to taxation. Roth IRAs are funded with after-tax dollars, so your client pays the income tax on their contributions this year but benefits from tax-free withdrawals in the future. And because this retirement plan uses after-tax dollars, your client can withdraw their contributions (but not their earnings) at any time penalty-free.
Nonprofit professionals do not talk enough about investing in the stock market through retirement plans. As problem solvers, maybe you focus your attention on your client’s presenting problem, typically debt repayment or cash flow. Also, as not everyone has a workplace retirement plan, you might feel that since this retirement plan are not ubiquitous you should not talk about them. Finally, investing in the stock market is a complicated topic! For financial educators who do not have specialized credentials, talking about investing seems like a third-rail topic that is best left to investment advisors. This is the correct assumption! Instead, reach out the members of the National Association of Personal Financial Advisors (NAPFA) for advice.
3. Start a business
A third way that your client can build wealth is through starting a business. This might come from your client putting their natural talents to work to earn their own income, all the way to them recognizing a problem in the marketplace and using their ingenuity to solve it. True entrepreneurs get a kick out of figuring out the puzzle of getting a business idea to market. And nearly 68% of the world’s richest people are “self-made.” While starting a business is not for everyone, it is a key avenue to building wealth over time.
Where can your client go for help in starting their own business?
Small Business Development Centers (SBDCs): Resources vary by location, but typically include things like assistance with business planning, access to financing, counseling services and classes
Small Business Administration (SBA): District offices in all 50 states provide resources, training and specialists to help start and grow businesses, plus hundreds of online resources for small business owners and employees.
SCORE: SCORE has the largest network of free volunteer small business mentors in the nation. No matter what stage your business is at SCORE has a mentor for you.
Association for Enterprise Opportunity (AEO): Since 1991, AEO and its member and partner organizations have helped millions of entrepreneurs contribute to economic growth while supporting themselves, their families and their communities.