Do you sometimes feel that debt is a hammer and you’re the nail?
The median black household had less than half the debt of white households — $35,000 compared to $75,000, according to a 2013 U.S. Census report. Yet, black households carry significantly more debt relative to their household assets than white households.
The lower debt of black households primarily reflects the fact that black households carry much less mortgage debt than white households. But, only 43 percent of black households own their own homes compared with 73 percent for white households, the report showed.
Overall, blacks continue to carry more debt relative to their household assets than do whites: 34.5 percent of average assets, versus 14.5 percent for white households. Researchers have also identified some possible explanations as to why the rising income in black households has not resulted in a rise in wealth, including less intergenerational inheritance, higher unemployment and lower incomes, differing rates and patterns of homeownership, marriage, and college education.
There are ways, however, to climb out of the debt hole and move forward with attaining your financial goals. By taking small steps to set up an investment plan to build wealth, you can begin erasing your debt, save for mortgage down payments, learn to set up college savings accounts. You can improve your finances if you look for ways to Uncover Investment Opportunities that Match Your Goals.
What is your invest plan? Do you have one? Don’t look for the easy answer. One of the problems of investing is the unknowns, such as unexpected stints of inflation, short-term market panic, and quick changes in economic assumptions. It’s your money, and your future. If you need help, seek out an investment adviser. If you have a long-term time horizon, you might want to consider investments that bring a higher return.
A well-designed portfolio should ideally not rise with stocks or crash with corrections, but sell off as stocks rise and reinvest in those instruments when prices fall. That way, you’re using new money, dividends, and interest inflows to pad your portfolio. If you're long on time but short on expertise, an index fund or exchange traded fund (ETF) may be a sensible choice. With one investment, you'll access companies spanning the breadth of the S&P 500. ETF portfolio management is all about managing risks.
Take a close look at your finances. Before you can do anything about your debt, you must know where you really stand financially. Chart your current financial status, including all those unpleasant elements that you really don’t want to think about. Write a detailed budget for your regular expenses, including mortgage/rent, utilities, telephone, and groceries. Expand that list to include all of your regular expenses, such a gas/transportation, cable TV, subscriptions, insurance, entertainment, and clothes. Don’t stop there. Detail the exact amount of your debt and itemize it. Plug in the minimum payments on your credit cards, student loans and auto loans, and list the balances and interest rates. Now you’re getting to the meat of the problem. Once you know what you're dealing with on finances and obligations, you can begin to drive down your debt.
A down payment is the amount of money you spend upfront to purchase a home and is usually combined with a mortgage to reflect the total purchase price of a home. In addition to your down payment, your credit score, credit history, total debt and annual income will determine what size house you can qualify for. That’s a lot to think about. Usually, you will need to put up 5% to 20% of the sale price in cash to qualify for a conventional loan. If you put down less than 20%, you will most likely have to pay for mortgage insurance.
However, saving that kind of money may take too long for first time homebuyers, so there are alternatives that will cut the down payment rates to zero or 3.5%. Check out loans from the Federal Housing Administration (FHA), where loans require only a minimum 3.5 percent down payment. And if you’re a veteran, by all means, invoke your veteran house loan benefit to see if you qualify for a mortgage with no down payment through the Veterans Affairs, or the Department of Agriculture (USDA loan) programs. Your state, or local agencies may also have programs to help with down payments down payment assistance programs. You can do this if you qualify and put the time in. To see how much you can afford based on your down payment and annual income, take a look at the Zillow affordability calculator.
College Savings Accounts
Virtually every state has a 529 college savings plan available. But what is it? A 529 is an education savings plan operated by a state or educational institution that will help families set aside money for future college costs. And was created in 1996. These plans can be used to meet the costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a resident in one state, and send your child to college in an entirely different state. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for your child’s college costs are federally tax-free. In addition, your own state may offer some tax breaks, such as an upfront deduction for your contributions or income exemption on withdrawals, in addition to the federal treatment.
You should research what benefits residents receive for investing in your own state's 529 plan. If you don't get any benefits from your state, you have the check the 529 plans in any state you want your child to attend college and see what they have to offer. One important feature. The 529 plan is an easy, hands-off way to save for college. Once you choose a 529 plan to use, you complete a simple enrollment form and make your contribution, or you can sign up for automatic deposits). The continuing investment of your account is handled by the plan, and not you. The assets are professionally managed either by the state or an outside investment company.
What if you’ve already completed college and have a mountain of debt? More than 40 percent of African-American families had student loan debt in 2013, compared with 28 percent of white families, according to an analysis by the Urban Institute, a Washington-based think tank studying issues of education, health policy and low-income families. African-American families also typically take on more student debt — $10,295 on average, compared with an average of $8,020 for white families.
The main reason black families are more likely to borrow for college is because they’re less likely to have access to traditional sources of wealth such as inheritances, or wealth-creating tools, such as homeownership, according to the Urban Institute.
Once black students graduate, the extra debt may prevent them from activities that build wealth, such as buying a house or saving for retirement. This disadvantage means that African Americans are getting a late start in wealth accumulation.
What can you do? Rolling Jubilee, a nonprofit organization dedicated to eradicating debt, purchased $4 million in private student loan debt and forgave all of it, relieving some 2,000 Americans of that oppressive burden. But that activism can only go so far. A bill is pending in congress that would allow millions of hardworking college graduates to refinance their student loans at current low interest rates. Allowing students to forgive their debt in bankruptcy is an idea that is sometimes talked about, but that effort is stalled in congress. Some borrowers who get in the income-based repayment program, which lowers monthly payments for those who have experienced financial hardship, are entitled to having their student loans forgiven after 25 years. Beginning next year, graduates can be a candidate for forgiveness after 20 years of income-based repayments.
There are no easy answers to the impending crisis of ballooning student debt, and it is even more important that parents, students, and everyone interested in their financial futures make informed choices about their debt and finances.