Looking at the numbers, there are financial issues that seem indicative to black women. They earn less money than men, 61 cents for every dollar. They have less net worth, one penny for every dollar of wealth owned by their male counterparts.
They are draining their financial resources to care for their children and extended family. On top of that they have to contend with issues affecting the rest of the world such as high unemployment, economic uncertainty, international turmoil, and market fluctuations. However, there are still opportunities for black women to gain financial footing and get ahead.
Coming off the heels of the Black Enterprise 7th Annual Women of Power Summit, BE convened a roundtable panel of female personal finance all-stars to answer investing and other financial questions from our editors and our female fans via Twitter and Facebook. BE asked the pros to share their advice on how women can better manage their money to achieve their goals even during an economic downturn.
Roundtable members were Dail St. Claire, President, Williams Capital Management; Lori Anne Douglass, Partner, Trusts and Estates Group, Moses & Singer L.L.P.; Sharon Epperson, CNBC Senior Commodities and Personal Finance Correspondent; and Robin A. Young, Financial Adviser and President, Women Behaving Wealthy.
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The advisers all agreed that no matter what your circumstances, you have to pay yourself first. Meaning, you have to make regular, consistent savings contributions toward building a retirement nest egg and wealth that will last a lifetime.
BE: How do you advise your clients on how to approach their savings and investments when there are fluctuations in the market? The Dow hit 13,000 points, at the same time money market rates were down to 0.50%.
Young: I find that people have a tendency to focus on what’s external–the economy, global, and political issues. I ask people to focus on their internal financial life. Understand your risk tolerance, because most people’s portfolio allocation is not consistent with their risk tolerance. They may have their entire 401(k) in stocks, but they may be a balance investor, meaning, they really need 50% bonds and 50% stocks. Take a risk tolerance questionnaire. It will give you a sense of what kind of appetite you have for risk. Second, you need education about the markets. The markets will fluctuate. They are very cyclical. So, you have to be able to accept some fluctuation.
St. Claire: An investment plan includes risk tolerance in addition to time horizon, tax circumstances, and special circumstances. I think time horizon is one of the critical elements that come into play because the market will fluctuate by definition. Depending on your time horizon, that is going to affect how you feel. If the market fluctuates, even if you’re 30 years old, if you can’t sleep at night your investments aren’t in the right place. I think that’s a really key correlation.
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Epperson: You also have to understand that in this market environment you have to be well-diversified. The idea that you can just be in stocks and bonds is not going to cut it anymore if you really want to achieve the growth that you’re probably going to need in the retirement years, which are going to be a lot later probably than you expected. You also shouldn’t be over-weighted in your company’s stock, which is what a lot of people do.
Young: A couple rules of thumb: Never have more than 5% in one particular stock. You want to have exposure in sectors. A lot of my clients were investment bankers. So, of course they knew financial stocks really well. But they didn’t have exposure to pharmaceuticals, energy, consumer products. I recommend that when you think about diversification you want to have exposure to sectors and industries. The easiest way to do that generally is through a mutual fund as you’re getting started.
BE: When you look at the numbers the reality is a lot of black women are not investing in a 401(k) plan at work. Why is it important for them to invest in their 401(k)?
Douglass: The benefit of a 401(k) is you can really put it on autopilot. You don’t even get the money; your company will take it out before you get the check. The other thing that’s key about retirement planning is that you get an immediate tax benefit. So, money that you put in a qualified plan such as a 401(k) you don’t pay income tax on. If you’re putting $15,000 of your income into a 401(k), you’re not paying $15,000 worth of income tax on that money. For many people, when they’re working they’re in a higher tax bracket than when they retire. [You’re] now getting $15,000 basically tax free toward your future.
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BE: A lot of women, particularly black women, are now starting to own businesses. So, they may not be eligible for a 401(k). But that doesn’t mean they still can’t put their retirement on autopilot. And that doesn’t mean that they can’t contribute even more in an IRA. Not just a Roth or a traditional IRA but another type of IRA or a solo 401(k) where you can put tens of thousands of dollars in [it].
St. Claire: Even when they do invest, not everyone understands what a 401(k) is for in the sense that they also look at it not just for retirement but as a place to take their money out of for emergencies. This brings into bear the other elements of one’s financial picture, the emergency fund, which was our grandmother’s rainy day fund. Call it whatever you want, but it’s c
ash; three to six months worth of living expenses, covered in liquid investments as you’re investing alongside your retirement. Your retirement account is not your cash cow. It’s not your emergency fund.BE: What about those women who say “I can’t save or invest because I don’t earn enough money†or “I have to worry about taking care of my kids or aging relatives?â€
St. Claire: Putting yourself first means just that, putting “you†first. So, the $5 coffee, you might have to forgo that. Do coffee at home, $5 to $7 is a savings. Make your child’s lunch instead of giving them $5 to $7 for lunch money. What’s going on in the market is a wake-up call for everybody. A dollar is critical. Respecting money is really what it’s all about. A dollar is not a throwaway because it adds up to $50, to $100. I think that’s the most critical thing to adjusting your lifestyle. So, in fact you can figure out where to start saving. You start with the $50 and you auto invest the $50 a month.
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Douglass: One thing I wanted to add for the women who say “my children come first.†No. You need to support them. You need to motivate them. That’s what scholarship and financial aid is for, college. So, you need to put yourself first.
Hopefully you’re going to work it out and then you can help them with their college. But they’re young people and they need to get on up and figure their plan out. For women age 35 to 55 dealing with elderly parents, there are a lot of services and there are a lot of things you can do to help your parents financially in terms of their assets when they’re aging or in nursing home care. One of the things that people really don’t do early enough is to go get advice from a lawyer. Elder law practitioners help elderly people figure out how to structure their assets, so that they can get the benefit of government entitlement, Medicaid, Medicare.
BE: One of the questions that came from a reader is ‘I’m single. I don’t have children. I don’t own a home. Do I need to bother with a will?’ What would you say to her?
Epperson: That person needs estate planning more than anybody else, the single person without children. She has a job. Most jobs give you life insurance. You may have other employee benefits, stock options or whatever. So, you have something. You’ve got a checking account, savings, Christmas club fund, whatever it is. Typically, for most single people without children, if they should die unexpectedly they would want that 401(k), money in the bank,
to go to their brothers and sisters or their nieces and nephews. If your parents are alive, even though you don’t care for them, you don’t have a relationship with them, you have not talked to your mother or father in forever, under state law they automatically get your estate. So, there is no way it will ever get to the niece you adore. It’s going to the father who you haven’t spoken to in 50 years.Continued on next page
Douglass: A will is especially important for a single mother. My son likes his father and his father likes him, [but] other people are in charge of the money that [I’ve] left to take care of my son. If mom and dad die in a common car accident, it is crucial if you have children under [age] 18 to appoint the person you want to physically have your children and who you want to run the money that’s going to come with your children. It’s only in a will where you can appoint that.
BE: One of our Twitter followers wants to invest in a hedge fund, but doesn’t want to end up with a Bernie Madoff situation. How do you avoid investment fraud?
Douglass: That was a Ponzi scheme which was effective because he targeted his affinity group. People didn’t really question who or what is Madoff. If you are going to work with a financial person or you’re investing your money with them, you want to make sure that it’s not a guy in a storefront. Do your homework on who is this person, where are you investing, under what circumstances are you turning over this money? What are the written agreements involved? I have a client who gave a $25,000 investment to somebody who said, “Invest with me.†She told me, “It’s a guaranteed return.†I was like, really? That doesn’t sound right. She got nothing and who knows what he did with the $25,000.
Epperson: A red flag: if someone doesn’t answer your questions, that’s not the adviser or the financial professional for you. Because your money, your needs, your preferences are paramount to making the right decisions for your portfolio.
BE: How can women educate themselves and gain a comfort level to ask questions?
St. Claire: Recognizing and identifying your fear. There’s lots of ways to do that. One way is actually writing down what you’re afraid of, writing down your goals, and speaking about it. That’s why statistically there are a lot of women involved in investment clubs because they’re a forum where they can speak about investments. But you don’t need an investment club. You can get a buddy. The moment you start to dispel your fear by speaking about it, by writing it as well as educating yourself, then that starts to dispel the myth that this is scary.
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Young: I always tell people who are hesitant of investing to start with something fun. So, I ask people to go to their closet and inventory the designer they have the most
of. If they’re publicly traded you should have their stock, because you obviously care about them. If you go to Starbucks every day and you don’t have a share of Starbucks, shame on you. The key, I think, to money management, investing, anything financial, is to take baby steps. You will make such strides in addressing your fears that you can take the next step. Then you will look back a quarter, a year and you’re like “look how far I’ve gone.†That gives you more personal power and it empowers you so that bigger decisions can [be made] a lot easier.BE: To sum it up, what critical piece of advice would you give black women?
St. Claire: One of the things I think is important for people to do now is an asset liability sheet. You want to know your net worth. When you [subtract] your liabilities [from] your assets, it may be positive or it may be negative. But the facts are there and then you can set some goals and you know what you want to address. Then you need a budget because you now know what you’re dealing with.
Epperson: Of course, you have to spend less than you earn. But you need to know how much income is coming into your house and how much is going out. It’s a very basic first step. But until you do that, you can’t think about what your risk tolerance is or how much you’re going to contribute to your 401(k). Cutting back on certain things like stopping your 401(k) and not contributing to any savings is not going to be a good idea.
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Young: Managing money equals freedom, because once you understand your money, whether it’s your cash flow or your net worth, that’s power. Personal power comes from education. Personal power comes from doing. So, you have to take some sort of action. If you know you want to retire early or you want to put your children through college, quantify that. How much does that cost? What would it take for me to get to that point? How much do I need to save? Answering those questions is part of financial freedom.
Douglass: You shouldn’t ever be embarrassed that you don’t know something or that you have to ask questions. The reality is that three generations ago we were the asset. In other communities, they have always thought about wealth and generations because they have always had assets. Well, we just started to get assets around about emancipation. My grandfather couldn’t watch Roots because it was too close to home for him about slavery. So, now that we are not the asset, we need to learn how to acquire assets during our lifetime and transfer it properly [to the next generation].Â