Sharing the Wealth

Apologies to all for my neglect of the blog—with my new job came the obligation to prepare for another bar exam, so anytime not spent on billable hours I spend trying to remember when the Rule Against Perpetuities does and doesn’t apply (don’t ask!).

In any case, the new year has put me in mind of resolutions, since for many, January 1 tends to act as a catalyst for change, or at least promises to do so. For all of my sisters and those who love us out there, I hope that you will agree with me that one of the most important resolutions that we can make (and keep) to ourselves is to get our financial houses in order.

Black women as a group have lower individual incomes, lower household incomes and assets, and less income stability (i.e., last hired, first fired) then virtually any demographic group in this country. We still collectively face real and daunting barriers to our material progress, not the least of which is that we are less likely to be married and more likely to be the sole or primary supporters of households with dependents that lack secondary incomes. These challenges make building financial security both more difficult and more crucial for black women than for virtually any other group. All too often, we are the safety net in our communities—and thus have no soft place of our own to land when inevitable financial calamities strike.

This will only be increasingly true as the U.S. enters a recession that will have negative economic ramifications the world over. I’m far from a financial guru, but I’ve lived and observed enough to come to some general conclusions as to the best ways to both protect and enrich ourselves financially in an increasingly uncertain economic climate:

1. Save and Invest FIRST!
This one is nothing that we haven’t all heard before, but it bears repeating since so few Americans actually do it. Many of us have come to rely on credit cards and home equity as “emergency funds,” letting our precious earned income flow through our fingers to taxes, consumption, and any and every expenditure BEFORE we pay ourselves. Thus, we become trapped in a downward spiral, where increased debt requires increased debt service, thereby further limiting the funds available to commit to building our own financial security.

If you find yourself in this spiral—STOP! Before you pay rent/mortgage, buy groceries, pay MasterCard or Visa, your first and foremost creditor is YOU. Quite often people say “I can’t afford to save—after all, I have to eat/have a place to live/clothes to wear, etc.” However, in the event of a financial crisis, you will not have the ability to pay for any of these things without having savings to tap. It is better to put aside a dollar BEFORE paying anyone else anything, than to put away nothing at all. Too often, if we can’t afford to save large amounts, we become discouraged from saving anything at all—a recipe for disaster. Credit in the coming years will become harder to access and more expensive than ever, which makes having cash on hand more crucial than ever. Whatever your needs may be and whoever you may owe, start paying yourself SOMETHING today.

2. Pay Down Debt
Another “no brainer” most readers will say—we all know we should, and most of us try our best to do it. What tends to undermine our efforts is the factor discussed in point 1: the lack of savings means that we must rely on credit to finance needs (and too often wants), so as soon as we reduce a debt, it simply climbs back up again. This is why it cannot be said too often: pay yourself first, pay for needs (necessary food, necessary shelter, necessary clothes and medical care) second, and pay debt third. Ironically perhaps, the only way to retire debt for good is not to make it your number one priority.

3. Learn to Distinguish Wants and Needs
Americans and other Westerners have often been raised in such an atmosphere of affluence and materialism, that we identify our very selves with our money and possessions. This is dangerous, because when you derive your identity from something, you are dependent on it—i.e., you need it. Thus people scoff at poor children who long for iPods and overpriced tennis shoes, when many solidly “middle class” adults are financially capsizing because they put 50% or more of their income into having the “right” house in the “right” neighborhood. Why? Because to be “middle class” requires living in a “middle class” neighborhood, driving at least two “middle class” vehicles per household, wearing “middle class” clothes, sending your children to “middle class” schools, etc. Too many Americans haven’t heard the news: all but the highest incomes have been stagnant for decades, while the costs of maintaining a “middle class” lifestyle have blown through the roof. In other words, many Americans are really no longer “middle class,” simply because we increasingly no longer have a “middle class.” We have the top 20% of income-earners and wealth-owners, and everybody else, just like most of the countries in the world.

This inability to recognize the fundamental change that our economy has undergone is the root cause of the “dot.com bubble,” the “subprime bubble,” and all the bubbles to come: Americans can no longer depend on earning a middle class income, so they have been reduced to trying to scramble into the top 20%, through stock-trading and selling each other overpriced houses (to paraphrase Paul Krugman). I have strong opinions about what our response to this crisis should be on a collective level—but on the individual level, I think the answer is unavoidable: we in the majority need to withdraw from the consumer society, and stop defining ourselves through our possessions.

For example, we have friends who thought my husband I were “nuts” not to buy a home in the NYC metro area over the past five years: a home is your best investment, with the tax writeoff it’s cheaper than renting, mortgage rates are lower than ever, etc. Left unsaid was the presumption that those who can afford to buy (i.e., the "middle class"), buy, while only poor losers rent. We are educated, earn good incomes, can "afford" to buy--in other words, we are "middle class." So why haven't we bought?

Because a home should not be your “best investment”; it should be a place to live, just as your car is a means of transportation, and nutritious food is fuel for your body. Your goal in purchasing such items is not to mistake them for investments, but to minimize their cost while maximizing their utility. Certainly, historically, residential real estate has steadily increased in value—but that doesn’t mean that it always has or that it always will. Today, millions of people are learning this lesson the hardest possible way: through foreclosure, insolvency and bankruptcy.

For too many Americans, their homes have become, in the words of Elizabeth Warren, a “cement life raft,” that they cling to desperately, even as it pushes them ever deeper underwater. All around us we can see the disastrous consequences of 125% ARM mortgages and home equity loans, used to increase the “value” of our “investments” through the installation of granite countertops and stainless appliances—after all, realtors insist, “middle class” buyers expect nothing less, and we should always be looking for a buyer—right?

My point isn’t that no one should buy a home, or even that our needs are concrete and uniform. After all, if you live in NJ, you need a heavy winter coat; if you live in Florida, you probably don’t. My point is only that we must all look closely at our own lives in order to determine what we really need vs. what we only want—our perhaps have been taught to want—instead of allowing our consumer culture to convince us that we are what we drive, where we live, the clothes we wear, and thus can’t afford to stop spending, least we cease to be meaningful and worthwhile beings. Today, our friends don’t call us “nuts” anymore for renting a modest home that we can afford, and instead saving and investing the excess that would have gone into purchasing a home in currently overpriced Bergen County. We will buy when houses are affordable—and we will decide what “affordable” means for us, not a bank, realtor, or mortgage broker.

I would appreciate it if some of the smart, savvy sisters and those who love us out there who often share their wisdom on this blog will expand on the thoughts I have shared here, and share some of their best financial insights in response to this post. We only have ourselves to depend on, so sharing your wisdom means sharing the wealth!