Investment Tip 1: Go to the Markets

A market is a place where buyers and sellers trade assets. At the farmers market, buyers look for the best priced fruits, vegetables, and meats, controlling the farmers market demand, or how much (quantity) is desired by buyers. The higher the price, the less buyers are willing to pay; the lower the price, the more buyers are willing to pay. If a buyer can purchase 8 peaches for $4 (50 cents per peach), then buyers will buy lots of peaches. However, if a buyer can only get 2 peaches for $16 ($8 per peach), then buyers will buy fewer/no peaches.

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The Law of Demand

Sellers control for what is offered at the market, or supply. The higher the price, the more the seller is willing to sell; the lower the price, the less the seller is willing to sell. If a seller can sell 8 peaches for $16, then the seller will try to sell lots of peaches. However, if a seller can sell $4 for 2 peaches, then the seller will sell fewer peaches. The seller would rather sell a higher quantity (8 peaches) at a higher price than a lower quantity (2 peaches) at that same price.

The Law of Supply

The Law of Supply

Similar to a farmers market, the financial markets are dependent on the laws of demand and supply. Buyers are looking to buy low and sellers are looking to sell high.  The most common financial markets are:

  • Stocks
  • Bonds
  • Commodities/Currencies

In the next investment tip, I will discuss stocks. Reach out in the comments section or via email (TheLucesco@gmail.com) with any questions or thoughts.

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Debt 1.0

The Numbers

  • Thirty percent of Millennials would sell an organ to get rid of student loans.
  • Baby Boomers view debt more positively than Gen Xers and Millennials; millennials have primarily student loan and car debt.
  • Median percentage of American households with debt: 80%.
  • The average American credit card debt is $15,500.

The Basics

Debt: Money owed. Companies as well as individuals can borrow money.

Debt is easy to get into and hard to get out of. Rule of thumb — long-term investments may require debt, but short-term investments should not require debt. The best examples of long-term investments are college and home ownership; these are the two main factors that determine wealth potential for minorities. Short-term investments are things, like cars, clothing, and dining out, none of which build wealth.

The best method for getting out of debt is Dave Ramsey’s snowball method. I used this method in 2009 to get out of debt in 18 months, and plan to use it again to get out of debt in about 2 years. Almost all of my debt consists of student loans. Here’s how the method works:

  • Build an emergency savings of one month of expenses. As stated in Budgeting 1.0, only 38% of Americans have emergency savings for an unexpected $500 to $1,000 event.
  • List all of your debts from smallest to largest. You’ll have more momentum this way, instead of trying to pay everything off at once. With this method, you’ll target your attack on debt by focusing on one at a time.

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  • Begin making progress
    • Make minimum payments on every debt except the smallest loan ($2,500 in the example above).
    • With the smallest loan, pay as much as possible. Squeeze the rest of your budget to make the largest payment possible.
      • Get a roommate to reduce your rent.
      • Make creative meals and don’t dine out.
      • Cancel the gym membership and work out at home.
      • Cancel cable and share a Netflix, Hulu, HBOGo, and/or AmazonPrime account(s) with friends and family.
      • Suggest drawing names during the holiday season, instead of buying everyone a gift.
      • Find more ideas with the Budgetologist.
      • Pick up a side hustle to increase income. Use the skills that you have or want to acquire. Here are some great examples:

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To-Do’s

Invest in your long-term and short-term goals only after you’ve cleared all of your small debts (typically everything but your home and student loans). In the example, once you’ve cleared $24,000 (everything but the student loans), maybe you can plan a quick trip via car or bus somewhere cool, or attend a cheap concert. Upon completing the student loans, celebrate by doing something you really enjoy. Return from your trip and build a complete emergency fund of 6-9 months of expenses. So if your monthly expenses total $2,000/month, save at least $12,000 (and $18,000 if possible).

Measuring Your Improvement

  • Paying all of your bills on time
  • Minimizing your debt
  • Contributing to your long-term goals each month
  • Allowing for money to meet some of your short-term goals 3-4 times a year

Debt can be a huge burden, but it does not have to be. Getting rid of your debt can play a part in building wealth. Additionally, you can think with a clear head when you have little/no debt. Examples include evaluating your career and making life changes most easily. You no longer feel obligated to work at a job that you hate, or can think about starting that business that you’ve always dreamed of. Typically, you can pay off most of your debt in less than 2 years with this method.

Reach out to me at TheLucesco@gmail.com if you have more specific questions. Happy to share information on how to build a budget and kill your debt.

Education Fails to Solve Income and Wealth Gap

Growing up, my mom instilled strong values around education in my life. She saw education as a tool for economic mobility, particularly as she raised three black girls in Little Rock, Arkansas during the 1980s & 1990s, when the city was considered the murder capital of America. She drilled into our heads that we would be self-sufficient, educated, professional black women. There was no question about college: we didn’t have a choice, we were going to college.

Observing the world around me, I have taken note of a significant discrepancy: Black and Hispanic individuals with a 4-year degree are not protected by their higher education.  The Federal Reserve Bank of St. Louis’s Center for Household Financial Stability recently published a report on “Why Didn’t Higher Education Protect Hispanic and Black Wealth.”

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Table 1 – Median Family Income in 2013. Source: Federal Reserve Bank of St. Louis

Median Family Income in 2013 Points.

  • Four-year Asian college graduates ($92,931) make $51,457 more than White non-college graduates ($41,474).
  • Four-year Black college graduates ($52,147) make $10,673 more than White non-college graduates ($41,474).
  • Four-year Hispanic college graduates ($68,379) make $26,905 more than than White non-college graduates ($41,474).
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Table 2 – Median Family Net Worth in 2013. Source: Federal Reserve Bank of St. Louis

Median Family Net Worth in 2013 Points.

  • Four-year Asian college graduates ($250,637) have $169,945 more in net worth than White non-college graduates ($80,692).
  • Four-year Black college graduates ($32,780) have $47,912 less in net worth than White non-college graduates ($80,692).
  • Four-year Hispanic college graduates ($49,606) have $31,356 less in net worth than White non-college graduates ($80,692).

Asian American incomes and net worths mirror that of White Americans, making education an economic mobility tool. However, for Blacks and Hispanics, education does not have a significant impact on economic empowerment. Increasing the college rates of Blacks and Hispanics, currently at 20% and 13% respectively for four-year college degrees, will help only slightly. Discriminatory hiring practices, higher risk of career termination, predatory mortgage lending and redlining, 4-year college selection, and lower net worths are potential reasons for the discrepancies.

I wouldn’t trade my Bowdoin education for anything, as my experience was a transformational one that played a part in the person that I am today. The solution is not that all Blacks and Hispanics stop attending 4-year college. In order to address the income and net worth gaps that minimize Black and Hispanic economic mobility, these groups should:

  • Understand the basics of personal finance. My “1.0 series” on personal finance started last week with this post on budgeting. Get a financial advisor to provide guidance on the how to build out your plan.
  • Know your rights. Between issues at work and applying for a mortgage, there are a number of opportunities for Blacks and Latinos to be victims of discriminatory practices. When in doubt, seek an attorney for advice.
  • Invest in you and your family for the long-term. Home ownership, retirement, and small business ownership are the primary ways to build wealth. Saving for your children’s college will ensure optimal school options, which also plays a part in the post-college career opportunities, networks, and salaries.

 

Budgeting 1.0

The Numbers

  • Roughly 32% of Americans have a budget for managing monthly income and expenses
  • Another 16% of Americans think that they have a budget, but really don’t
  • College graduates are 50% more likely to have a budget than those with only high school diplomas/GEDs.
  • Only 38% of Americans have emergency savings for an unexpected $500 to $1,000 event.
  • About 30% of Americans have no money saved for retirement.

The Basics

Budget: is telling your money where to go; the ability to tell yourself “no.”

Many people think that budgeting is knowing where your money went, but that’s only a small percentage of the matter. Budgeting requires goal setting. Without a goal, the chances of derailment is extremely high. What do you want to do with your money? Instead of impulsively doing what you want, some structure and restraint will allow you to meet goals and manage unexpected financial burdens.

Minorities, particularly ethnic minorities, are more likely to encounter financial hardship. The barriers for economic stability are high for minorities. Predatory lending practices, higher insurances premiums, and lack of transparency lead to higher monthly expenses for minorities. Across socioeconomic classes, many Black and Brown working Americans support their parents and grandparents financially, due mostly to barriers and the lack of generational wealth, money that is passed from one generation to another. My parents generation, the Baby Boomers, was the first Black generation to receive open opportunities to borrow from national-level banks.

To-Do’s

The key to making a budget is to focus on your goals. I encourage you to find the space to think, to dream about your long-term goals. If money were not an issue, then how would you spend your money? Do you want to retire and not work? Are you hoping to send your children to college? Next, identify your short term goals. Do you like to travel? Want to go to the Made in America concert next year? Want to buy a home in the next few years?

Once you’ve identified some goals, build your budget. Are there expenses, like eating out or debt, that are taking large portion of your check? Eat out less by preparing your lunches ahead of time and pay above the minimums to get rid of the debt. If your rent is super high, then consider getting a roommate. If your car note is high, then sell the car and buy a cheaper, used one.

Here’s a sample budget. The extra $300/month can go towards both short-term and long-term goals; it could also go towards paying off debts, like credit cards and student loans, sooner. Without the credit card and student loan debt, you would have $650/month left over to go towards your goals, more than double your current $300/month left over each month.

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Measuring Your Improvement

  • Paying all of your bills on time
  • Minimizing your debt
  • Contributing to your long-term goals each month
  • Allowing for money to meet some of your short-term goals 3-4 times a year

Budgeting is the most important step in personal finance. Goal setting allows you to plan for the things that are most important to you. Staying committed to your budget will provide financial freedom. If you feel that you’re not able to meet all four of these criteria, then reconsider your career goals and the feasibility of your personal goals. In my case, I am planning to work and build a business on the side so I’ll have two incomes each month. If you’re a full-time student, then focus on the first two goals until you complete your academic program. I don’t recall having the ability to save during school, but that does not mean it isn’t possible!