Generating Wealth: Just Take the First Step

I struggled with what to write today, so I called my mom to talk about it. I call my mom a lot for advice, and in typical form, she delivered. We talked about the goal for this blog as a chronological blueprint for generating wealth that Black professionals could follow. We also talked about the best way to get back to the blueprint. Her advice for me will be the theme of this post: Just take the first step.

I love the Martin Luther King, Jr., quote this advice invokes: “Take the first step in faith. You don’t have to see the whole staircase, just take the first step.” In many ways, this is what I did in November 2016 when my spouse and I opened our first brokerage account. We had no real idea what we were doing. In hindsight, there were three real steps we took that might be helpful as you take your first step to generating wealth:

Eliminate ALL your consumer debt

America’s credit card balance totaled $357 billion as of September 30, 2021. While this number is significantly lower than pre-pandemic days, it is still quite high. The average American carries a balance of $5,525. Black Americans are faring better than average, carrying only $3,940 on average. This is still too high. Here’s why:

As of this writing, the average credit card interest rate is about 16.13%. This interest rate represents the additional balance a cardholder will accrue on any unpaid balances at the end of a billing cycle. Credit card companies typically express this interest rate as an average percentage rate, or APR. Here’s the rub, though. APR gets applied to a cardholder’s monthly balance although it represents an annual rate. Which means, the longer you carry a credit card balance, the bigger the hurdle you face in generating wealth.

Let’s illustrate through a quick example. Kevin carries the average balance for Black Americans ($3,940). He also has the average interest rate (APR) of 16.13%. Using some quick math…

• Divide the APR (16.13%) by the number of days in the year (365) = 0.000442 (the daily periodic rate)

• Multiply the daily periodic rate (0.000442) by Kevin’s average balance ($3,940) = 1.741156

• Multiply this number (1.741156) by the number of days in Kevin’s billing cycle (30) = 52.23468

As you can see, Kevin pays (rounded to the nearest cent) $52.23 each month – on top of his average balance – to his credit card company. And not to himself in the form of wealth.

Even worse is that this example is grossly oversimplified. I haven’t touched on the different types of APR a credit card holder may face on any number or type of credit card. The moral of the story here is – carrying a balance on your credit card (or any consumer credit instrument) carries you away from generating wealth. Eliminate it!

We were fortunate to not have any consumer debt when we started our wealth creation journey. If we had had this kind of debt, we would’ve worked to eliminate all of it first.

Build Emergency Savings

I know this advice is “long in the tooth,” but that’s because it works. Most personal finance pundits recommend keeping between three to six months’ worth of expenses in an emergency fund (usually a savings account).

Less than half of Americans have that. In fact, 1 in 4 of those Americans report having no emergency fund at all according to Bankrate. Of course, COVID-19 made financial health precarious for many Americans, but disproportionately affected Black Americans.

The Federal Reserve Board’s most recent Survey of Consumer Finances revealed that only 42% of Black households have a savings account, and “many with an account said they were not saving enough to meet emergency expenditures.”

An entire blog series could be devoted to the pitfalls of having no emergency savings, so suffice it to say that this would be my second priority after eliminating all consumer debt.

Open a Brokerage Account for Investing

As I mentioned in an earlier post, Black investing is a full 19% lower than White investing despite the stock market remaining one of the best tools we have in our wealth creation toolkit. After eliminating all consumer debt and building an emergency savings of 3-6 months’ worth of expenses, I urge all of you to take this important and truly life-changing step.

What first step would you take to generating wealth?