“At the bottom of education, at the bottom of politics, even at the bottom of religion, there must be for our race economic independence. “ – Booker T. Washington

Imagine five people are running a race – can the person in distant last run at the same speed as the ones in front and catch up? Obviously not. The African America median net worth is shown to be dead last in a 2004 report by the UCLA Center for Asian American Studies out of the four major ancestral groups studied. The report shows Asian America 1^st with a median net worth of $144,000 followed in 2^nd by European America with $137,200 then in 3^rd Latino America with $19,300 and bringing up the rear is African America at $12,000. Remember this was 2004 before the Great Recession that would see African Americans lose eighty three percent of its wealth according to the Economic Policy Institute. Arab America was not reported but it is not hard to imagine they too are well ahead of us. It is indeed time we rethink our financial strategy.

So then why am I saying we should NOT be maxing out our 401(k)? Suze Orman told me it’s a great thing. Flag on the play. One of the major issues is we continue to try to answer African American questions with European American answers. You can not do as another is doing when your situation is not the same as a group. Most of the so-called financial help that we see on TV is based in an Eurocentric view of American life and reality.

To max out your 401(k) would mean to contribute $16,500 pre-tax income per year or $1,375 per month into it. We currently contribute at a median of approximately $175 dollars a month or $2,100 annually to our 401(k)’s as reported in the Ariel Capital Charles Schwab Black-White Investor Annual Survey. Its not hard to see why though when the median income for African America is approximately $32,500 (Asian & European America stand at $65,500 and $54,500 respectively) according to the latest U.S. Census Bureau data. The likelihood that we would be able to reach that plateau without putting our families into poverty ($22,000 is the poverty income level for a family of 4) is as likely as a year without a rap beef given that you would be taking the median taxable income down to $16,000 by contributing the max. I don’t know many places in America you can make it on $16,000 a year. Unfortunately as noted in the census as well 25% of African America is below the poverty line.

Let us make sure we understand though what the 401(k) as a vehicle is built to do and what it does. The major contention with the 401(k) is that its primary investment vehicle is mutual funds. Per Investopedia a mutual fund is “An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.” These funds are “actively” managed funds. That is there is a manager who buys and trades actively trying to beat the market. They of course then past that expense on to you. Usually you can find a mutual funds management cost as the expense ratio. Unfortunately, as Motley Fool points out in its mutual fund study “more than 80% of mutual funds underperform the stock market’s average returns.” The other problem with mutual fund for African America is that it does not equate to direct ownership of any company. In a self-directed Roth IRA you have direct control of where that money is going. So you can buy Google stock directly or you can place it in Index Funds, which have historically outperformed mutual funds because they are not actively managed and so have less cost built into them leaving more money in your pocket for the long-term.

So what SHOULD we be doing as African Americans?

1)    Build a six to nine month emergency fund. An emergency fund for African-Americans is a tricky dynamic because any money we hold in cash is capital that is earning very little and could be used in building long-term wealth. However, we are also more likely to suffer job loss, hospital visits with no insurance, helping family members, and other unforeseen needs so how one manages their cash (it is king after all) balances in short-term and long-term investments might be the most vital element to wealth creation.

2)    Try to max out your Roth IRA contribution (max $5,000 per year), which will give you control of where the funds are invested and can place them in less costly investment products. If you do no more than put them in index funds, which as stated have historically had better returns than mutual funds and also cost you less. Roth IRA’s also have tax-free earnings, which means when you have to take the money out at retirement in 30 plus years you would not have to pay any taxes on it. And as the cost of living rises you will need dramatically more dollars tomorrow than you do today for the same standard of living. Because I believe we need more equity ownership though I’d suggest no more than 50% of your Roth IRA be in index funds. The majority should be in individual stocks and bonds.

3)    Next if your company matches 401(k) contributions then put in the percentage they will match and not a penny more. Its free money and so there is no reason to pass it up. At that point you want to treat the money in the most conservative manner possible. Remember if your company is giving let’s say $0.50 for every $1.00 you put in you’ve already made a gain of 50%! At that point there is no need to get cute and become greedy with an aggressive mutual fund that as we see is almost guaranteed to lose money. Or as I tell former clients if you walk into a casino and they give you free money. Put it in a bag and walk right back out (and say thank you of course).  That is to say get the return from your company matching and then put it in a safe product. Do not gamble the free money away in high-risk mutual funds.

4)    All monies after that should be going into either starting a business of your own or an individual (or joint) brokerage account where you will buy and trade stocks, bonds, and other investment vehicles. This by far should be your largest account as it is the account that can give you the most direct ownership of companies through direct ownership of their stocks (equity) and bonds (debt) of companies with unlimited contributions.

This is a very basic game plan to address wealth creation. Wealth creation in of itself is a simple and complex creature. But these basic steps can help you and your families get started off on the right path. Recognizing where we are in the game and that is dramatically behind in the ownership category we cannot afford to put money into investment vehicles that do not give us any. Knowing is half the battle to quote a GI Joe. Now go out there a bit more armed to build for future generations.