Many Black families operating with a limited income say they are struggling to save money for such things as retirement and college expenses.
But investment whiz Mellody Hobson says it can be done with a slow and steady approach. “Too many parents, Black parents in particular, will save money for their kids’ college tuition before they save for their own retirement, and that’s not good,” says Hobson, 39, president of Ariel Investments LLC, a Chicago-based, Black-owned money management company with $16 billion in assets under management.
“As a parent, you should save for your retirement first and college second.” She added that next to owning a home, having a retirement plan, such as a 401(k) plan, is the next best thing when trying to build up wealth.
“It’s important to protect your retirement plan, especially if it’s employer sponsored,” Hobson told the Defender. “Having an Individual Retirement Account is good, but it’s better to enroll in your employer’s retirement plan.” By enrolling in a company-sponsored plan, Hobson says a person could receive free money. “Most employers contribute something to the plan whether it’s matching it dollar-for-dollar or contributing a certain percentage,” Hobson said. “With an IRA, you do not have this advantage. It’s funded solely by you.” However, not everyone is ready to buy into Hobson’s advice. Diane Jackson, 39, a single mother of one, said she earns $30,000 a year working as a receptionist at a Chicago engineering company. She said after her employer deducts for medical insurance, she barely has enough to last until the next pay period, let alone investing in a retirement plan. “I have a checking and savings account, that’s it. That’s my retirement,” Jackson said.
Erik and Paula Davis have three kids, and both work as teachers at a Chicago Catholic elementary school. Combined, they earn about $55,000 a year but do not have a retirement plan. Instead they chose to invest in a college savings plan. “The math just doesn’t add up for us to do both right now even though I know it is needed,” Erik said. “As a parent, you should never put your needs first. It should be the needs of the child so I do not feel bad if we don’t have a retirement plan as long as our kids can go to college.”
Hobson counters that it just makes more sense to have a retirement plan because you can use it to leverage other ways to get cash. “You can get a loan against your retirement plan, and it would cost you less to repay it than going to a payday loan store or getting a personal loan from a bank,” she said. “I know parents do what they feel is right for their kids, but building a retirement plan is a solid way to help pay for college. I recommend students and parents exhaust all financial aid options before seeking alternative funding avenues.”
She added that Web sites like www.scholarships.com are good sources to find “free” money to help pay for college. “There is literally a scholarship nowadays for almost anything so a student does not necessarily have to be getting straight A’s to win a scholarship,” Hobson said. “We (Blacks) never pass down wealth, and we’re always behind the eight ball when it comes to investments.” And as far as the current foreclosure crisis, which was created largely by subprime loans used by many Blacks to become first-time homebuyers, Hobson recommends families continue to rent until they can qualify for a better home loan.
“There are some advantages to renting. You do not incur any repairs and do not have to maintain insurance either,” Hobson cautioned. “Before a person applies for a loan, they need to make sure they can not only afford the monthly mortgage but can also afford to pay for any unexpected repairs. If not, I suggest a family remain renting until they can afford to do these things without having to rob Peter to pay Paul.” And while there are various ways to keep track of spending habits, Hobson recommends creating a journal to write down what is spent each day.
“Everyone wastes a certain amount of money each week. Whether it’s from eating out, buying cigarettes or playing the lottery,” she said. “But to actually sit down and add up how much you spent on these items would grab your attention and identify monies that you could be saving.” She also recommends making purchases in cash rather than using a credit or debit card.
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