Building a firm foundation

When helping people understand how to improve their financial standing, TC Alexander knows he's frequently battling decades of ingrained lessons on money matters.

Consider the couple in their early 30s who sought him out a few years after attending one of his personal finance workshops. They wanted to share the good news about their new house, their 401(k) plan balances and the college savings accounts they'd recently started for their two young children.

"They came back to say thank you and explained that these things hadn't been taught to them as they were growing up," recalled Alexander, a community development relationship manager with BOK Financial^®. "By showing them the benefits of different financial philosophies than what their families followed, they were able to change some of the generational cycles."

In the process, the couple was building generational wealth and creating a more secure financial future for their children, grandchildren and beyond.

Home is where the wealth builds

A common approach to building generational wealth is through homeownership, which Alexander understands runs counter to traditional thinking in many minority communities and households.

For instance, the homeownership rate among Black Americans was 44% in 2021, according to the National Association of Realtors, a fraction higher than it was in 2011. The rate among Hispanic American households was 50.6% in 2021—a greater than 4% gain over the decade. Meanwhile, 62.8% of Asian American households owned their residence, an almost 5% rise since 2011. The homeownership rate among white Americans, by contrast, was 72.7% in 2021 and has hovered near 70% since 2017.

"In some families, there's a strong sense that renting has always made more sense as they focused on avoiding the costs associated with owning a home," he said. "Plus, they appreciated the convenience when it came to things like repairs, which could be handled with one call to the landlord."

And yet, regularly paying property owners ever-increasing rents has excluded such families from building up home equity, which occurs with regular mortgage payments as well as rising values—an average of 4.4% a year since 1991, according to the Federal Housing Finance Agency.

As it grows, the accumulated wealth in a residence may be accessed through a home equity line of credit (HELOC) to pay educational costs, start a business or help another family member buy their own home. Plus, home ownership offers select tax benefits and provides a sense of control that a rental will never offer.

"If you're renting, the owner can raise your rent whenever they want, but with a fixed-rate mortgage, you know what your housing payment is going to be for the next 15, 20 or 30 years," Alexander said.

Get smart about getting a home loan

Alexander stressed that the first step for any potential homebuyer is learning about the process. He said a good seminar will cover first-time homebuyer assistance programs as well as dispel myths such as any purchase requires a 20% down payment and only people with spotless credit profiles need apply.

Once all that's understood, the next steps include:

• Start saving. Even those who qualify for assistance programs will likely need to bring cash to closing, plus cover moving expenses and potentially new furniture or appliances.
• Reduce debt levels, especially those subject to high interest rates.
• Review credit reports and actively work to improve credit scores.

"The first step is to get educated and hear from an industry expert who can answer your questions and give you a realistic view of where you are today on the path toward home ownership," Alexander said. "Then, focus on the financial aspects."

Other tactics beneficial as well

Home ownership is generally the easiest way to build generational wealth, Alexander said. The monthly mortgage payment is replacing the rent payment that already must be made, yet it's steadily adding to equity in the property, he explained.

He added that other avenues to generational wealth include:

• Having life insurance policies that ensure an inheritance is left behind.
• Investing in mutual funds that build up through diversified stock and bond investments.
• Teaching children about personal finance to break the generational cycles passed along by their parents and grandparents.

Allowing for different paths to long-term savings can help increase the likelihood that populations that haven't prioritized such efforts in the past develop new patterns and traditions. For example, the T. Rowe Price 2022 Parents, Kids and Money survey found that only 47% of Black and 56% of Hispanic respondents said they had received financial support from parents or grandparents, compared to 69% of whites polled.

"Ultimately, generational wealth gives the generations that come after yours a leg up," he said. "It gives them a great opportunity to get a better start in life, as not being buried under debt creates a situation where they have more money to save and invest."