As a Black financial planner who works with people of color, my clients often face the dilemma of balancing their financial goals with the internal pressure of helping others. When you’re the first person in your family or social circle to reach a certain level of success, you may have family members or friends who come to you for financial support. Often referred to as the “first-generation wealth builder’s tax” or “Black tax,” this financial support can derail your financial goals and prevent you from building wealth. Either way, it’s important to make sure that you prioritize your financial needs before helping others. After all, who will help you if you’re unable to meet your financial obligations? I understand how hard it can be to say “no” to family and friends when you’re making a healthy income and they’re barely getting by. You may also have a cultural obligation to support your parents. Here are a few strategies to guide you in balancing the “Black tax” with your desire to build wealth.
Establish Your Priorities
The first step is to establish priorities for yourself. When you fly on a plane, the flight attendant always instructs you to put your oxygen mask on first before assisting others. While it may feel selfish to take care of yourself before your loved ones – especially in a life or death situation – it is vital. If you run out of oxygen, you may not be around to help your loved ones.
Establish priorities for yourself by taking an assessment of your financial situation. Do you have an emergency fund that can cover unforeseen expenses or a job loss? How much debt do you have? Having an emergency fund in place and a plan for managing your debt should be top priorities. These measures protect you from blowing up your budget or getting into more debt while helping others. Think about your short-term and long-term financial goals. Do you have a plan in place to reach those goals? Are you on track or making progress? Knowing where you are and what you want to accomplish in your life gives you guidelines as you work through the process of juggling financial obligations.
The second step is establishing priorities for those you want to help. Who is most important to you? Who needs your help the most? Your parents may be a bigger priority over other family members, or your siblings may take precedence over distant relatives or friends. There’s no right or wrong answer here, and this is always a personal decision.
Understand Your Cash Flow
After you establish your priorities, the next step is to assess your cash flow. Take an inventory of your sources of income so you have a clear idea of what comes in each month. Review your expenses over the last 6-12 months to understand where your money is going. After covering your living expenses and meeting your financial obligations, do you have money left over? Are you on track to reach your financial goals?
Look back and see how you’ve helped others over this same period financially. What was your total monetary support? Did a large percentage of your support go to one person? What were the reasons for the support? What did the money cover? Just like it’s important to align your spending with your values, it’s important to align your financial support with your priorities. This exercise reveals if you are in line with your established priorities or need to make adjustments.
Now that you’ve determined your priorities and understand the scope of what’s needed, decide how much you can allocate to helping others. One method is to set an annual budget for giving. This budget could be a total “friends and family” bucket for everyone or a bucket for the people you prioritize and a general bucket for everyone else. If needed, set limits for “repeat offenders” who are lower on the priority list within each bucket. For example, you may decide on a general “friends and family” bucket to allocate $3,000 per year. If you receive consistent requests for help from a particular family member throughout the year, you can set a personal limit of $500 for that person.
Help Them Help Themselves
There will always be people in your life who push your boundaries or take advantage of your generosity. Keep in mind that you don’t have to give money freely with no expectations or requirements. In your desire to help others, it is crucial that you don’t become a financial enabler. There are several ways to establish boundaries and help others help themselves.
- Set expectations – If you see a pattern of help requests from a particular person and there are no meaningful improvements in their financial situation over time, set expectations so they don’t become dependent on you. You could require that they actively work to improve their situation, whether it’s by getting a side hustle or creating a budget to reduce spending.
- Consider gifts other than cash – Another option is providing financial support for education expenses. Could they make more money by taking a class or obtaining a certification? Offer to cover the cost of course fees and study materials. Do they need help creating a budget, paying down debt, or improving their credit? Offer to pay for financial courses or time with a qualified financial professional.
- Avoid making loans – Consider any money you give as a gift and make sure you can afford to give it away. Someone may have the best intentions to pay you back, but if they fail to repay the loan, it can lead to hard feelings.
- Think carefully about cosigning on loans – Cosigning on a loan with a friend or family member is a big decision, as it can affect your credit (and the ability to qualify for loans in the future). Cosigning should always be a last resort and considered very carefully. Anyone asking you to cosign on a loan should prove that they are responsible and will pay the loan back. If they don’t you should be in a position to cover the liability.
Prepare for Future Obligations
Whether or not you have any current financial obligations, you may anticipate future support for your parents or other loved ones. To prepare for these future obligations, start by understanding the situation of your prospective recipients. Review their current finances and estimate their future needs so you can understand the scope of the support that is needed. Review their estate plan and make sure they have basic estate documents in place (this includes wills, powers of attorney, and advance directives for healthcare). Offer to cover the cost of an estate planning or elder law attorney. If you’re concerned about potential long-term care needs, you can also consider paying the premiums for a long-term care insurance policy.
When you have an idea about your future obligations, you can set aside separate funds. Decide on a savings target and contribute regularly, as you would with any other financial goal. Keep the funds in your name so you have the flexibility to use the funds for yourself if needed. You may have siblings or other family members who are doing well and can pitch in. If so, have discussions with them in advance so you can coordinate your efforts.
Consider Equity Compensation
Using equity compensation to provide financial support is a great strategy, as it doesn’t affect your regular cash flow. Do you have shares of company stock with large gains? You’re most likely in a higher tax bracket than friends and family members who need your help. Under current tax law, taxpayers in the lowest two marginal tax brackets pay 0% in long-term capital gains taxes. Consider gifting shares of low basis stock instead of cash. Make sure you’ve held the stock for at least one year. This strategy requires a little work by setting up a brokerage account, but the process is simple after the initial legwork. Are you already selling Restricted Stock Units (RSUs) as they vest to fund other financial goals? You can allocate a percentage or amount from the proceeds to either your annual giving budget or the separate funds you’re setting aside for future obligations.
The racial wealth gap already makes it harder for people of color to achieve financial success. Young professionals of color are often underpaid compared to their white counterparts and carry more student loan debt. The obligation of supporting friends and family members added to this can make what’s already an uphill battle feel impossible to climb. Prioritizing yourself first puts you in a better position to build wealth and have a more significant, long-term impact on your family’s future. If you must provide support to others, plan ahead, set boundaries, and be strategic.
Need help balancing the desire to build wealth with the obligations to support others? Let’s have a conversation!
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Chloe Moore, and all rights are reserved. Read the full disclaimer here.