Wealth Building 101: Transforming Salary Into Net Worth

Often, when people think about personal finance, they focus on their income in the form of paychecks. But net worth is what ultimately has the largest impact on how much wealth you pass onto your heirs.

In this Motley Fool Live video recorded on July 23, Fool.com editor Desiree Jones speaks with Wealth Noir founder Damien Peters on how to shift your frame of mind from income to generational wealth.

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Desiree Jones: Hi there Fools and welcome to Fool Live. I’m Dez Jones, a Fool on the editorial team and I’m so excited to welcome Damien Peters, the founder of Wealth Noir. Damien, how are you doing today?

Damien Peters: I’m doing pretty good. A little small cold from my son, but surviving.

Jones: That’s good to hear. Welcome, and we’re going to go ahead and get started. Tell us more about yourself and the mission of Wealth Noir.

Peters: My name is Damien Peters, I founded Wealth Noir back in 2018. Our mission really is we focus on high-income millennials, in particular African-American millennials. We’re really focused on building wealth, so increasing net worth. The reason I started Wealth Noir and story behind it was I was a product manager at Facebook, I was working there, enjoying my job. I found out that I was having a child and I decided I wanted to take a little bit of time off, I wanted to take a year off to be with my son. Everyone at work they were like, “How can you afford this?” When I talked to people outside of work, they were also shocked. My personal thought was I was very well compensated, I had been investing in real estate at the time, so at this time I had two rental properties, I had six figures in stocks, taxable on my own, in addition to the same in my retirement account. I just felt that there were more people who are in this income bracket, they had solved one problem, but they weren’t building wealth and net worth and they still felt trapped financially. At Wealth Noir, we really focus on bringing content, services, programming that really focuses on helping people transform salary into net worth. We have a heavy emphasis on real estate investing and also for accredited investors.

Jones: That’s awesome. That is amazing to know that there’s something like Wealth Noir to help uplift the black community. Of course, we’re going to talk more about the impacts of the black community and financial literacy. For starters, what is the racial wealth gap and why does it matter?

Peters: The racial wealth gap. I think everyone, or there’s many different ways to define it or think about it, and the way I think about it really is, when you tease out salary and other impacts, when you look at net worth between African-American and the majority races or medium net worth, you see a gap. Given that you’re earning the same amount of money we’re not accumulating or building net worth at the same rate. For example, there was a study by the Institute of Policy Studies that showed at above $93,000, so given that you’re earning more than $93,000, a white family had about 2.2 times more net worth, $320,000 versus $142,000 of Black families. We see this pronounced in many different aspects where it impacts the ability for African-American families to participate in the economy and in wealth building compared to our counterparts.

Jones: The importance of generational wealth is very key and understanding that there are different factors that come into that financial aspect of literacy. My next question is, what can someone do to build and earn wealth for themselves given the challenges they may face?

Peters: If we think about the wealth gap, there’s two aspects I think really show themselves and are pronounced. One is that you have an income gap, so on average African-Americans tend to earn less, and that’s pronounced, so your ability to save and build net worth is going to be slowed because you fundamentally will be earning less, and have less to save and contribute. The second really big factor is generational wealth. Unfortunately, we have just been oftentimes kept out of the economic and wealth-building system for years through redlining, through certain discriminatory practices, and even in certain points where being a wealthy African-American was a risk if you look at atrocities like Tulsa and other places. That ability for my grandparents to have bought a home and then that could be given to my parents to have grown, appreciated, and then for that to pay for my college tuition is just something missing, and that is one of the huge contributors to the wealth gap. When it comes to really beating the wealth gap, we’re trying to change things, there’s a couple of things that anyone can do, and it’s the same way that everyone builds wealth, but it really is embracing them and utilizing them within our communities. The first thing I always tell people is start investing and start investing yesterday. Even if you’re not good at it, even if you lose some money, your ability to invest and participate in the capital markets that build wealth is going to be the key to you being able to build wealth. If you don’t invest in stocks, you will never see any benefits from stock investing, if you don’t invest in real estate, you’ll never see any benefits from real estate, and there’s a slew of other types of investments. I always say people investing is, they call it personal finance for a reason, you should find out what you feel comfortable with. But I think there are a lot of reasons and it’s way easier from your phone, you can be investing within minutes. The second thing is really just learning and understanding money. I still think it’s a bit of a travesty that they don’t teach more about personal finances in school. My undergrad was in economics and just in computer science, and then went on and got a Masters in business. I learned a lot about how money works, debt, investing, rate of returns, things like that, and a lot of people that we talked to, a lot of people that we engage in Wealth Noir will be oftentimes making a quarter or half a million per year and still don’t understand some of the basics about investing in a retirement account versus non-retirement account, avoiding large tax bills by correctly allocating your money or simple things like portfolio diversification so that they are not completely wiped out when there’s bad move in the market. Another thing too is to talk about money. I think this does hamper our communities more but in general, a lot of people just aren’t comfortable talking about what they are investing in and not investing in. They don’t want to talk about their salary, and I think this hurts us a lot. We don’t understand how to price ourselves going into a new job, and we don’t understand how much people are saving or what they are investing in, and we don’t get excited about it. I can have a three-hour conversation about the draft picks for the Washington Football Team, but no one wants to go deep into Tesla (NASDAQ: TSLA) versus some of the new entrance into the EV (electric vehicles) market, or overall, what the economies look like as it pertains to the current health situation. Then last thing is just watch out for common traps for misguided information, and this goes back to learning and understanding money. Everyone wants to get rich quick. No one wants to work. The truth is wealth building is typically slow and it’s boring. Most of my money is held in broad ETFs that cover the market and they grow over time. I continue to put more money into them. I buy rental properties. I’m planning to hold for decades. It’s not sexy as making $100,000 in a day doing option trading, but it’s a more consistent plan and path. By really investing in what’s worked for people with wealth over the last decades, hundreds of years, that’s what people should be thinking about as opposed to what they read on Instagram.

Jones: These are really great tips. Especially for me, so I appreciate that. The next question, what is the difference between income and wealth. We already talked a little bit about it, but why is it important to build wealth?

Peters: The loose analogy I always use is a bathtub. Your income or your salary or where you get your money from is water going into the tub and your expenses is water leaving the tub. You can’t take a bath if all the water going in is immediately being left. Wealth is the water in the tub. It’s a pool there that you can bathe in, you can take a sip from it if you want to. You can turn off the spigot for a little bit, and as long as you control the money flowing out, it will be there. Wealth is measured by your net worth, and your net worth is simply all the assets that you have; house, stocks, bonds, money in the bank, subtracted by all the money that you owe; mortgage, car loan, car note, money that you owe your mom, all that counts against it, and your net worth is the difference. By increasing your net worth over time that is where you will have both the ability to unlock financial freedom, so if you have enough money, if you have a large bathtub full of water, it’s hard to die of thirst because you have water sitting there. Also when it comes to generational wealth. If you have kids and if we really start talking about breaking this wealth gap over multiple generations, you can’t give your kids something that you don’t have. You can’t leave it for them. Yes, it may seem like, “Why would I not spend money during my lifetime?” But the truth is, oftentimes, money loses its value the more you make. Spending your first $100,000 is super fun, the next $100,000 is not as fun as the first because the first you’re buying all the stuff that you really wanted. The second, you’re stretching. Generational wealth, unlocking financial freedom is really two of the key benefits that wealth really brings along. Changing your context, not think just about salary and income coming in and your expenses, but what are you building in terms of wealth. Then the last most important thing I would say is that money makes money. Whether it’s interest in the bank account, which is next to nothing right now, but whether its returns in the stock markets or it’s the cash flow that you’re getting from a rental property. The more wealth that you have, it actually grows itself. One thing with that bathtub analogy that it doesn’t talk about is, the water actually multiplies on its own. The water being in the bathtub will increase on its own. Going back to that point of retirement or financial freedom, if you turn off the spigot of salary, if you have a large body of money or a large pool of water that’s growing itself, you can live just off of that passively without having to go out and actively participate work for money.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.