Did you know that one of the top indicators of a child’s social class is the social class of their parents? Social mobility is at an all-time low in the US. Nearly half of the kids born into the lowest class will stay there for their entire lives, and only 4% will ever reach the highest class.
These statistics really highlight exactly how important generational wealth is and how it impacts our lives. Here’s what you can do right now to start build wealth that will last generations.
Get Out of Debt
Debt destroys wealth. According to the Fool, over 16 million families in the US have a negative net worth. That means they owe more in total than they have. These families can’t pass anything on to their offspring other than debt.
Digging out is the first big step towards building generational wealth. Many people use the snowball method, which means that they put all their extra money towards paying off the debt with the lowest balance first. That psychological win of paying something off really motivates them to keep it up.
Establish an Emergency Fund
Financial emergencies can hit at any time. And if we aren’t prepared for them, we may end up relying on credit to resolve them. And sometimes, it can feel never-ending. Another emergency hits before you’ve even dug out from the last one.
An emergency fund can help. Having a cash reserve that’s specifically there to help you solve emergencies can offer a ton of peace of mind and prevent you from taking on more debt. Although some financial experts recommend saving $1000 for emergencies, you’ll likely need more. I’ve hardly met an emergency that’s less than $500, and most of them are $1000 and beyond.
How are you going to find money to put in your emergency fund? Well, you should start by making a budget if you don’t already have one. When you start being more intentional with your money by keeping track of it and telling it where to go (other than the other way around), you’ll find that you do actually have something to put in these accounts.
But don’t expect immediate results. Building a budget won’t automatically put thousands of dollars in your emergency account. It will accumulate slowly, and that’s okay. Building generational wealth is a long-haul game.
Automate Your Savings
An easy way to start saving money is to automate your savings. I have money from every paycheck directly deposited into a variety of savings and investment accounts. This money is never seen and thus never accidentally included in my weekly spending money.
Start automating small amounts from your paycheck, and increase it every time you get a pay raise. You won’t miss money that you never had, and your savings will continue to grow.
When you do your budget for the first time, you are going to have to make some difficult choices. In order to have extra money for the future and for wealth building, you’re going to have to find ways to cut back.
When it comes to cutting spending, it’s about cutting out things that don’t bring you real happiness. If going out to lunch every day is your one half-hour of sanity during your hectic work life – keep it. Don’t make yourself even more miserable by brown-bagging. But if you are just running to the local fast food joint, grabbing trash food to go, and bringing it back to your desk – is that ten dollars you just spent really improving your life? Couldn’t that be better spent saving and investing?
Being frugal isn’t exactly the same as cutting your spending. It’s all about finding great deals on things that you were going to buy anyway.
Frugal doesn’t have to mean don’t spend money – just be smart about the way you spend it.
Invest for the Future
Budgeting and saving money are only half the battle. The other, more important half is investing that money. Although keeping money in a savings account (or under the mattress) is safe, it won’t do you any good. With interest rates at historical lows, inflation will eat away at any of your savings.
Investing is the best way to bridge that gap and build personal wealth. Your investment plan should include diversified assets, such as Vanguard’s total market fund. This index fund invests in the stock market as a whole, so it gives you instant diversification. It’s also not actively managed, which helps keep the fees incredibly low. I’m not affiliated with Vanguard in any way other than having an account with them, and you should do your research before making any commitment.
Invest in Yourself
Investing isn’t limited to hedge funds and IRAs. Investing also includes investing in yourself. Take classes for personal development, like a cooking class or an antique class. Find groups to join in your local area of groups that share common interests. Get a gym membership and invest in your health. Focus on taking care of yourself. These things will lead you to a longer, healthier life and minimize the amount of time that you will need full-time care.
Increase Your Income
Sometimes budgeting and saving money just aren’t enough. Sometimes there isn’t anything left to cut, and there are still bills to pay. And sometimes, you just want to be able to save and invest more.
In all of these situations, increasing your income is the way to go. You can do this by either increasing your skills at work and winning that promotion or by starting a side hustle.
Recognize Assets vs. Liabilities
Recognizing the difference between assets and liabilities is not always easy. Unfortunately, financial education in the US is lacking, and we sometimes think things will be worth money that never are. I’m looking at you, beanie babies!
Identifying financial assets and using them to create individual wealth is a key component to building generational wealth. Some examples of assets include stocks, mutual funds, gold, precious metal, and real estate. Some examples of liabilities include cars, clothing, most “trendy” collectibles, and most of the stuff you buy at the store. Spend more money on assets than on liabilities.
The last component of building generational wealth is one that we don’t really like to talk about. Planning for our eventual departure from this world is uncomfortable, but it’s important to ensure that our family wealth stays in the family and goes to our heirs in the way we want it to.
Talk to a financial advisor about your estate plan. Ultra-high net worth individuals may want to set up trusts for any of their beneficiaries to ensure that all the money is being allocated correctly. Even those with few assets will benefit from ensuring that they have the basics covered. That includes reviewing your life insurance policy, creating and notarizing a will, and discussing any tax implications with an accountant.
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