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Creating Generational Wealth

Will Ashburn Photo Atticus Contributor
Will Ashburn

Finwell + Atticus on creating generational wealth.

Generational wealth, more commonly called an “inheritance”, refers to passing down something of value from one generation to the next. Many of us typically think of leaving behind financial assets like cash, investments, and real estate, but generational wealth also includes sentimental assets. While these vary family to family, it often includes memory-etched effects like paintings, dish-ware or holiday decorations, as well as personal belongings with long-standing family value such as jewelry, heirlooms or collections that hold higher meaning (or value) when kept within the family.

Though often unspoken, equally important aspects of generational wealth include intangible assets, such as education, financial literacy and a general understanding of family culture & legacy.

Like anything well-balanced, families can’t successfully transfer generational wealth if only prioritizing one aspect of the complete picture, otherwise all of your hard-build wealth will likely be squandered.

Statistically, 70% of families lose their wealth by the second generation, and 90% lose their wealth by the third generation.

Which is why an intimidating concept like “generational wealth” deserves an equally powerful guide to help you understand and address it. In this multi-part series, Atticus has teamed up with the financial planning experts at Finwell to break down generational wealth into three phases to help guide you through getting started & tackling each:

  1. Wealth Creation,
  2. Wealth Preservation, and
  3. Wealth Transfer

Part 1: Creating Generational Wealth

Where do you stand today?

The first step on the journey to building generational wealth begins with finding where you stand today. A popular way to determine your starting point is to calculate your net worth, which represents everything you own, like your house and retirement account, minus what you owe, like a mortgage, credit card debt or perhaps student loans.

Do you know your net worth? If not, check out this Smart Net Worth Worksheet.

If your net worth is in the positive, great! That’s an incredible starting place. And if your net worth is zero or below, take comfort knowing you’re far from alone. In fact, a recent study found that more than 1 in 5 Americans has a net worth at or below breakeven. This is typically due to any number of factors, such as record levels of student loan debt, auto loans or high credit card balances, coupled with stagnant wage growth.

How to grow wealth: balancing today’s lifestyle and tomorrow’s goals.

“The foundation of building wealth is understanding your relationship with money.” -Dominique McQueen

It doesn’t really matter whether your income is $50,000 per year or $500,000 per year, in order to grow wealth it’s critical to spend less than you make. For many Americans, this is easier said than done; 63% of Americans admit to living paycheck to paycheck, meaning they have nothing left over to save or invest after paying their monthly bills.   

After making the commitment to begin building wealth, two critical next steps are to begin looking for ways to maximize your income and to focus heavily on optimizing your spending.

1. Maximize your sources of income

One of the most effective tools you can use to build and maintain wealth is your income. For this reason, creating additional income sources beyond your regular employment income can drastically help you grow your wealth.

Earned income is what most people think of when they hear the word “income”. This is the income you receive from an employer or as an independent contractor. Unless you earn commissions, it’s difficult to control how much earned income you make as an employee because you do not control the business itself.

That being said, with most jobs, there’s generally always an opportunity for growth. Polish your resume, YTD contributions, focus on establishing some new goals at work, and then have an honest conversation with your manager about promotion opportunities. Don’t forget to do some market research around what the going salary is for your role— it never hurts to make sure you’re being paid competitively.

Earned income can also come from secondary jobs, hobbies or even from side hustles. These days, it’s pretty easy to jump online and start making some extra cash by trading skills or picking up some side projects as a commissioned writer, photographer, or using tech-oriented skills like graphic design and computer programming. Other opportunities like jumping on Upwork or driving for Uber, can offer a means to additional earned income with about as flexible a schedule as you’d like.

Business income is income received from a business that you own. Owning a business can provide a lot of control over how much (or how little) income you earn. Not to mention, as a business grows in value, so does your overall wealth [because of equity, or just more income as cash flow increases?]. A great first step is to consider about a few questions:

  • What are you passionate about?
  • What are your skills or talents?
  • How can I make money combining my passions and my skills?
  • Do I know others with similar skills who could help me start or run a business?

Real estate income is income received from rent collected from tenants as a property owner. This is often portrayed as “passive income”, however that is not entirely true. As a landlord, you are responsible for repairs and responding to your renters’ requests— something which can feel pretty active at times. If you can’t handle these responsibilities on your own, or perhaps don’t live nearby, you’ll have to pay a property manager to do it for you.

Many aspiring real estate investors immediately gravitate towards the concept of buying and renting residential real estate, but don’t forget companies often rent their offices and real estate from owners as well. Commercial real estate can be a uniquely attractive, stable and diversified form of additional revenue, particularly if the properties support multiple businesses. For those looking for the ultimate passive approach, also consider raw land which can be leased for agriculture or secured by long-term contracts like harvesting timber or renewable energy sources like solar farms. 

Investment income is income received from stock dividends, bond coupon payments, annuities or other financial instruments. Investment income is generally easier to acquire than business or real estate income, because it’s more liquid and offers lower points of entry with less initial capital commitment. For example, in order to produce real estate income, you generally have to find a property to buy, apply & qualify for a loan, maintain insurance, attract tenants, and physically maintain the property. With investment income, it’s often as simple as opening an investment account online and starting to buy  investments that pay dividends.

The difficult part, however, is choosing the right investments. For this reason, many people work with a professional wealth manager to help buy & prudently manage an investment portfolio. 

Buying publicly held stocks is also an excellent way to begin learning more about financial investments, as the prices per share can range anywhere from under a dollar to a few hundred dollars. Others, like Amazon, can cost a few thousand dollars per share. Either way, sometimes the best way to learn is by simply jumping in head first. And while it’s generally okay to begin learning by picking a few shares of stock in companies you particularly like as a consumer, just be sure to consider the diversified approach or to connect with an advisor— particularly as your portfolio begins to grow.

2. Optimize your spending

Each dollar you make should have a specific purpose within an overall budget, such as paying rent, buying necessities like groceries, or being reserved for savings or investments.

Here are a few tips on how to establish a budget, optimize spending and establish a habit for saving and investing:

Create a spending plan. Creating a spending plan will empower you to decide where your money should actually go. After all, nothing feels worse than working hard day after day, only to be left wondering where all of your paycheck went by the end of the month.

While it can be intimidating to create a spending plan from scratch, it feels incredibly satisfying and empowering once you’ve done it. If you need some help getting started, check out helpful resources like Finwell’s Smart Spending Plan template.

Pay yourself first. Once you’ve listed every necessary and non-discretionary expense, decide on a set percentage of remaining income to allocate toward investing. Make it a goal to choose a slightly uncomfortable amount initially. Even if you need to adjust that amount down slightly next month, it will give you an encouraging push in determining how much money you can realistically put toward building wealth each month. 

And remember— like most habits, consistency is key. Make use of automated functions like direct deposit or auto invest in order to consistently act upon building wealth over time.

Shop wisely. Use the 24 hour principle.

Remember that childhood rule of only going grocery shopping after dinner, as opposed to when you’re hungry? It’s legit advice and also more applicable to all types of shopping than any of us would like to admit.

In fact, studies show that 84% of all shoppers have made impulse buys. “Sooooo guilty...” said literally (almost) everyone. If you find yourself in this category, consider trying “Finwell's 24 hour rule” of waiting at least 24 hours before making any unplanned purchases. If you still think making the purchase is a good idea after 24 hours, then go for it!

3. The Tried-and-True Tools of Wealth Creation

After you’ve taken the initial steps of maximizing your income and optimizing your spending, it’s time to talk about the 6 tools you have at your disposal to create wealth efficiently.

Tool #1: Time. Time is one of the absolute greatest wealth building tools there is, because the sooner you start investing, the longer you have to learn from your mistakes and make better investment decisions later on. By investing early in life, one develops a healthy pattern of financial discipline and independence. Not to mention, the more time one has to invest, the greater the opportunity to compound increased returns based on the time value of money.

Just keep in mind that “it’s also about time in the market, and not timing the market”, advises Will Ashburn, Head of Financial Wellness & Lead Financial Planner at Finwell.

Tool #2: Stocks. Sure, it’s never been simpler to open an investment account than it is today, but building an optimal portfolio isn’t as easy. If you plan to manage your own portfolio, be prepared to put in the time to research, select, and monitor the investments in your account. Millions of Americans work with a professional wealth manager to help research, select investments, monitor rebalancing of their stock portfolios, and to give them prudent financial advice along the way. Remember that your wealth building portfolio is for the long term, so the less you react to the short term volatility of the market, the better.

Tool #3: Real Estate. Given the potential for a steady stream of income and relatively stable growth, real estate is a very popular way to build wealth over time. The idea of building a real estate portfolio beyond your primary home is intimidating, but for those investors who slowly acquire additional real estate one property at a time, the amount of income and return on equity due to the appreciation of fair market value over time can have a significant impact throughout their life and any heirs and beneficiaries if passed on to the next generation.

Tool #4: Education. Even if you already have a college degree, keep investing in your education throughout your life. Despite its importance, financial literacy in particular is something most schools don’t properly cover. And when it comes to your wealth, instilling sound financial education is also one of the most reliable ways to help you build and preserve it for the next generation.

Americans in particular don’t often think of education as wealth, but it’s actually one of the most direct impacts on the level of financial success and opportunity passed on to heirs and the next generation. In fact, a recent 2021 Estate & Inheritance Study by Atticus and found that the typical family with college-degree level parents has about 1.7x times the wealth of families with no college-level parent. That being said, a child’s own education is an even stronger predictor of wealth than the education of their parents or childhood household.

So whether it’s picking up that next degree, or simply carving out time to master a new hobby or skill (like investing)... the resounding advice is to— Never. Stop. Learning. 

Tool #5: Your Business. Have you had an idea for a business but you haven’t taken any steps to get it started? Or perhaps you’re actively engaging in offering a hobby or service to friends or family but haven’t taken that leap of faith?

Either way, we encourage you to keep moving the idea forwards by taking the next step. Some helpful steps for getting started include:

  • Put a name on your “dream” business idea
  • Ask prospective customers if this is a product or service they would seek out or pay for? Is there an amount or price they would gladly pay in exchange?
  • Register a web domain and create an initial landing webpage
  • Write (and practice) a 30 second elevator pitch explaining your business idea
  • Talk to a mentor about your idea to get a better sense of what it would require to start or operate the business. Ask for help and accountability in moving the idea forwards.
    And if necessary, look around for angel investors who can help you get started or consider making a pitch video for any of the major crowdfunding platforms

Tool #6: Expert Advice. Building wealth involves a lot of discipline and also some level of comfort in taking risks. This means it can often be really difficult to separate sound objective decisions from bad subjective feelings, which is why having a trusted advisor to consult when you’re making decisions about your wealth goes a really long way. Studies show that “Advisor Alpha” can even translate into earning up to 3% better investment growth every year

That being said, keep in mind that not all financial advisors are registered fiduciaries or are required by law to act in your best interest. Like most things, consider seeking out advice from accredited, qualified advisors who hold designations such as the CFP® credential, or who at minimum hold themselves to a fiduciary standard.

And just remember— a dream without a plan is... well, just a wish

Wherever you are in your generational wealth journey, you will need a well thought through plan to actually make it happen. Whether you’re feeling overwhelmed with where to start or unsure of how to improve upon a plan that’s already in motion, Finwell’s expert team of CFP’s would love to hear more and help you determine what should come next in reaching your financial dreams.

Finwell’s team of Certified Financial Planners has partnered with Atticus to help power financial legacy for all families. Finwell is an affiliate partner of Atticus. Learn more or schedule a free appointment with a Finwell CFP® today by mentioning the promo: AtticusFam.

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