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Build Generational Wealth
American Middle Class

You Can’t Build Generational Wealth If You Are Broke

The estimated reading time for this post is 446 seconds

You can’t build generational wealth if you are broke.   It’s great that people from all socio-economic classes are talking about building generational wealth.  However, the term “generational wealth” has been overused, and too few individuals understand what it takes to build it. 

What Is Wealth and How to Build It?

For wealth to be generational, you need to have it first. Frankly, too many of you don’t have it.  The average American is saddled with both mortgage and consumer debts and has no emergency fund.

The average household’s cash outflows exceed its cash inflow in most months, not including savings and investing. A regular paycheck, royalties, or any other cash inflow should go towards spending, investing, and savings.

Wealth is built when at least 5 to 10 percent of income goes towards investing and savings, preferably more.  Unfortunately, most households are in the red zone every month.  

According to a new survey from Bankrate,  61% of Americans could not pay for a $1,000 emergency expense.  The average credit card is nearly $8,000, and a vast majority of people are paying more than 28% of their gross income in monthly mortgage payments.  When debt is normalized, wealth cannot be built.  Your journey to building wealth starts with paying off debts and reducing financing costs.

Building wealth needs to be the buzzword. Once you accumulate significant income-producing assets and build sizable wealth to pass to your family, you can start talking about generational wealth–the chicken before the egg type of thing.

Build Wealth

Whether you are a W-2 employee, a retiree, or self-employed, you can start building wealth today.  The first step is to categorize investing or savings or both as expenditures.  

In his excellent book, the Automatic Millionaire, David Bach talks about paying yourself first.  Suppose you are a w-2 employee and your employer has a qualified retirement plan with a matching contribution. In that case, you have to pay yourself first because your employer might match 100% of your contributions up to a certain percentage of your income.

Building wealth is about paying yourself first and seeing savings and investing as regular expenses like your mortgage, credit card payments, and others.

Usually, people work on their budget by analyzing cash inflows and expenditures, then save or invest the residual income.  Your mindset needs to be different to build wealth.

Your Cash Flow Statement should look like this:  Cash inflows minus spending minus investing minus savings=$0.  

Investing and savings have to be part of your budgeting.  You need to figure out ways to cut on spending if you have minimal or no money left to invest or save after paying all your bills.

Don’t buy into the belief that you won’t become rich working for somebody else, or a job stands for “ just over broke.” You can start building wealth wherever you are in life by allocating a more significant percentage of your cash inflows to investing and savings.

Income-producing Assets:

  • Entrepreneurship

Too many times, I hear aspiring entrepreneurs said that they want to start a business because they want to build generational wealth.  Entrepreneurship is one sure way to become rich. 

However, if you put the chicken before the egg, you will never be successful in business.  When you start a business, the goal needs to be creating a product or providing a service that solves a problem and has tremendous growth potential.

If you meet the criteria mentioned above, you can yield significant profits, which you can invest in more income-producing assets that you can pass to your family.

Startups often have a hard time raising capital, predominantly African-American startups. Categorizing your investment and savings as expenditures will free up cash from your 9-to-5 earnings for you to invest in your new business.

Here’s How You Get Started with Your Business

Don’t waste your time telling your grandpa and grandma how great your idea is. Execute fast and bring the product or service to the consumers and let them tell you how great your product or service is.

Before you go and get a limited liability company (LLC) registered, run your idea through the grinder. There are too many LLCs buried in the LLC gravesite.  

Draft a lean business plan and conduct a quick SWOT analysis.  A lean business is the best way to get familiarized with your business idea. It answers the main questions for you. Who are your targeted customers and main competitors?  Does the product solve a problem, and does the business have growth potential?

The quick SWOT, less meticulous because you don’t want to paralyze by the analysis, lets you identify the strength, the weaknesses, opportunity, and the threat in the industry.

Between the SWOT and the lean business plan, you should have a good idea of whether or not you want to move forward to the execution phase:

    • register & structure your business in YOUR state (LLC)
    • Get an employer identification number (EIN) from the IRS
    • Open a business bank account under the LLC & EIN#
    • Get a DUNS number from Dun & Bradstreet
    • buy a domain name for your website
    • hire a freelancer on Fiverr to design your logo and develop your website
  • Equities and financial assets

Equities and other financial assets are great ways to build wealth, but you must stay away from meme stocks, cryptocurrencies, and other hot alternative investments.  You can open a speculative brokerage account specifically to gamble on those assets, but you need to keep in mind that it’s more than likely that you will not build wealth this way.

Paying yourself first allows you to allocate up to 10% of your earnings to a qualified retirement plan. If your employer matches at least 100% of your contributions up to 5% of your income, you will end up saving 15% of your income yearly. Dividends and portfolio appreciation can also add a few percentage points.  More importantly, both taxes on your contributions and investment gains are deferred until distributed. 

401(k) and 403(b) are the two most popular qualified retirement plans employers offer to their employees. Stocks, exchange-traded funds, and mutual funds are financial assets you can hold inside your qualified retirement plans. 

If you are a business owner, you set up a Simplified Employee Pension or Sep-IRA to take advantage of the same benefits that W-2 employees get from their employer-sponsored qualified retirement plans.

Of course, most people are eligible to contribute to a Roth IRA, which lets you contribute part of your take-home pay and provides tax-free growth and withdrawals.

  • Real Estates

Your primary home needs to be your first real estate purchase.  Your primary home is not an investment; it’s a shelter.  Don’t get caught up in the “should I rent or buy” debate.  It’s pointless because it does not factor in the intrinsic value of homeownership.

You need to figure out the area you want to live in and how much home you can afford.  Once you have 20% or more to put down, go ahead and buy your shelter.

You should postpone buying a home if you cannot afford to put down 20% or more. Otherwise, it’s just too expensive to get into homeownership.

Your primary home is not your ATM.  It doesn’t matter how much it appreciates. You don’t take money out of it in the form of cash refinancing or home equity line of credit (HELOCs) to put in a pool or renovate the kitchen.  Again, it’s your shelter and part of your basic physiological needs, so you have to protect it.

Real estate investment trust (REITs), rental properties, and flipping properties are ways you can invest part of your 9-to-5 earnings into the real estate market to start building serious wealth.

What is Generational Wealth Anyway

New research from  Italian economists Guglielmo Barone and Sauro Mocetti shows that today’s wealthy in Florence, Italy was the same families 700 years ago; that fact is the quintessential definition of generational wealth. 

According to the Federal Reserve data, the median net worth of an American family is $121,700.

The median net worth of an American family is a fraction of what the Uber rich pay financial advisors and attorneys to set up complicated estate planning documents such as GRITs, GRATs, and GRUTs, section 2503(b), and section 2503(c) trusts.

Those sophisticated estate planning documents allow them to facilitate intergenerational mobility for seven centuries.

The bottom Line

It would be best if you focused on cleaning your credit profile, paying off debts, and categorizing investing and savings as expenses, and obtaining enough insurance to safeguard you from financial disaster.

Every month, you can save and invest part of your 9-to-5 cash inflow in income-producing assets, which allow you to build wealth. 

Hopefully, your financial discipline rubs off your family and kids. They choose to invest the wealth you pass to them in more income-producing assets.

You can’t build generational wealth if you are broke, but your heirs can.

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Senior Accounting & Finance Professional|Lifehacker|Amateur Oenophile

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