5 Things Parents Get Wrong About Building Generational Wealth
Generational wealth is defined as wealth passed down from one generation to another. Generational wealth can take form of investments, real estate, or straight up cash. Because money and wealth hold immense power in this country, it is no surprise that acquiring generational wealth presents itself with a significant advantage in life. However, maintaining this wealth is very difficult. It is estimated that 70% of families lose their wealth by the 2nd generation, where 90% lost it in the third. (1) We may have heard about legacy families like the Vanderbilts or the Kennedy’s, but this sort of decades long wealth if very rare. However, if more parents learned not just how to preserve their wealth but also how to hand down these lessons, we could more easily break the cycle and maintain generational wealth for far longer than 2-3 generations. If you’re looking to build generational wealth, read on to understand the 5 things parents get wrong about building generational wealth.
Mistake #1: Not discussing money with their children
The topic of money for many families is considered taboo. According to a 2017 T. Rowe Price survey, 69% of parents have some reluctance when it comes to talking about money with their children with only 23% of children claiming they are able to talk to their parents frequently about money. (2) Many parents may be reluctant to discuss money because they fear these topics are too beyond their children, they may not understand, or they think it’s just not child appropriate. While we don’t encourage you as a parent to burden your children with your financial problems, openly discussing financial topics can help your children form a stronger grasp on the topic of money early on. Additionally, it may be easier to discuss concepts or values rather than figures. Your children don’t need to know exactly how much you make every month but they could probably learn quite a bit from some simple discussions on budgeting and spending. Our children can’t be expected to maintain wealth if they were never taught how.
Mistake #2: Not investing early or often enough
Many parents become side tracked trying to spend and save for their children instead of savings for their own retirement. For example, many parents prioritize saving for college over their own investment or retirement accounts. While as a parent you may think spending on your children is the better option, there are a number of reasons you should prioritize your own retirement. Without a retirement fund you children may be forced to care for you in your old age, saddling them with a greater burden in the form of both time and money. Your children also have multiple options to help pay for college including scholarships, work studies, and low interest student loans. Your children will also have many years ahead of them to acquire wealth and invest whereas your retirement years are limited. Not prioritizing your investment fund is a big thing parents get wrong about generational wealth, assuming all money should be spent on their children.
Mistake #3: Not investing in the right Assets or accounts
You will never be able to save your way to wealth. Every year the dollar loses more and more value to inflation making not investing a losing game. Saving for an emergency via a high-yield savings account is an important part of smart financial planning but it shouldn’t be the only account you leverage. If you’ve never invested before, consider starting out with something easy and less volatile like an ETF or mutual fund. Financial planners are also another option should you want expert advice. Many employers offer 401ks or IRAs with matching programs which are great ways to invest for retirement. Investing is key to building wealth as it allows your money to outpace inflation and works for you even when you’ve decided to retire.
Mistake #4: Not having an estate plan
Before getting into this mistake, I encourage you to consult with an estate lawyer. Estate planning can vary between states or can have different implications based on your plans so it’s difficult to give specific advice on what to do. However, improper estate planning is a big thing parents get wrong about generational wealth. Having a solid estate plan will allow you to make key decisions such as assigning power of attorney and designating beneficiaries. Having a clear plan ahead of time will make sure your family is taken care of in the event of your passing.
Mistake #5: Not allowing your children to Build financial independence
If your children are too coddled in life they will not develop any drive to work or plan for the future. Providing for your children is a beautiful thing that should be celebrated and enjoyed. However, tackling every barrier for your children will put them in a defenseless position as they never learned to fight for themselves. Encourage your children to work and achieve on their own so no matter where you end up in life, they are financially independent. Encourage them to create their own budgets or try picking up side jobs when they’re old enough. These small exercises or lessons will help strengthen their financial knowledge for the future and help them maintain their wealth.
Successfully building generational wealth starts with two things: 1) Taking care of yourself financially and 2) Educating the next generation. While well-intended, there are a lot of things parents get wrong about building generational wealth. However, many of these mistakes are easily corrected and can help you be well on your way to building generational wealth.
Source:
(1) 70% of Rich Families Lose Their Wealth By the Second Generation. Chris Taylor. June 17, 2015. https://money.com/rich-families-lose-wealth/ (accessed November 25, 2021)
(2) How To Talk to Your Kids About Money. Ramsey Solutions. September 27, 2021. https://www.ramseysolutions.com/relationships/how-to-talk-to-your-kids-about-money (accessed November 25, 2021)