The first step toward any building wealth for the next generation of your family is having disposable income. The more income you have, the faster you can reach this goals. When written out like this, it seems rather simple and obvious, doesn’t it?
I don’t mean to oversimplify the situation, nor do I mean to sound flip. I recognize that there are a great many jobs out there that pay just enough to let workers make it from one paycheque to the next. Workers don’t have the extra money from which to acquire disposable income. Guess what? Your employer doesn’t care. As callous as it sounds, your paycheque is an expense that your employer wants to minimize in order to maximize profit. It’s not personal – it’s business.
It’s your responsibility to figure out how to acquire the disposable income that you need to create intergenerational wealth for your family. Does that mean a second or third job? Would getting a roommate be the smart move? Do you need to upgrade your education to access better employment opportunities? Is there debt in your life that needs to be paid once and for all?
You know the details of your life, so you’re the only one who can answer these questions. Regardless of what you determine, you’ll still need some disposable income in order to achieve your financial goals. Living from one paycheque to the next will not give you the cash that you need to do anything other than think about the next payday.
The first people to teach me about creating a pool of disposable income were my parents. They were big believers in education. It was always preached to us kids that we would go to school and obtain a profession. Money from all baby bonus cheques – now the Child Tax Benefit – was set aside in our bank accounts until the fall, when it was invested in Canada Savings Bonds. The decision of my parents to invest in CSBs paid for a cumulative total of 14 years of post-secondary education for my sibling and I. Not too shabby for people who didn’t attend university themselves!
Getting a good education led to a well-paid career and that comfortable paycheque meant that I could accumulate disposable income. Post-university employment paid so much better than the jobs that I’d held as a cashier, caterer, and bank teller while going to school. I had relatively little debt when I finished school – roughly $15K – so I was able to pay it off quickly. Once that was finished, I had more disposable income because I didn’t have to make student loan payments anymore. When my car loan was gone, the same thing happened – my disposable income shot up. And when the granddaddy of debts was finally eliminated, my former mortgage payments exponentially boosted the amount of disposable income available to me every two weeks.
The first step was accomplished – I had disposable income to invest!
So what was the next step?
Great question! For me, the next step was deciding that I wasn’t going to waste my disposable income on stupid stuff. I chose to pay attention to the people who I wanted to emulate financially. I saw that people who had money were using it to help their children get established in their adult lives. At the time, I didn’t have the right terminology to describe my observations. Thankfully, my lexicon has since come a long way.
Initially, I looked around at my friends, who were all starting their families & paying down mortgages. We were earning similar amounts but their priorities meant that their spending patterns were extremely different than mine. Once debt-free, my financial circumstances aligned far more closely with those of my parents’ friends and those of my friends’ parents.
Although I didn’t know the term at the time, I observed many, many examples of intergenerational wealth in action. I realized that some of my friends had parents who had assisted them with major home renovations or down payments. At least one of my friends had her student loans paid off by her parents. Three of my cousins were lucky enough to have each received $10,000 from their parents as down payments on their first homes. And I also noted that my parents’ friends were assisting their kids in similar ways, by loaning them down payments to buy businesses or their first homes.
These were gifts that went beyond the tradition of paying for a wedding. The parents whom I was observing were using their wealth to improve their children’s lives.
Parents have always tried to assist their children, but my parents had never benefitted from such monetary transfers. My four grandparents had produced 21 children between them. Understandably, neither set was really in a position to gift each of their children down payments, pay their students loans, or loan them money to buy established businesses. My grandparents lived from one paycheque to the next. Their children – my parents, aunts, and uncles – were on their own to figure out financial stuff once they left the nest.
So what are my friends doing now? Many of them have kids entering or firmly ensconced in adolescence, so I’ve had a bit of time to see what kind of choices they’ve made as parents. Most of my friends have a Registered Education Savings Plan (RESP) for their children. Some of my friends have businesses that can be passed down to their children. Others of my friends have invested in rental properties. By the time their kids are grown, the mortgages will be paid and the properties can become cash-cows for the kids. Alternatively, the properties can be sold and the money invested elsewhere.
What I’m observing is that nearly all of my friends are taking “the next step” by using their disposable income to create intergenerational wealth. Very few of my friends are living from one paycheque to the next. While they all complain about the cost of their children’s various activities, not a single one of them is at risk of losing their house or unable to buy groceries for their families. All of my friends are able to meet the necessities for their families, and there is still money leftover for children’s extracurriculars, summer camps, tutoring, etc…
That “leftover money” is the disposable income that my friends have. Once their children are adults, I’m certain that my friends will use their disposable income to assist their children financially. My friends will help with down payments on first homes and businesses. They will pay for schooling, and they will set up RESPs for their grandchildren. My friends’ children will benefit from intergenerational transfers of wealth.
You don’t need to be in a couple nor do you need to be a parent in order to create intergenerational wealth. Two people near and dear to my heart are women have never married, nor are they mothers. However, they are aunties to some pretty spectacular kids. These two women have built wealth for themselves, and will presumably leave their estates to their nieces and nephews. These are smart women who understand the power of investing. They appreciate that the seeds they planted yesterday – via very smart real estate decisions – will bear fruit for the next generation.
What are you doing today to create intergenerational wealth in your family?