For the past year or so, I’ve been fascinated by all the examples I see of intergenerational wealth. I like to think that it’s because my assessment of the FIRE movement and personal finance has become more nuanced. I’m always curious about and very intrigued by how people get the money for their first investment. When I listen to podcasts devoted to personal finance and FIRE, I’m constantly thinking about the power of intergenerational wealth. I want to know how many people honestly and truly do it all by themselves.
Lately, I’ve been listening to podcasts from www.biggerpockets.com, which is a US-based website. I have learned a lot about real estate deals from listening to these podcasts! If you’re in any way interested in doing real estate investing, I would suggest that you spend some time listening to this podcast. It’s a great starting point, and you’ll learn what regular people with regular jobs have done to improve their finances through real estate investing. Some of their methods might work for you, or they might not. The salient factor is for you to learn about these methods so that you can figure out whether to pursue them. Once you do, then you decide how to customize your next steps to best suit your own particular circumstances. Knowledge is power, right?
**** To be explicitly clear, I am not endorsing any of the methods suggested on that website. I am not an expert in real estate investing. I am not qualified to tell anyone how to do it. ****
This post is about intergenerational wealth, not real estate investing. So why am I talking about Bigger Pockets?
Intergenerational Loans are a Huge Help
Earlier this week, I listened to an interview with a man who was earning $10,000 per month by age 35 from his real estate investing. Needless to say, I was very interested in what he had to say. I too would like to earn $10,000 per month, even though I am no longer 35!
Without divulging too much, I would like to focus on one particular element of the story. The interviewee had benefitted from intergenerational wealth on atleast two separate occasions as he built his real estate portfolio. He and his wife were able to gather a down payment on their first home, a duplex. However, they needed to borrow $4K from their parents to pay the closing costs. This was the first time that they benefitted from intergenerational wealth since their parents had the $4k to lend them. As a result, the interviewee and his wife were able to significantly lower their living costs and they decided to start buying more properties.
As the podcast episode continued, the interviewee disclosed that he borrowed money from both his father and his father-in-law. They each took out lines of credit on their residential homes and gave him the down payment to buy property. This was the second occasion on which the interviewee benefitted from intergenerational wealth.
Again, it was an “A-ha!” moment for me. This man had access to family members who had assets. His family had been able to lay hands on money, and they willingly helped him to invest in real estate. This is the heart of intergenerational wealth – those in the older generation are able to use their own accumulated money to assist the people in the younger generation to build wealth.
Please don’t misinterpret this post. I don’t begrudge this man for seeking his family’s help, nor do I think it’s unfair that his parents and his in-laws were willing to assist him and his wife. It’s completely natural for parents to want to see their offspring succeed.
Getting A Leg Up
What I find fascinating is the effect that intergenerational wealth has on so many aspects of our lives. Those who don’t have access to this form of wealth face more barriers in acquiring wealth. One of the barriers that I see for those without access to intergenerational wealth is the passage of time. It simply takes longer to build wealth if you don’t have wealthy parents or grandparents because you, as an investor, first have to save the seed money to buy that first investment. No one is around to gift you, or lend you, the money to start investing.
The sooner money is invested, the sooner a person can start building wealth. In other words, those who have access to intergenerational wealth have a leg up on those who don’t. Those with access can invest their money sooner. This means they have more time for their assets to grow and to compound.
If the interviewee’s family had not lent him $4K for the closing costs on his first home, then he wouldn’t have been able to buy it. I’m not saying that he never would have bought a home. I’m just saying that it would have taken him longer to buy one; he would have had to save up the money for closing costs to complete the purchase of another house. The same goes for his first real estate investment. Without money from his father and father-in-law, the man would’ve had to wait until he had sufficient seed money – whether equity in his first home or savings in the bank – to buy his investment property.
The Confidence of a Cushion
The second barrier to acquiring wealth is the natural hesitation that can arise when assessing risks without a cash cushion. When you know that your family has the ability to financially assist you if the need arises, you have the confidence to take more and/or bigger risks with your investing dollars. The confidence rests on knowing that you won’t lose everything, that you won’t have to start from scratch all over again. If your family can help you to recover, you’re more inclined to try in the first place.
For those without a financially-flush family, the consequences of making a poor investment decision include the very real and very significant risk of losing everything. There’s no one to bail you out so you might not make the same kinds of investments, or you may hesitate a bit longer before making a decision. The price of a failed investment is costlier when you don’t have the option of accessing intergenerational wealth should things not go as planned.
Do not misunderstand me. No investment is without risk, regardless of your access to intergenerational wealth. I’m simply stating that the downsides of the risks are more acute, and possibly more detrimental, when you do not have access to family money should your investments fail.
A Lack of Intergenerational Wealth is a Hindrance, not Brick Wall
I want to be very, very clear on this point. A person can still acquire assets and build wealth for herself without the benefit of intergenerational wealth. It will probably take a bit longer, or it might involve thinking outside the box.
To its credit, the Bigger Pockets podcast also features people who haven’t been able to turn to family for financial help. I particularly like the episode about the 23-year old single mother who has created a steady cash flow from her real estate portfolio. Though very young when she started, this woman learned how to buy, renovate, and refinance her properties. She has created a financially secure life that for herself and her children. In turn, she is pursuing a path that will allow her to provide intergenerational wealth to her children when they need it.
The longer I think on this topic, the more I appreciate the power of intergenerational wealth. Money creates the opportunity to build wealth. If it is not squandered, then wealth can be transferred from one generation to the next. The wealth, if not lost, can create a self-perpetuating cycle that ensures the financial security of successive generations. Each generation can reap the rewards which come from financial stability and good investment opportunities.
There are few among us Singletons who don’t have a connection to the next generation in some form or another. Even if you don’t have your own children, perhaps there’s a young person in your family who you would like to help at some point. If so, build your own wealth and you’ll be able to offer intergenerational wealth when the time comes. Perhaps you have a niece who wants to go to med school, or a nephew who wants to start a business. Maybe you just want to start some sort of scholarship for students you’ve not yet met.
Whatever your goals are, I encourage you to build your wealth now. One day, you’ll be the one who has the power to transfer it to the ones coming up behind you. You have the power to create intergenerational wealth for the next generation.