Category: Intergenerational Wealth

Intergenerational Wealth – Start Them Young

Very recently, I learned that dear friends of mine had opened an investment account for their child who had recently turned 18 years old. My reaction was one of happiness because my friends are nurturing the seeds of intergenerational wealth for their family. The intent is to help the offspring build the habit of investing for the future, to have money in place for a down payment in 5-10 years, and to start retirement planning early. Helping their child today improves the odds that their grandchildren will also have a measure of wealth at some point.

Since the child is only 18 years old, a little will go a long way. As a matter of fact, steady contributions of as little as $50 per month can generate a big cash cushion 5 decades from now. Thats assuming the money is left to compound for the long-term goal of retirement. If the money is spent on a down payment, or other life expenses, then obviously the final amount will be smaller. The more withdrawals that are made, the smaller the final amount.

Earlier is better when it comes to investing.

I’ve never accepted the premise that it’s unwise to start saving small amounts in your teens & 20s. While those are supposed to be years of “carefree youth”, my view is that those years should not equate to carelessness with money. The two need not go hand-in-hand. Starting to invest early is rarely a bad idea.

To my way of thinking, the most important thing is to build the habit of saving and investing. I agree that $50 isn’t a life-changing amount of money. However, the contribution amount likely will not stay at $50 forever. At some point, the amount will increase to $75, then $100, then $200, and possibly more. Once it’s invested, the money will be working non-stop in order to maximize compound growth. How is that a bad thing?

Practicing good money habits is a key factor to succeeding with money as an adult. It’s never too early to build good habits in this area of your life.

It’s true that the 20s and 30s are expensive years for many people. Pursuing an education, buying vehicles, starting families, maybe even buying a home – these are all costly endeavours. I’m not here to argue otherwise. That said, the 20s and 30s are also the very best years for starting to invest. Most people have time on their side when they’re this young. Compound interest works best over longer periods of time.

Not the First Step

Allow me to be clear. My friends’ choice to set up their 18-year old with an investment account isn’t the first step in building intergenerational wealth for their family. I would say it’s the second-last step, or maybe the last step in their plan.

The first step was to set a good example of how to live below your means. My friends had certain priorities for their family and those got funded first. Debt did not become a permanent fixture in their lives. Every month, they paid the full balance on their credit card bills. They used the word “No” so that they could stick to their financial plan. Yet they still travelled as a family. My friends’ children all participated in extracurricular activities. The family built many great memories together and with friends, all while attaining their dreams and goals.

My friends’ next step was to start a registered education savings plan when their child was born. The RESP was fully funded every year. They knew that they only had 18 years before the money would be needed to pay for post secondary education costs. As soon as they could, they started saving for those expenses.

The third step was to pay off their mortgage when their child was in junior high. They did it by making extra lump sum payments where they could, maintaining a budget, and employing a little bit of delayed gratification. They worked hard to eliminate their four-figure monthly debt, aka: mortgage payment.

Between what’s in the RESP and their former mortgage payment, my friends’ child will not have to take on student loans to pursue post-secondary education.

Starting adulthood without student loans is a wonderful leg up on the journey to wealth. No student loans and a decent-sized investment account upon graduation from post-secondary education? Now, that’s an even better advantage! One could even call it a super-power… if one were so inclined.

If you’re lucky enough to be able to spare $50 or $100 per month before the major costs of young adulthood land on your shoulders, then take advantage! Start investing small amounts while you save for other goals. I’m not suggesting that you never have fun. Life is meant to be enjoyed at every stage, so enjoy it! However, I’m urging you to also realize that you also need to pay heed to Future You.

My friends’ offspring is being given a golden opportunity! How many of us wish we could’ve started investing sooner? Or had been encouraged to learn about personal finance in high school?

Even if your parents didn’t do this for you, find a way to do it for yourself.

Intergenerational Wealth – Down Payments

Even though I’m not a parent, I find the topic of intergenerational wealth fascinating. It makes perfect sense to me that parents want to help their children succeed. Parents with wealth are able to give their offspring a boost with so many of the costs of starting adulthood. This week though, I was surprised to hear about parents who are starting down payment funds for their newborns.

My first reaction wasn’t that the parents are nuts, nor that they are helicopter parents. I didn’t even think that the parents were trying to deprive their children of the opportunity to achieve something on their own. Instead, my first thought was that it made sense to start saving at birth. Not even 50 years ago, eyebrows went up when learning that non-wealthy parents paid for a child’s post-secondary education. Kids who wanted to study after high school had been expected to pay their own way through school by working summer and part-time jobs. Today, I can’t think of a single parent in my circle who isn’t financing their children’s post-secondary education through RESPs, co-signing loans, or cash-flowing the tuition bills. My parent-friends all realize that their kids cannot earn enough money from summer jobs & part-time employment to pay for undergrad and graduate degrees.

Over time, more and more parents realized just how expensive a post-secondary education would be. They determined that one of the best ways to help their children become successful in life was to pay for their studies beyond high school. No parent has ever paid their child’s tuition because they believed that doing so would somehow hinder or limit their child’s opportunities for a quality life.

So when I hear of parents who want to save for their newborn’s eventually down payment, I’m not at all surprised by the idea. To my mind, it’s the next logical step in helping one’s child become economically established. Houses are incredibly expensive! Back in the day, a person aimed for a mortgage that was no more than 3 times their annual salary. Those days are long past. When house prices are such that a first mortgage can be 8-10X one’s salary, it’s very realistic to think that it may take 25 years to build a down payment.

Parents who can save for their children’s down payments will do so. They realize that if they don’t do this now, then their children might be priced out of the future real estate market later. Of course, if they’re wrong and their children can acquire a home on their own, then so much the better. The money is still available for something else…maybe the foundation of the anticipated grandchildren’s education fund?

The other aspect of parents saving for their offspring’s down payment is that such actions contribute to the very wealth inequality from which the parents are trying to protect their children. Parental financial contributions reinforce the divide between those who have financial resources and those who don’t. In 20-25 years, the children with down payments funded by their own contributions and those of their parents are going to be better positioned to buy a property compared to children who don’t have the benefit of parental money.

Bridget Casey talks about this phenomenon in her article about the Funnel of Privilege. Essentially, the privilege allows young adults to start investing for their future without the burden of debt. By starting down payment funds in their child’s infancy, wealthy parents are positioning their children on the property ladder sooner. Being handed a down payment means that someone need not spend years saving money from their paycheque to simply by the first property. Instead, that same money would be spent building equity sooner rather than later.

Parents help their children. This has been true since the dawn of time, and I expect it will be the governing order of things until the end of days.

I’ve mentioned before that my parents saved all baby bonus cheques and a portion of money from their paycheques so that they could pay for my brother and I to attend university. I have 8 years of post-secondary, while my brother has 9 years under his belt. I will never complain that my parents’ gift has ever diminished my life and I know that I’m far better off than I would have been without my education. My parents did the best they could, but they were nowhere near able to also save for our first down payments. My brother and I had to save for those on our own.

Did my parents help contribute to the increase in wealth inequality by directing their wealth towards ensuring their children graduated university without debt? Or were they simply taking the natural steps to make sure that their children had the best shot possible at having a successful life?

Wealth begets wealth. It is natural for parents to want what is best for their children. Helping a child to achieve a home is simply the next step for parents who have the money to make such a contribution. These are the seeds of intergenerational wealth.

House-Hacking is Worth Considering

House-hacking can be an amazing tool for building wealth.

You know how sometimes you’re on YouTube watching one thing and then a suggestion pops up on the side of the screen? And you decide to hit play instead of scrolling past it? Well, this week held one of those so I indulged my curiosity and hit play on a video that I otherwise never would have found by searching. For one reason or another, I was watching some videos about tiny houses. I started with this one because I wanted to know how anyone could spend $165,000 to build a tiny 300 sqft house.

And that’s how I discovered Robuilt. I promptly watched several more of his videos and I have to admit that a lightbulb went on after watching his video on house-hacking. I loved this particular video because this fellow goes into detail about how he financed his house-hacking project. He’s not shy about sharing how he obtained the money to build a tiny house, to renovate his basement suite, and how much rental income he’s earning from various sources. The only question I would’ve appreciated hearing him answer was how he and his spouse had initially accumulated the down payment for the purchase of their $640,000 home on writer & teacher salaries, but I guess everyone likes to maintain at least some small measure of mystery.

Anyhow, the lightbulb moment for me was when I realized – deep in the marrow of my bones – that it’s sometimes okay to go into debt if you’re borrowing money to buy real estate. I shouldn’t have been so shocked by this revelation. I’ve borrowed money to buy all of my properties. I’m very familiar with the concept of mortgages, how they work, how to repay them, etc…

Living in a Million Dollar House for Free

No. What shook me to the core was the manner in which Mr. & Mrs. Robuilt went from having a $4000/mth mortgage payment to a $0/mth mortgage payment by borrowing money. This video goes into more detail about how exactly they accomplished this feat so I encourage you to watch it.

Okay – so they bought the house and renovated the basement suite within two months. That rental of that suite netted them at least $2K – sometimes $3K – each month.

Blue Lobster, that still leaves at least a $2K/mth mortgage payment.

Yes, Numerate Reader – you’re right. Having the basement suite wasn’t enough.

The Robuilt’s decided to build a tiny house in their backyard. They’d initially budgeted $40,000 but the project ended up costing them $72,000. They didn’t take the money from the equity in their main home. Instead, they went to a private money lender to pay for this project.

Once the tiny home was built, they eventually rented it for $1800 per month. They refinanced the mortgage on their home to get rid of their PMI, bringing their mortgage payment down to $3700/mth… meaning that they were able to live in their home for free. Oh, and the value of their principal residence had gone up to over $1,000,000 because of the tiny home in the backyard.

Damn…

The Key was Getting Financing

Pay attention to the part where they went to a private money lender. (And they also relied on their credit cards, which is a very risky move because of the very high rates on credit cards. I am not recommending that you do this.)

As I watched the video, I could hear the thunderclap inside my head. You need access to money to acquire property, whether your own home or rental properties. The money can come from your own savings, from a family member, from friends, from a sou-sou, from a lifetime of collecting your loose change… it matters not. You need to get your hands on money to fund your real estate purchase.

And if you don’t have cold hard cash of your very own, then you need financing.

The Robuilt videos opened my eyes to the world of private money lenders. I don’t know all the details about how they work. Nor am I familiar with how they structure the lending terms. I don’t even know the rates or how they assess your credit. And to be clear, I don’t know why Robuilt’s didn’t go to a bank to get the money they needed to build their tiny house.

What I do know is that people who are cut off from obtaining financing are essentially cut off from the opportunity to acquire real estate. And if they’re not cut off completely, then their lack of access to money contributes to their delay in wealth-building. Maybe it takes someone an additional 7 years to be in a position to buy real estate. Whether that’s 7 years to save up a sufficient down payment, or 7 years to clean up their credit enough to qualify for a mortgage or a private money loan, it hardly matters. The result is the same – that person is unable to build wealth through real estate for 7 years.

Financing & Intergenerational Wealth

The thunderclap for me was the realization that access to financing is one of the keys to getting ahead when it comes to building wealth. If you buy rental properties, then you earn the equity while your tenants pay down the debt. If you buy your own home, then you still earn the equity while you pay down the debt. In order to earn the equity in the first place, you have to own property.

House-hacking as displayed in the Robuilt videos wouldn’t have been possible in as short a timeline as theirs without access to financing. That access allowed them to start creating wealth for themselves today. They’re also now able to build intergenerational wealth for their daughter.

It should be obvious that a lack of access to financing inhibits the creation of intergenerational wealth. In this blog post, I’ve focused on one couple who have used financing to buy & build real estate. Their reliance on financing allowed them to craft a situation where others pay for their mortgage. This results in their salaries going to other things, like accumulating another down payment to buy more property if they choose.

I’d like to point out financing can also be used to start a business. People who are more sophisticated than I am use it to invest in the stock market. For the record, there are many ways to use financing to build wealth.

People who don’t have access to financing have fewer opportunities to build wealth. It can still be done but it’s harder because those people have to accumulate the same amount of money from their own earnings. Imagine if your credit was so bad that you couldn’t get a mortgage. Or if you were legally prohibited from owning property. The only way for you to buy a property would be to save money from your paycheque then pay cash for a home.

How long would it take you to save enough money from your paycheque to buy a house? Even if you were house-hacking by living with a roommate?

Access to Financing = Access to Opportunity

The person who has to pay cash for a house doesn’t have the same opportunity to build wealth through real estate as the person who can get financing to buy property. I know that it might take the mortgage-holder a lifetime to repay the debt. After all, that’s why 25-year and 30-year mortgages exist, right?

Assuming the mortgage is paid, then the home can be passed down to the next generation. Imagine where would you be financially if you’d inherited a full-paid for home!

The person who can’t get financing for a home – yet miraculously saves enough money to buy one – can also pass their home down to the offspring. The possibility exists in theory only. It’s just such a monumentally harder endeavour to use cash to buy a home that most people never seriously consider doing it this way.

I’ve always believed that debt-free is the ultimate and best status when it comes to personal finance. This week, I’ve had cause to re-assess my position on debt. For whatever reason, these videos about house-hacking were more visceral for me than anything else I’ve read, watched, or heard. The power of financing and its ability to generate intergenerational wealth was put on full display. I have to admit that my eyes were opened to the possibilities in a way that they hadn’t been before.

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Weekly Tip: Borrow books from the library. It’s free and it’s a better use of your time than scrolling a social media site. There are books on anything that you can think of. Borrowing books is free. Libby is a magnificent app that prevents you from ever incurring a late fee because it automatically returns books to the library for you. Feed your brain – read a book.

It Takes Some Time

Near as I can figure, it takes some time to become wealthy. There are those who manage to do it very quickly, and they generally fall into one of these three camps:

  • Being born into wealth.
  • Winning the lottery.
  • Inheriting money from someone else.

And I have to give an honourable mention to those who, every so often, invent something that’s so valuable someone pays lots of money for it. Yet, this isn’t always a “quick” way to make money. Usually, it takes a little while … but the possibility of doing it quickly still remains.

For the rest of us who don’t fall into these categories, building wealth is an activity that doesn’t occur overnight. Even for the adherents of Mr. Money Mustache and other FIRE followers, a commonly touted timeframe for building the kind of wealth that allows for early retirement is anywhere from 5-7 years depending on how much money a person has already accumulated.

If you’re not willing or able to live a very frugal life for 5-7 years, then you’re probably looking at 2-3 decades to acquire sufficient wealth that will allow you to live the way you want without having to earn an income. No matter how you slice it, 20-30 years isn’t a short period of time. Yet it’s definitely a sufficient amount in which to build wealth.

Okay, Blue Lobster… so what?

I’m going to suggest that you figure out what best makes you happy and find a way to do that for money. It seems obvious, but the truth is that most people don’t love what they’re employed to do. They do it for the paycheque. I’m not knocking that path. It’s a valid one if you’re a fan of eating, sleeping indoors, and having some measure of comfort in your life. Working for a living has been a time-tested method for ensuring that you can earn money.

Whether your employment brings you joy or not, I’m going to urge you to have your money do the heavy lifting for you. Every time you get paid, you save a portion of your paycheque and you invest it for the long-term. You’ll re-invest the dividends and the capital gains along the way. In the first 10 years or so, these contributions from your paycheque are going to do the heavy lifting of building your wealth. After that, the dividends & capital gains that your investments generate will exceed the contributions from your paycheque. So long as you don’t interfere with the Money Machine, you’ll be creating a very nice cash flow for your later years.

And just to be blunt – “interfering with the Money Machine” means siphoning off your dividends and capital gains instead of automatically re-investing them. The phrase also covers any interruption in your commitment to send a portion of every single paycheque to your investments. Finally, these words also encompass any strange desire you might have to temporarily halt your investment contributions during times of extreme market volatility. Further, the more you save at the beginning, the faster your wealth pile will grow.

The only catch is that it will take some time before you can stop depending on your paycheque.

Simple? Yes. Easy? No.

Not easy, not at all! It has never been easy to save money consistently over a long period of time. There is always a temptation to spend. Saving money is downright boring compared to vacations, concerts, vehicles, clothes, socializing, hot air balloon rides, jewelry, collectibles, camping, road trips, golfing, theme parks, shoes, massages, new furniture, artwork, streaming services, coffee, etc… Saving money reflects a pessimist’s viewpoint because it means that you don’t trust the universe to provide for you in the future. Saving money is viewed as selfish when someone important needs your income, i.e. someone has to make a rent/mortgage payment, a sibling lost their job, a parent needs a medical device.

Building wealth… it takes some time. In some cases, it takes generations. If you’re the first in your family to graduate and earn a higher than median income, are you going to say no to helping younger siblings on their way through school? Will you turn your back on your parents if they need your help?

It’s easy to encourage people to give up the luxuries, the nice-to-have’s, the fun-stuff in order to build wealth for the future. Lately, however, I’ve started thinking about the harder choices that people face when having to choose between spending now and spending later.

A very simple definition of poverty is that it is the state of lacking of wealth. From my observations, poverty affects entire families, sometimes over generations. Few of us would put saving for retirement or a home ahead of paying for a sibling’s groceries, if push came to shove. For the majority of us, the familial bonds are stronger than the need to save for our futures.

Where families have financial wealth, there is less need for financial interdependency. If each adult child can pay their own way, then they need not look to their parents or siblings for assistance. As a result, all of the adult children and the parents are free to save & invest some of their money for the future. The invested money, aka: wealth, can be left to grow because there are no other immediate demands on it. In addition, the adult children will more than likely inherit some portion of the parents’ money once the parents are gone. The wealth moves from one generation to the next, compounding over time.

The less money a family has, the greater the interdependency among its members. When parents can barely keep the lights on, they will turn to the adult children for assistance. This limits the adult child’s ability to build wealth because the money that goes to helping their parents is money that is not invested for the future. The same principle applies if one adult child makes good money but her siblings don’t. More than likely, she’ll feel obligated to assist her siblings and that means less money is available for investing. This family doesn’t get to benefit from intergenerational wealth because all of its wealth is spent in order to survive from one day to the next.

The money is needed now, which means that its owner doesn’t have the privilege of letting it compound to be used at some point in the distant future.

Realistically speaking, building wealth from a position of poverty creates untenable choices for many. When your family needs financial help to survive, are you obligated to sacrifice your financial health? Does your paycheque belong to you or to your family?

And the answer is…?

I wish I had the answer. I honestly and truly do. One of the saddest observations that I’m seeing as I get older is that wealth is funnelling from the many to the few. More and more people are barely making it from one paycheque to the next, even when they make the so-called right choices about how to spend their money. It’s happening at such a fast pace that I wonder if the trajectory can be changed.

Marketing machines are working non-stop to get people to spend money. Sure, we’re in a pandemic (at the time of this post). However, pandemics do not last forever. The advertising industry will go into overdrive once the pandemic is over in an attempt to get people to open their wallets.

And if the pre-pandemic situation is a good predictor of behaviour, people will spend. It might be slowly at first but then they will gradually “forget” to put money into their emergency funds, to only pay with cash, to decline offers for credit.

I don’t have all the answers. What I have is a theory and it is this.

Once the not-rich are barely making it from one paycheque to the next, they reach for a lifeline to maintain the illusion that they’re living comfortably. For a great many people, appearing poor is just as awful as actually being poor. The anchor-disguised-as-help that is offered to those in this particular situation is called credit. So the paycheque that barely covered the necessities is now most definitely incapable of covering the interest charges on the debt. Remember! Once you’ve used credit, you’ve simultaneously created a debt.

The not-rich person (or family) has taken the first step towards becoming trapped in a cycle of poverty. After all, if one cannot survive before taking on debt, then how is one to use the same insufficient paycheque to pay off that debt?

Then there’s the little pesky, incidental problems such as rents eating 50% or more of a household’s income in some cities. Trust me – the high income household aren’t the ones paying the majority of their income on rent. Another pesky problem is the fact that some mortgage are over 7x the household’s income. Again, households with higher incomes can manage to get mortgages which are less than 3x their income.

So going back to where we started, the steps for building wealth are the same all of us who aren’t born rich, who haven’t inherited money, and who haven’t won the lottery. Earn an income. Save a portion of that income and invest it for long-term growth. Re-invest the dividends and capital gains for many, many years. It will take some time, but these steps will build wealth.

The reality of the situation is that not everyone has the advantage of having financially-secure loved ones. The steps to building wealth are grounded in the assumption that investing for wealth is your highest priority. When there are competing and equally important uses for your money, then the choice to save and invest gets much harder.

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Weekly Tip: Keep your emergency fund separate from your other savings accounts. Segregating your money by its intended use solidifies the line between what can be spent today and what can be spent in a true emergency. Emergency funds nestled in their own dedicated account decreases the likelihood that you’ll somehow spend the money on something that isn’t an emergency.