intergenerational wealth - Millionaire on the Prairie

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.

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.

Getting Ahead vs. Getting By

You have to earn money to even be able to save and invest a portion of it… by MI154 of ESI Money

There’s a silent assumption in the Financial Independence Retire Early world that is, in my opinion, at the root of the derision heaped on this community. And it is this: everyone has a little bit of extra money that can be invested somewhere.

My position is that this assumption is false.

I’ve no doubt that there are those who believe that they can’t live without unlimited data plans, gym memberships, annual vacations, spa weekends, second homes, and cable TV. People get used to their luxuries. They easily conflate their daily, monthly, or even annual wants with basic survival needs. It’s called acclimation.

And why not? Luxuries make life better.

However, there is precious little useful information for those who are already living without any luxuries. This is a fundamental flaw of the FIRE sphere. Many of the most prominent bloggers of the FIRE community are tone-deaf to this reality. They appear to assume that everyone has money that can be diverted towards investing.

This assumption is wrong. There are many people who are barely making it from one paycheque to the next. Almost half of the Canadian population is struggling to pay their costs of living. These people aren’t setting aside money and then not using it because they’d prefer to struggle. They’re using all of the money that they earn to get from one paycheque to the next.

Now, I realize that some of these people will have some flexibility in their budgets once they pay off their debts. Former debt payments can be re-directed towards investing, a la FIRE-philosophy. This is fantastic news!

Yet, I also realize that there are many people who aren’t in debt…and are still living paycheque-to-paycheque. These are the ones who don’t have the money to spare for investing. And for these people, the FIRE-philosophy is as foreign as breathing under water.

Cable and gym memberships were sacrificed years ago.
Vacations are only taken in the imagination.
Wifi hotspots – if one even has a mobile phone – are the only source of connectivity.
Roommates and multiple part-time jobs have been part of the picture for years.
Cooking at home isn’t optional – it’s a requirement to ensure that one eats on a semi-regular basis because outside food is out of reach financially.

There are huge swaths of people who have already cut their budget to the bone. What does the FIRE-philosophy have to offer those who have no money to spare?

You need extra money in order to get ahead. And when you don’t have any extra money, you’re relegated out of necessity to just getting by. The FIRE movement offers little instruction on how to go from one stage to the next beyond the simply admonition to earn more money. Now that I think on it, I’m sure that those in poverty’s grip have never even considered the option of earning more money! <sarcasm off!>

Having access to “extra money” is the foundation of building that cash cushion, creating the army of money soldiers, or planting your money tree. If there’s no extra money to be found, then time and focus must be spent on using the available money to simply survive from one day to the next. Without sufficient money, life’s about figuring out where the next meal will come from and how to handle the inevitable rental increase. Heaven forbid that you should get sick and not be able to work. There’s never been enough money leftover between paycheques to build that vaunted 6-month emergency fund.

I’m not pretending to have an answer to this situation. My goal with this post is simply to remind those who have that there are many, many who have-not. If you’re one of the ones who has the ability to get ahead, be grateful. And appreciate that you might only be one misfortune away from falling down the ladder of financial security.

The paths to FIRE are varied but they all start with having a little bit of extra money. Anyone who argues otherwise is blind to the reality of poverty’s vicious grip.

A Faucet of Income

Even if you’re a Singleton like me, the implications of intergenerational wealth may have touched your life at some point. I like to think of intergenerational wealth as a faucet of income that helps younger generations to start their adult lives without debt. It’s a financial tool that allows young adults to master the skills of successful adulthood without being burdened by the yoke of debt.

In my case, my parents were able to pay for most of my education. They did the same for my brother. And had I not moved out during my second degree, they likely would have paid for all of it. I graduated with $15,000 in student loans and was fortunately able to pay them off within 2 years of graduating.

I’ve mentioned before that my parents weren’t rich, but they were long-term thinkers. My “Baby Bonus” cheques were deposited into the bank to buy Canada Savings Bonds from the time I was born. Interest rates were good – the money grew – my (and my brother’s) university was paid for – hooray! This is but one small example of the power of intergenerational wealth.

The parents in my social circle are using Registered Education Savings Plans (RESPs) to fund the costs of their kids’ educations. I’ve no idea how they invest their money, but I admire their determination to ensure that their kids have access to this form of intergenerational wealth when the time comes.

This week, I was listening to Beardy Brandon of Bigger Pockets on his YouTube channel. (Rest assured that I’m not getting paid for mentioning this website.) If you don’t know who he is, Brandon is a very successful real estate investor who runs a very, very successful blog teaching other people how to be successful real estate investors too. In one particular episode, Brandon mentioned buying properties for his children and having them paid off by the time that his kids started post-secondary school.

Wait! What?

Yes – you read that right. Part of Brandon’s plan to create a faucet of income for his family is to buy his children a property when they’re young, have it paid off by the time they graduate high school, and use the rental income and/or equity to pay for their post-secondary schooling. Along the way, Brandon’s kids will learn the real estate investment business while having some skin in the game.

Plans are the Result of Dreams Mixing with Money

Intergenerational wealth starts with a plan. This is not surprising. Yet, a plan without the money to implement it remains a dream. If Brandon didn’t have money, then he couldn’t have bought homes for his children. If my parents hadn’t had money, then they couldn’t have bought Canada Savings Bonds for their kids’ education. Sam Walton had to have the cash set aside to buy the first store way back in the day, long before the Wal-Mart empire took over the world and ensured that his kids never had to run a cash register for a living.

What I find so incredible about the stories of intergenerational wealth is that the parents (or grandparents) set a living-and-breathing example of delayed gratification for their children. They are long-term thinkers who find ways to use today’s money to fund the dreams of a tomorrow that may be well over a decade away. I always imagine young parents holding their new baby for the first time and thinking “How are we going to pay for med school?”

The decision by an ancestor to keep a little bit back in order to invest it in something profitable changes a family tree. The parent is taking a leap of faith, although hopefully a well-researched one. No one knows what tomorrow will bring and there are no guarantees that the investment will pay off. However, choosing to never invest in anything is guaranteed to bring a return of absolutely nothing.

Start Adult Life Without Debt

If not for my stubborn decision to move out of the house, I could have graduated completely debt free. My parents had created a faucet of income that would’ve allowed me that privilege. Instead, I made a short-term decision and there was a debt to pay.

Now that I’m well into adulthood, I have a better appreciation of how significant a gift it is to start adulthood without debt. I’ve paid off a mortgage, car loans, and student loans during my time. I took out the debt knowing full well that I had an obligation to pay it back – no argument there.

However, that doesn’t stop me from envying Brandon’s children who won’t have to take out a mortgage for a home. If they want to live in the homes that their father has bought them, they can. Should they decide to live in another home and have the first one pay the mortgage on the second home, they can do that too. And if they want to travel the world, their rental income can fund their travels. In short, they don’t have to take on debt because their father has created a faucet of income for them. It’s a plan that’s 15+ years in the making – another example of that long-term thinking that I was mentioning before.

Intergenerational wealth is a way to avoid assuming crippling debt burdens in your 20s. Beneficiaries of such largesse are able to start their adult lives on a firm financial foundation.

For example, take student loans. For some people, they’re a path to a financially secure future. After all, one can’t become a cardiologist without somehow footing the bill for medical school. However, there’s no denying that student loans can also trap people on a hellish repayment treadmill because they borrowed $100,000 for employment that pays $35,000.

It’s astonishing to me that people as young as 18 are allowed to take on huge financial debts, yet they’re not allowed to legally imbibe alcohol in many jurisdictions in North America.

“I’d like to borrow $30,000 per year for a degree, please. I have no idea how much I’ll have to pay back for these student loans once the interest is calculated. I’m not certain whether the salary of my desired career will allow me to pay off these loans while still saving for a home, a family, and a retirement. I also have no idea how to calculate how much my anticipated monthly repayment will be.”

“Sure – not a problem. Just sign here.”

“And I’d like a beer.”

“What the hell is wrong with you?!?!! You’re too young to drink!”

Play the Hand You’re Dealt

When you have access to intergenerational wealth, then debt isn’t such a significant factor in your life. You don’t have to borrow money for your education. You might not have to borrow money for a home! Just imagine how different your life would be if you didn’t have any debts to re-pay.

The reality is that not all of us are born to parents who have the money to buy properties for us. Some of us have parents who have the money but also believe that we should take out loans or find another way to fund our educations without their help. What can I say? You play the hand you’re dealt and you do the best you can.

Singleton or not, you have the power to create a faucet of income for someone else.

Living hand-to-mouth means that there’s no room for savings. This is a tough way to survive since you’re always living on the edge. Your income is barely enough to satisfy your necessities of life. This is a poor foundation from which you can build intergenerational wealth, but I’m not saying it’s impossible to do so.

You might want to think about how you’d like your money to be spent when you don’t need it anymore. Do you have nieces or nephews? Maybe there’s a neighbourhood kid who doesn’t drive you crazy? Perhaps you’ve always wanted to start a scholarship for kids interested in the things that tickle your fancy?

Even if you’re not a parent, you have the ability to create intergenerational wealth for someone in your world.

The Power of Intergenerational Wealth

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.

Disposable Income is the First Step

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?

Debt is Corrosive to the Creation of Intergenerational Wealth

Debt is a cancer to building intergenerational wealth. The phrase intergenerational wealth conjures up images of the very, very rich who are able to bestow entire empires upon their progeny. Truthfully, the concept doesn’t require anything quite that elaborate. My definition of intergenerational wealth is the ability to provide financial assistance to your offspring in order to help them get ahead as adults. It’s above and beyond that level of sustenance that is legally required of parents. Intergenerational wealth is what you use to assist your child in achieving a better life – financial or otherwise – than the one you’ve had. This type of wealth is created when you’ve acquired assets that can be utilized to fund the major purchases of your child’s life when the time comes.

A few weeks back, I read an article about how black women graduate with the highest amount of student loan debt. It got me thinking. How could these women build wealth for their families if they were saddled with big student loans which required years to repay? And what if they also had mortgages, car loans and credit card debt while carrying student loan burdens? How much money would they have to earn to both pay off all debt and save enough to invest in the family’s future? What kind of impact does debt – student loan or otherwise – have on a parent’s ability to build intergenerational wealth?

My ultimate conclusion was that all debt is an inhibitor to the creation and growth of intergenerational wealth, regardless of the demographic group to which the debtor belongs. Debt of any kind impedes the accumulation of wealth because you’re so preoccupied with paying someone else that you rarely get the opportunity to pay yourself first. Obviously, larger amounts of debt have a greater negative impact on the creation of wealth because it takes so much longer to pay it back. At the end of the day, debt is corrosive to the accumulation of wealth.

If you’re making payments on your student loan, your car loan, your credit cards, and your mortgage, then your money is not being put towards your family’s future. Whatever the size of the debt obligations, whether $500 per month or $5000 per month, the fact remains that you’ve committed to giving that amount of money to someone else in order to pay down your outstanding debt. You’ve agreed to give away the money that could have been used to build a foundation of wealth for yourself and your family.

Recently, I read an interview with a millionaire where a cycle of intergenerational wealth was put into place. The millionaire being interviewed was the daughter of parents who had worked very hard at regular jobs, while also running their own side hustles. Her parents had worked very hard to create wealth for their family. They taught their children the same principles, and the millionaire in turn taught those principles to her own two sons, the grandchildren. Over time, this family had created sufficient wealth that offspring who needed a mortgage did not have to go to the bank. Instead, mortgages were issued within the family from one generation to another. When the millionaires’s sons graduated from post-secondary schooling, each of them already had $200,000 in their investment portfolios. Their money had grown from cash gifts bestowed upon them by the grandparents. (Check out ESI Money if you want to read more millionaire interviews.)

Many parents want to pay for their children’s educations. This is a worthy goal and I have no quarrel with it. In today’s world, an education opens doors and provides opportunities that would otherwise not be available. An education is not a guarantee of success, but it is certainly an asset in the pursuit of success. Parents who save for their children’s educations are providing their children with a gift, i.e. starting their adult lives without student loans. They are gifting their children the opportunity to start with a clean slate. Once employed, their children will not be required to send a portion of their paycheques to the student loan people. Instead, if the children are wise, they will start using that portion of their money to invest for the future and to buy cash-flow positive assets…assuming, of course, that the children appreciate the opportunity provided by their parents’ gift of a debt-free post-secondary education.

The children who wisely take advantage of this opportunity are then in a position to do the same for the grandchildren, when they make their appearance. The children will have continued the tradition of ensuring that the next generation begins adulthood without debt. If the children were also fortunate enough to have invested in assets the grew over the years between their graduation and the start of the grandchildren’s post-secondary education, then those invested assets may still be available for the benefit of the grandchildren and the eventual great-grandchildren.

The cycle of passing down intergenerational wealth cannot flourish if the parents or the children are required to send part of their income to creditors, year in and year out. Creating intergenerational wealth begins with the basic principle of paying yourself first. The accumulation of wealth comes from the act of setting money aside from your paycheque and investing it for a positive return. If your money from today’s paycheque is being used to pay for yesterday’s purchases, then you’re impeding your ability to invest money for your future and for your family’s future. In other words, today’s paycheque cannot be used to pay for tomorrow’s needs and opportunities. Once you’ve given your money away to pay off debt, then your money is gone forever and you must find a way to earn more. Money spent on repaying debt can never be used to change your family’s future.

I am not an expert in parenting, but I have observed families in my life who have established a positive cycle of investing in businesses and assets while also saving money for their offspring’s future. These families are ensuring that the financial lessons are passed down so that each successive generation has the money to live a comfortable life and to both grow and preserve their wealth. One of the other things I’ve observed about these families is that they do not have debt.

I’ve watched as the parents gifted down payments for homes to the children. I’ve seen the parents assist the children to buy businesses. I’ve observed the children purchase income-producing rental property where their parents did not have intergenerational wealth to pass down. Where the parents didn’t have money, they had worked in real estate and had advice to give to their children about how to assess investment properties. The children’s rental properties will become part of the intergenerational transfer of wealth to the grandchildren. Personally, my brother and I benefitted from such intergenerational transfers of wealth by having nearly all of our post-secondary education funded by our parents.

Please don’t get me wrong. Receiving a down payment didn’t eliminate the children’s obligation to pay the mortgage. However, the gift of a down payment meant that the children were able to start building equity in their homes sooner than their contemporaries who had to save up a down payment.

Even where the parents assisted a child to buy a business, there was still the need for a commercial business loan from the bank which had to be repaid. The parents’ transfer of wealth assisted the child to take advantage of the opportunity to buy a business that he understood intimately at a time in the child’s life when he did not have the money to buy the business himself. In that situation, the child received another form of intergenerational wealth – his parents worked at his business for free for the first couple of years until he got himself established enough to hire his own staff.

The children whose parents did not provide them with intergenerational transfers of wealth still took it upon themselves to start creating a strong financial foundation for their own future children. They purchased property, lived in it, and then rented it when they moved to the next home. Did they have to use mortgage debt? Yes, of course. Are they using the underlying asset to create positive cashflows in their lives? Yes, they are. The tenants pay the mortgage debt, and the cash flow from the properties is directed towards improving the families’ financial future.

I have also observed other families who seemed destined to live paycheque to paycheque. From what I can see, they make decisions with their money which will always require them to remain in debt servitude. From the outside, it looks like they actually love being in debt to someone. When a car breaks down, a brand-new car with a $700 per month payment is immediately purchased. There is no consideration given to the option of buying an adequate used car that fulfills the same purpose of safely going from point A to point B. Student loan debts are not aggressively paid down as soon as possible due to other priorities. Such loans last for ten or more years after the former student has graduated when sustained monetary effort could have eradicated the debt in three years or less. Mortgages are taken out when there is insufficient household income to handle the monthly payment, the utilities, the taxes and the other associated costs of running a home. Unfortunately, the mortgage-holders do not earn high incomes so they’ve essentially made themselves house-poor. They will be forced to live paycheque-to-paycheque until the mortgage debt is gone or until the bank forecloses on them for non-payment.

These families have purposely created situations for themselves where they are unable to create any wealth to pass on to the next generation. In fact, they cannot even create wealth for their own retirements. They purposely seek debt-burdens rather than debt-freedom, and I haven’t been able to figure out why. At the same time, these families want to live a life that they could actually afford if they didn’t have debt payments. They want the toys and the travel and the comforts that come with debt-free living yet they are not willing to do what needs to be done to rid themselves of debt.

Perhaps the distinction between the two families comes from the debt-free choosing a long-term view while the indebted choose a short-term view? I will continue to think about why some people get it and some people don’t, how some families are able to create a comfortable legacy while others are not. In the end, I guess the reason for the distinction doesn’t matter too, too much. The bottom line is that debt always inhibits the creation and the accumulation of intergenerational wealth. Debt prevents people from saving for their families’ future since it requires people to pay for their past purchases.

Just imagine what you could do for your family if you didn’t have to repay debt. How different would your life be? Is there something that you would be able to give to your children and your grandchildren that you can’t give them right now? How much could you change your family’s future if debt were not a part of your life?