Wealth Creation - Millionaire on the Prairie

Consistency is One of the Keys

This week, I listened to a story that blew my mind! It was a testament to the power of consistency in investing, through good times and bad. Diane was her name – a lady in her 60s who’d survived divorce from an alcoholic, while raising 4 kids, taking 8 years to get her electrical engineering degree, and starting her professional life at age 42. By the time she’d retired, Diane was worth $5,500,000…. and did I mention that she never earned more than $82,000 per year?

Check out episode 99 on Millionaires Unveiled to hear the rest of her story, a podcast that has recently caught my attention. They focus on interviewing millionaires and the stories are fascinating.

The Financial Independence Retire Early (FIRE) community loves to tell stories about people who figured out who to make a lot of money quickly in order to retire in their 30s and 40s. And to those who can do it, I say “More power to you!”

I would have loved to have retired in my 30s too, but that wasn’t the way that my cookie crumbled. I learned about the FIRE community in my 30s, though the regular channels – Mr. Money Mustache – and went from there. However, no one has been able to teach me how to turn back time so I’ll be retiring in my 50s.

What I loved about Diane’s story is that she had challenges in her life, including cash-flowing college for her children. I mentioned that she had 4 children, but did I tell you that there was a 16-year spread from the oldest to the youngest? Diane was paying for college for 16 years straight and she still wound up debt-free with over $5Million in her kitty.

How in the hell did she do it?

Consistency is the key. Throughout her podcast, Diane emphasized that she and her husband saved atleast 10% of their income throughout their working lives.

Single People, please don’t roll your eyes at this point. Kindly avoid the trap of believing that it’s-easier-if-you’re-married-because-there-are-two-incomes! Diane was very clear that she kept her money separate from her husband’s.

In other words, the money that she has not is solely Diane’s money. Being single is not an impediment to becoming wealthy. It’s possible to become a millionaire even if you don’t become a spouse.

Diane committed to saving 10% of her income from the time she started working in her 20s. At the time of the interview, she was in her 60s. That’s 40 years of investing in the stock market! Diane mentioned that she’s been told to allocate her funds into a 60%-equity & 40%-bond portfolio, but she prefers to keep 70% in equity and 30% in bonds.

That’s two lessons we can take from her story. She chose to save something every payday by living below her means and she invested her savings in the stock market. Time in the stock market helped her investments to grow.

The third lesson from Diane’s story is that you don’t need to make a six-figure income to do what she did. Diane never earned more than $82,000 while she was working. I’ll agree that she earned more than the median income for the average bear, but keep in mind that she was raising children on this income. It’s reasonable to assume that the costs of childrearing ate into whatever was left of her income after she’d set aside her savings.

Creating Wealth for her Family

Diane has also set an example for her children, one that they will hopefully pass down to her grandchildren. Through her actions, Dians has shown her children that consistency is one of the keys to building wealth and that saving money has to happen no matter what. If I understood her correctly, Diane already had children by the time she returned to school at age 34 to study electrical engineering. She worked full-time while studying, and she graduated at age 42. Throughout those 8 years, Diane continued to save and invest from every paycheque like clockwork. At the age of 50, Diane was divorced…and she was worth a cool million dollars. The rest of her money came from the compounding over the next 15 years!

Creating a multi-million dollar nest egg was the first step towards ensuring an intergenerational transfer of wealth within her family. If she chooses, Diane can pay for the post-secondary educations of her grandchildren. By alleviating this financial burden, Diane would effectively be helping two generations of her family. Her children could invest their money towards their financial security and her grandchildren could study and graduate without the burden of student loans. If they are wise, Diane’s children will then use their money to pay for the educations of Diane’s great-grandchildren when the time comes so that the grandchildren can build their wealth.

Do you see how beneficial this cycle of intergenerational wealth can be? Diane’s example of consistently saving and investing for decades is a gift to her children, if they choose to follow it.

Save. Invest. Learn. Repeat.

Just like the rest of us, Diane won’t live forever. It’s time for her to enjoy some of her money while the bulk of it continues to compound and grow. According to the podcast, she is using her money to fulfill her dreams of travelling with her family and creating lasting memories. Good for her!

If you haven’t already started to save and invest, then start today. Open a savings account – set up an automatic transfer so that you save something from each paycheque – invest in the stock market through a broad-based index fund or exchange-traded fund. Live below your means so that you have the money to invest. Save – invest – learn – repeat.

There’s nothing to suggest that Diane had the ability to spend all of her money on her own personal priorities for her whole working life… I’m looking at your Single People Without Children. If you’re a Singleton, then you’re the only person making decisions about where your money should go, which of your dreams to fund, how much you’re willing to invest so that you can create a retirement nest egg for yourself.

Ignore the talking heads in the media. They deliver nothing but a steady stream of hype-and-fear in order to drive ratings. “It’s time to buy! It’s time to sell! It’s time to buy! It’s time to sell!” They have no personal stake in whether you achieve your goals or not, so ignore them.

Saving a little bit of money at a time and investing that money in the stock market will lead to more than a million dollars after a few decades. While your money is working hard for you in the background, you go about the business of living.

Plant Your Money Tree

“Daddy, can I have some money?” asks a 6-year old Blue Lobster.

“Sure – let me go pick it off the Money-Tree,” Daddy replied, in a tone I can now identify as sarcastic.

“Wait! What? There’s something called a Money Tree?” Little Blue Lobster thinks to herself. “I need to get one of those.”

And that, Gentle Readers, is when the wheels started turning…

Every tree starts from a seed. Your money tree is no different. The seed is your first nickel.

I read an interesting article this week about the distinction between “rich” and “wealthy”. Apparently, rich is when your have a high income. You can do what you want so long as the money continues to roll in. Once the money stops, so does the status of being rich. Rich is living a paycheque-to-paycheque lifestyle but the paycheques are simply much bigger. By contrast, wealthy is a status that is independent of income. Wealth is achieved when you have a cash flow sufficient to fund your lifestyle without having to work. You can work if you want to but you have sufficient assets to fund your lifestyle when you’re no longer enchanted with paid employment.

You can’t get wealthy without first having some money. In other words, you’ll need to find a seed in order to plant your money tree.

Step 1 – Get an income

I don’t mean to be an ass but I want to be exceedingly clear. You will need some kind of income in order to acquire the money to be invested at a later step.

How you make this income is entirely your choice. You can work for someone else, or you can be self-employed. It matters not whether you’re chained to a desk, or a digital nomad, or sitting on your couch to earn an income.

All that really matters in this step is that you have found a legal way to acquire money.

Got an income? Great! Now set up at least two bank accounts – a chequing account for your day-to-day living expenses and a savings account for the money that will be poured into your investments. This is the money that is going to feed your money tree for many years to come.

Again, to be perfectly clear: an empty savings account is utterly useless.

Step 2 – Set up an automatic transfer

Your automatic transfer is one of the most important tools in your arsenal if you want to become wealthy. This tool is second only to having an income when it comes to ensuring your money tree thrives.

Ideally, you will set up an automatic transfer to move at least 15% of your income into a savings account.

Is 15% too much right off the hop? Okay – start with less. You know your numbers better than I do. Start small and commit to working your way up to 15% as soon as you possibly can.

Do you want to save more than 15%? Then go for it! Pick whatever amount you want, so long as you won’t be required to use credit to fund the rest of your life.

In my perfect world, I’d already be saving 50% of my income but, alas, I’m not yet able to do so.

Step 3 – Plant your money tree

Learn about the various ways to invest your money.

Your money tree is meant to create cash flow for you. You’re going to be investing for a long time. In the beginning, you feed your money tree and, then later on, your money tree will feed you.

There are so many investments to choose from. I use exchange traded funds and index funds. They’re less expensive than mutual funds and they invest in the same equity markets.

Never invest in anything that you don’t understand. Don’t let anyone talk you into investing your money if you don’t understand the risks and volatility of the proposed investment.

Once you do find an investment that your understand, get your money into it as fast as you can to give your money tree as much time as possible to grow big and strong.

Step 4 – Keep learning about investments

Why are you surprised by this step?

I hate to break it to but your learning doesn’t stop just because you’ve invested some money. You have a responsibility to Tomorrow You to do the best you can to ensure your money tree is properly planted in fertile soil. The better your investments are, the better your money tree will grow.

Twenty years ago, I was huge fan of guaranteed investment certificates (GICs) because they are paying more than 5% interest. Woohoo! Guaranteed money – how could that be a problem?

It was a problem because inflation was more than 5%.

The purchasing power of my money was decreasing every day that my money was locked into my GICs.

As soon as I learned about inflation and purchasing power, I started investing in mutual funds. I knew they were more volatile but I also knew that their higher long-term returns would likely outpace inflation. Mutual funds would protect the purchasing power of my money.

And then I learned about exchange traded funds and index funds. They would deliver the same or better returns than mutual funds. ETFs and index funds would be volatile too, but I already knew that I could live with that. They offered the same benefits as mutual funds but at a fraction of the price.

So I started by investing in dividend exchange traded funds. I love the monthly cash flow. Lately, I’ve made a tweak to my investments in that future contributions will go towards a global equity fund.

If you don’t know where to start, might I suggest Quit Like a Millionaire by Kristy Shen & Bryce Leung and The Simple Path to Wealth by J.L. Collins? (I am not getting paid for endorsing these books.) Both books are easy to read and they lay out the concepts of personal finance in easily-digestible chunks. You won’t go wrong if you follow the path laid out in either of these books.

Step 5 – Grow your money tree.

Here’s where the steak starts to sizzle.

The more money you save to invest, the faster your money tree can grow.

Ignore the talking heads in the media. They don’t know the future – recessions are normal – daily gyrations of the stock market don’t matter very much when you’re investing for decades.

Step 6 – Repeat steps 3-5

Unless you’re ridiculously lucky, it’s going to take a good long while before your money tree is producing enough of a cash flow to fund your life.

Until that day arrives, you owe it to yourself to save a portion of your paycheque for the purpose of investing. You also owe it to yourself to continue learning about the various investment options that are out there.

You can do this, but your money tree won’t plant itself. Instead of waiting for some mythical “right time” to begin, plant your money tree today.

Are the Lessons Still Working?

The older I get, the more I think about the ideas that have guided my life’s decisions up to this point. I ruminate on whether some of the ideas that I’ve held dear for a long time are still good enough to follow, or whether they’ve led me to a place that I’d rather not be. In short, I ask myself if those ideas are helping me or hindering me when it comes to achieving my dreams. One of those lessons that I ponder has to do with investing.

When I was younger, I read Dave Ramsey’s book – The Total Money Makeover. I immediately implemented its principles into my life. This book for put me on a very stable financial path. I was young and inexperienced, so this book helped me immeasurably when I was first getting started. And since I’m older than the Internet, I didn’t have access to the myriad of great blogs and websites that now exist to teach people about money.

Fans of Dave Ramsey will know all about the Baby Steps, which are designed to get you living a life that fulfills your dreams once you’re debt-free. If you’re not familiar with Dave Ramsey, get yourself to a library and borrow his book. You may not agree with him, or you may become a disciple. If you’re uncertain about where to start with your finances, his book is a good place to figure out what your next steps should be.

There is a lot to appreciate about the Baby Steps. I’m firmly in favour of getting out of debt. It’s a fantastic goal for just about everyone. I’ve yet to come across a situation involving revolving credit card debt and then think to myself “Wow! What a brilliant idea to pay 29% interest month after month, year after year! I wish I was doing that with my money!”

Nope! I have never once had that thought. When it comes to getting out of debt, I think Dave’s advice is pretty sound… for the most part.

Never refuse free retirement money

However… I’m not as dedicated to everything that Dave preaches as I used to be. Our beliefs about best practices for your money diverge when it comes to saving for retirement and building wealth. If you read his book, then you’ll know that Dave wants you to stop investing for your retirement until all of your debt except for the mortgage on your home is completely gone.

In my opinion, ceasing retirement contributions is a bad choice for a number of reasons. Firstly, people already have a serious problem with saving for retirement and building wealth. That problem generally takes the form of them not doing it! Secondly, the longer money is invested then the more time the money has to compound and grow in the market. It’s so vitally important to simply start investing so that your money starts to grow as soon as possible!

Thirdly, the debt burden to be paid off could be quite large and it might take several years to eliminate it. That’s several years of missed investing! If you’re an older person who’s suddenly decided that it’s time to clean up your personal finances, then you don’t have the luxury of waiting to invest for your retirement. Finally, if you’re getting any kind of retirement match from your employer, then you’re giving up free money when you stop making contributions to your retirement accounts at work. You should not say “NO!” to free money from your employer!

Why pay more for the same thing?

The second area where I disagree with Dave is in respect of where to invest your money. He is a firm believer in buying mutual funds, preferably ones that invest broadly in the stock market. He urges his followers to invest in mutual funds with long-term track records and which provide 12% return on investment. Since he’s from the USA, he encourages people to invest in the S&P 500. I have no quarrel with investing in the stock market. I just can’t figure out why he wants people to invest in mutual funds instead of exchange-traded funds.

For the most part, there’s an ETF out there that is equivalent if not identical to whatever mutual fund has caught your eye. Buying an ETF instead of mutual fund is less expensive than buying a mutual fund. This is because ETFs have lower management expense ratios than mutual funds do. If you want to contribute to a mutual fund that invests in the stock market, then find an ETF that invests in the stock market. Compare the two and then buy the one that’s cheaper. You’ll be investing in the same thing, for a much lower price. The difference between the MERs for the two investment products is money that will stay in your pocket.

Imagine your investment as a 2L carton of milk. You can pay $2.49 for the milk, if it has the mutual fund sticker on it. Your other option is to pay $0.75 for the milk, if it has the ETF sticker on it. One carton is vastly cheaper but you’re still buying the same milk. Why would you pay more for the same thing?

Until I hear a persuasive argument from Dave on why he prefers mutual funds over ETFs, I can’t ever see myself agreeing with him on where people should invest their money once they’re out of debt.

Investing 15% isn’t enough when time is short

The third area where I disagree with Dave is with the amount of money that he wants people to invest. Once you’ve reached Baby Step 7, Dave wants you to invest 15% of your income for wealth-building. Presumably, you can spend the rest of it in any way that you choose.

Woah… 15% of your paycheque isn’t a lot of money if you have no other debts. Personally, I think this number should be way higher. I’d like to see debt-free people investing atleast one-third of their take-home pay, and ideally half of it! My reasoning goes back to the fact that money needs lots of time to grow to significant sums.

If you don’t become completely debt-free until you hit your mid-50s, then you won’t have enough time to build a super-sized cash cushion. Maybe you’ve got a pension so you don’t have as much interest in building your own pot of gold. If you don’t have a pension, then you’re going to need to fatten both your RRSP and your TFSA as fast as you possibly can so that they can get you through your second childhood.

I think saving 15% is a good enough amount if you start in your 20s. This is because young people who aim to retire at 65 have 40 or more years to invest 15% of their income and watch it grow. However, if you’re starting in your 40s or 50s, then you need to save a lot more because you don’t have 40 years of growth ahead of you. There’s no guarantee that you won’t be a victim of downsizing or ageism once you hit your 50s. Dave likes to throw around a rate of return of 12% on mutual fund investments. The longer your time horizon, the better your odds of getting such a lofty return on your portfolio. If you’ve got a short time horizon, then the growth of your portfolio is going to have to come from your return AND your savings so make sure that you save more than 15%!!!

There’s no harm in saving more. Please do not misunderstand – I don’t want you to lead a life of deprivation while you build wealth. I’m not advocating that you deny yourself some of life’s luxuries in order to build mounds of wealth. Sacrificing all the things that bring you happiness and joy alone your journey simply to save for retirement isn’t a good way to live the only life you’ve got.

I just want you to consider saving more than 15% of your income.

If you have no debt and no mortgage, do you really need to spend 85% of your paycheque? Could you not stumble along on two-thirds of it and still do/acquire/experience most of the things on your want-list?

Money Mistake #2 – My Mortgage

Looking back, I’m certain that I made a money mistake when I chose to pay off my mortgage instead of focusing on investing.

At the time, I was in my 30s and my mortgage was less than $100,000. I had bought my first home when I was 28 years old. I had a 25-year amortization and my bi-weekly payments were $750, if memory serves. That amount was probably $450 more than I was required to pay since I had routinely increased my mortgage payment by the maximum allowable percentage each year. I was able to handle the costs of running my home, and my budget fortuitously still contained a significant bit of disposable income.

Hindsight is 20/20

I wish I had known then what I know now. Had I become wiser sooner, I would have invested that extra $450 bi-weekly into the stock market. Hindsight is always 20/20, right?

So how do I explain my choice? A good deal of my reasoning at the time was founded on fear. I’m a Singleton. That means I don’t have a second income coming into my household. I knew that if something were to go catastrophically wrong, then I would lose my home. My family’s not wealthy. They would have done what they could, but I would have most likely lost my home eventually. Having a paid-off home seemed to be the smartest move for me.

I was also a huge fan of Dave Ramsey’s book – The Total Money Makeover. I read that book diligently and wholeheartedly subscribed to his teachings of becoming debt-free as soon as possible. After adopting his teaching, I put it into practice and attacked my mortgage with a vengeance.

With the benefit of time, I’m wondering if I didn’t make another money mistake. My goal had been to retire at age 50, not a particularly young age in the world of F.I.R.E. but certainly younger than the traditional age of 65. I’ve crunched the numbers and I won’t be able to hit my target without a large lottery win, or without developing a taste for cat food. I don’t want to retire simply to stay in my house due to financial constraints.

What could have been

If I’d known then what I know now, I would have stuck to my minimum required mortgage payments. Doing so would have allowed me to invest all that extra money into the stock market. Obviously, I would have taken part in the roller-coaster ride of the 2001 crash. And I would have gone through the other one that we had in 2008. Yet, I would have been be sitting quite pretty by now. My investment portfolio would be much fatter even though I would still have my mortgage.

I should not fault myself for not knowing everything about money in my thirties. Blogs were just beginning to take off. Unlike today, the Internet wasn’t a ready source of debates about the benefits of paying off a mortgage versus investing for the future. I picked a path, believing that I could do just as well if I started investing in my mid-30s. I wanted the security of a mortgage-free home before directing my funds towards my investment portfolio. It seems kind of weird to write that down. Today, I realize that if I had invested first, my portfolio would be throwing off enough income to pay my mortgage.

Take it for what it’s worth

What worked for me won’t necessarily work for you.

Today, 5-year mortgage rates are less than 3.5%. When I took out my first mortgage, I was overjoyed to have a 5-year rate of 6.5%. Today, my first condo would sell for approximately $240,000. I’m the first to admit that my condo wasn’t anything special even though I fell in love with it on sight. (That’s another money mistake that I made!) When I bought that condo, I paid $74,000.

My advice to other Singletons with a mortgage is to crunch your own numbers very carefully.

Like I’ve written elsewhere on this blog, you’re the one who is responsible for your income security in old age. You’ll need a place to live and your goal should be mortgage freedom before retirement. At the same time, you need to invest your money for growth so that you have a nice, fat investment portfolio to get you through the thirsty underwear years.

Even though I now believe that everyone should be investing for long-term growth while paying off their mortgage, you know the particulars of your circumstances better than I do. As such, you are the person best situated to make the choice that you think is best.

My money mistake was a doozy, but I’ll still be okay. I’ve got a mortgage-free home and a solid portfolio. I would have had more if I’d known better, but I still have plenty so I can’t complain too loudly. Life presented me with a choice between two sacks of gold. I chose one over the other, but I still wound up with a sack of gold.

Coasting to Financial Independence

How many of you have heard of coasting to financial independence once you’ve hit a pre-determined target for your investment portfolio?

It’s a concept known as Coast FI. I first learned about it in a post from Military Dollar. Essentially, Coast FI means that you can stop contributing money toward your goal of financial independence once you’ve accumulated a certain amount of money in your investment portfolio, i.e. your Coast FI amount. Your Coast FI amount will increase via compounding returns until it’s the amount of money needed to sustain your life’s expenses without you having to earn an income. Once you’ve obtained the prescribed amount of money, then you need not ever add another penny to your investment portfolio because compounding will do the work of growing it to the right amount of money to cover for your future spending needs. Keep in mind that if your spending needs increase, then your required Coast FI amount will also increase proportionally.

I was most intruiged! Coast FI is a great idea and I admire those who have faith that they will get the annual returns that they need to make this work. Obviously, higher annual returns mean that you’ll need a lower amount in your investment portfolio. The opposite is also true – if the anticipated annual returns are going to be lower, then you’ll need a higher initial amount in your investment portfolio before you can start coasting. The real trick, of course, is reliably predicting what your future returns will be in order to accurately determine your personalized Coast FI number.

Based on the Rule of 72, you can figure out when your money will double by dividing 72 by the your investment return. For example, if you earn a 9% annualized return, then your money will double every 8 years. If you earn a 10% return, then your money will double every 7.2 years. If you earn a 3% return, then your money will double every 24 years.

The other neat thing I like about this concept is that once you’ve saved your Coast FI number in your investment account, then you can stop contributing to your investments because compounding will take over and you’ll reach your financial independence number without adding another nickel!!! This is where faith comes in. There are people out there who will stop contributing to their investment portfolio once they’ve hit their Coast FI number. They will trust in the long-term returns of the stock market to deliver unto them the money that they will need in order to retire when they want.

For the record, I’m not a person who would stop making contributions without a signed guarantee from God that I’d have enough money in place to stop working. Others may feel differently. I have a feeling that I’ll keep adding to my investment portfolio forever. My reasons are as follows:

One – I actually feel better when I set aside a little bit of money. Psychologically, I know that I’m saving for a rainy day. I get great comfort knowing that there’s a little pot of money set aside in case I need it. Saving money also makes me feel responsible and in control of my destiny. It’s my way of telling myself that I’m doing the right thing with my money. I’ve been a saver since I was a little girl and I’ve lived by the spend some, save some philosophy for my entire life so I doubt that this aspect of my personality is going to change just because I’ve reached the point of Coast FI.

Two – Saving a portion of my paycheque helps me with budgeting. For the past 18 years, I’ve been using percentages to divvy up my money. Right now, 40% of my net income goes to investing. There may come a time when I drop that allocation down to 25% but that’s pretty far away. If I were to start adding more fixed expenses to my budget now, then I’d have to figure out where to cut them later just in case I wasn’t getting the annualized returns that I would need for the Coast FI method to work for me. So instead of having 15% more expenses, I simply invest that money and live on whatever’s leftover. So far, this method has worked beautifully for me.

Three – Even if I do get the returns that I need to coast to financial independence, adding extra money to my investment account would mean that I could retire from work even sooner! Pretend for a moment that relying on Coast FI means I can retire at 56. If I keep adding to my investment account in addition to relying on Coast FI then I’m creating the option to possibly retire even sooner at 52 or 53. Nothing wrong with that!

Finally, when it comes to money, I’ve always believed that it’s better to have it and not need it than to need it and not have it. In the unlikely event that I wind up with “too much money” – a concept I find as foreign as the idea of “leftover wine” – I will have done myself a huge favour by creating a financial cushion that weathered the storms of my life. Whatever money remains after I’ve departed this mortal coil will be used to better the lives of my beneficiaries. Make no mistake – I am not depriving myself during my lifetime and I’m going to continue doing the things that I want to do. The reality is that my wants are few: time with family and friends, travel to new places, money for dining out, theatre and concert tickets, renovations to my home. My income is sufficient to satisfy these desires and I see no reason to find new ways to spend my money simply because I have it. I’ve found that delicate financial balance between living for today and saving for tomorrow. Coast FI is simply another layer of icing on my already super-delicious cake!

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?