TO THE POINT: According to Pritchett, other than lacking discipline, not addressing the idea of building wealth and just thinking it will build itself is the biggest mistake people make. “Even if you create the wealth, without a plan, it can be challenging to know how to get it to the next generation in a way that allows it to grow,” he said. “You have to ask, ‘How can I protect this wealth even after I am gone?’ Sometimes the answer means trust arrangements might be needed.”
Learn how to create a nest egg that can sustain your family (and future family) long after you’re gone. The phrase generational wealth is thrown around a lot with the consensus being it’s a goal worth pursuing. But aside from the obvious — who doesn’t want to be wealthy? — why is it something we should strive for and what are the practical steps to achieve it and pass it on? We asked local expert Shaw Pritchett, President and Wealth Advisor with Jackson Thornton Asset Management, for his insight.
GEN WEALTH 101
CINC: What is “generational wealth”?
Pritchett: The specifics of the definition vary among individuals, but basically, it’s wealth that someone generates that is expected to last beyond their lifetime. Many probably think it has to be this massive amount, but that varies too, and depends on a lot of factors, like different lifestyles.
CINC: Why should someone work to build it?
Pritchett: Often, the people who deem it important are the first to create it, meaning they didn’t grow up with the benefit of generational wealth. They view it as a way to give family members a leg up, opportunities they may not have had. They know decisions they make today can give future branches of their family tree an advantage. That said, we deal with some people who express reservations about passing on a lot of wealth, probably thinking about the old saying, “The first generation makes it, the second generation maintains it, and the third generation spends it.” These people are concerned about creating an entitled mentality in future family members; they see that as a hindrance that could wipe out wealth’s benefits.
MAKE MORE, SAVE MORE
Saving is essential to creating generational wealth, but the more money you make, the easier it is to put money aside. Consider an additional revenue stream to boost your income. A popular choice is creating a source of passive income, which is money coming in from assets that requires little time or continual effort. One example is buying a house (or houses) to rent. Or add a side gig to your current job.
HOW TO PASS IT ON
Pritchett shared what you can do now to give your family a head start on a brighter future.
- Save Money: Fiscal discipline is what comes to my mind first. You need to make and model choices that are consistent with building wealth, which means not spending money frivolously and being consistent about saving money.
- Have a Plan: Those best at building wealth are also those who know or learn how to boost their savings with tax efficiency. They learn how to reduce their tax drag, how to contribute to charity, and last, but not least, do good estate planning. That’s where the guidance of a professional comes in handy. Not making a plan is the fastest way to let taxes erode the wealth you worked hard to create.
- Invest Wisely: A lot of people are out there looking for the lottery stock, but that’s not a real strategy. We advise our clients to opt for the “get rich slow scheme.” That means regularly making investments based on a plan and not having to dip into those investments because you spent too much or didn’t save enough. The key is letting the stock market work for you over time, not overnight.
- Prioritize Education: Teaching your kids about money is key, and the best way to do that is show them through your fiscal behavior. If you’re buying lavish cars, taking extravagant vacations and not managing debt, you’re setting that expectation, and it’s really hard to teach that away. You should also actively engage them; talk to them about the choices you’re making and why.
- Use Life Insurance: It can play a big role, especially if you leverage its benefit to pay for any estate taxes due. Life insurance payouts are also tax free, making them a useful generational wealth vehicle. There is one problem though: timing. If you live longer, your policy could start to get really expensive, and that can counteract its usefulness. And you can build wealth without relying on life insurance. But again, this widely varies for each individual.
WHY WAIT?
You can start giving the next generation the benefits of the wealth you’re building now by paying for education and career development, helping them buy a house or car and handing down heirlooms, jewelry, and art ahead of them receiving their inheritance.
