Building generational wealth has become my reason for working towards financial independence (FI). I’ve written about discovering the journey to financial independence and how it was lifechanging. It changed how I spent, saved, and invested my dollars. Having a clear goal of financial freedom gave me and my husband a reason to change how we managed our finances.
At the start of my FIRE (Financial Independence Retire Early) journey, I was invigorated by learning about compound interest, wealth accumulation, passive income, and investing. Learning how to grow my money energized me. But after the sexiness of early retirement and leaving the traditional workplace earlier than most wore off, I began to feel a pull to plan for something bigger. I was uncovering a deeper reason for reaching financial independence.
Over the months, as I increased the contributions to my savings and retirement accounts, I knew that I was on my way to reaching a goal of the first million dollars. Even if there were detours along the way on the path to financial independence, I felt confident that I would attain it.
However, was that it? Was reaching financial independence for the Millers the entire goal? I never thought that I could or would ever be a member of the Two-Comma Club. It was now achievable, but what did it really mean to be “wealthy.”
The question now, was building generational wealth possible through the strategies of the FIRE movement?
The purpose of financial freedom is not simply to accumulate wealth, it gives me control of my time. I wanted to travel more, spend more time with family and friends. The desire to make a financial difference in the lives of my loved ones also got stronger. It wasn’t enough to simply buy gifts on special occasions or treat everyone to dinner or even pay for summer camps for the little ones.
My why of FI has evolved. I want to help the next generation in a meaningful way. Reality set in that achieving financial independence just for myself was not fulfilling.
I had the opportunity to truly change our entire family’s legacy. It was possible to build something bigger and leave something behind. The reason for being on the path to financial independence has evolved into creating generational wealth.
At first glance, reaching a million-dollar net worth would be a victory. Reaching financial independence and making work optional meant success. Some projections showed me that I could reach age 100 and still have money.
Nevertheless, I felt like the FI number goal wasn’t enough. I felt that I had to do better. My goals couldn’t be just about me.
Generational wealth is the passing of wealth from a previous generation to the next. It’s the idea of using your assets in a way that would benefit the next generation. Simply, think of generational wealth as an inheritance.
The term generational wealth is new to me. There wasn’t anyone that I knew of in my family that had inherited anything. Not a house. Not a business. And no trust fund.
As a woman of color, my story isn’t unique.
In February 2020, the Brookings Institute released a report about the wealth gap in the United States. The net worth of a typical white family is nearly ten times greater than that of a Black family and 8 times the median wealth of a Latinx household.
Learning about generational wealth, it became clear that my path to FI/RE could also be a way to set up the next generation for success.
Yes, generational wealth is about passing down money but it’s also sharing institutional knowledge about the systems in place. The wealth gap is also a knowledge gap. It’s not a lack of formal education, but the knowledge you gain from certain life experiences. If you’ve never bought a house, owned a business, or applied for college, it’s information you do not have to pass on.
As a Latina and daughter of an immigrant, there were times when I felt as though I was behind. There were books I had not read and experiences I had not had. As soon as I realized the deficit I tried to learn. I wanted to gain the perspective and knowledge that others around me had.
As a first-generation college student, I struggled to understand what I needed to do in high school to get into college. Everything from registering for the PSAT, SAT, and ACT. I struggled to navigate the world of college scholarships and the application process. While some of my classmates had tutors and Saturday SAT prep courses, I was left simply with an SAT prep book borrowed from the school library.
Honestly, I can’t remember how I paid for college entrance exams or college applications. Did I get a fee waiver? Perhaps. Don’t get me wrong, I began the process of applying for financial aid, also known as the Free Application for Federal Student Aid FAFSA, documents on my own. But at the age of 16, I struggled to understand my parent’s income tax returns and define what assets were to correctly fill out the FAFSA forms. I didn’t know anyone who had attended college.
Purchasing my first home at the age of 27 and navigating the home buying process without the help and knowledge of my family was challenging. I was grateful to have friends and colleagues who helped me along the way, but at the time I couldn’t help but feel like there were lessons to be learned and information to be had. Who would tell me if I was making a mistake? Would I be taken advantage of? Was I overpaying?
I did not understand the true price of getting a college education.
Student loan debt is crippling the financial success for the next generation. I was fortunate that my $20,000 in student loans didn’t leave me in financial ruin. My interest rate was less than 2% and the monthly payments were about $200 a month. This is not the case for most people. My story is far from reality for so many.
I didn’t take out my first student loan until I was a junior in college. I worked at least 30 hours a week while in school which helped me pay for lab fees, books, and whatever tuition wasn’t covered by need-based financial aid. In my junior year, I remember going to the financial aid office and explaining that I wasn’t able to pay for the next semester. I must have filled out an application because the next thing I knew I had $5,000 deposited into my account for the remaining four or five semesters.
By the time I was a senior in college, I was working 8 am to 5 pm and was taking classes in the summer. During the fall and spring semesters, I took classes in the evening and weekends. The limited-time between working, school, and travel time between the two, took a toll on my grades, however, I was able to pay for the bulk of my education out of pocket.
Although I was able to pay for college expenses with the help of financial aid and my job, I received more student loans than I needed. I don’t know for sure how this happened, but I am sure Sallie Mae was happy to loan me money. One of the best things I did was put the disbursed funds that I did not need to pay for school, into a high yield savings account. Later, I used those funds to buy my first home. (You can learn more about my house hacking experience here.)
Student loan debt is one of the most debilitating reasons for growing the wealth gap. The average cost for a college education for baby boomers was $1,031 per year in 1982. For millennials, it’s $9,970 for in-state tuition. The yearly cost of a college degree could easily exceed 45 percent or more for a family of three’s annual income at the poverty level.
Let that sink in. The cost of college tuition is more than 45% of a family’s total income.
The wealth gap is not the same as the income gap. I want to be clear that the focus in this post is not on the income gap. That is an entirely different problem but just as important.
According to the 2018 US Census Data, there were 38.1 million people in poverty. The highest poverty rate by race were Native Americans at 25.4%, Black families at 20.8%, Hispanics at 17.6%, and Whites and Asians were each at 10.1%. The 2018 poverty threshold for a family of four was $25,701.
In 2020, the poverty line for a family of four is $26,000.
With the poverty rate in 2018 at 11.8 percent, this number will be much higher with more than 40 million people unemployed during the current pandemic.
The first time I calculated my net worth I used a free online financial tool by Personal Capital. You can either plug in your numbers manually or link your financial accounts and let the program calculate your net worth for you.
If you prefer to do things with pen and paper, know that your net worth is determined by adding up your debts, also known as your liabilities. Once you have listed the balance of every credit card, student loan, mortgage, car note, and any other debt, it’s time to add up your assets.
Let’s examine what an asset is. An asset is defined as a possession that has value. A wealth-creating asset generally increases in value or provides a return, for example, a savings account, retirement plan, a house, stocks, and bonds. Possessions like your car, clothes, or household items are assets but they don’t earn money and tend not to rise in value.
It’s incredibly hard to build wealth when other people depend on you. In communities of color, it’s not uncommon to support your siblings, parents, and other relatives who are struggling.
When you first calculate your net worth, notice your initial reaction. Remember that your net worth is not defined by your self-worth. Understanding and knowing your net worth gives you a starting point to creating financial goals. Once I understood my net worth, I focused on reducing my debt and building my wealth.
Increasing the balances in your savings accounts is a necessary step. Nevertheless, the key to building wealth is not simply saving, it’s investing. The goal is to get your debt balances as low as possible and steadily increase the value of your assets. Remember, when you lower your debt balances you are increasing your net worth.
Let’s keep it real though, building wealth is incredibly difficult when you are constantly playing catch up. I have often fallen into the error of focusing on debt. But the reality is, most of the people I know who are struggling, don’t have credit cards. There is an income opportunity issue. Some of it is location-based, some of it is because of education. Financial education alone won’t help the income inequalities.
In this report by City Lab, it’s clear that the racial income gap is the main contributing factor to the U.S.’s wealth gap today. Generational wealth, homeownership, and higher education are factors but according to data from the Economic Policy Institute, wages for White workers grew much faster than wages for Black and the Latinx community.
Closing the wage gap can take decades. Knowledge is power and I can use what I’ve learned about wealth building and investing to build wealth for the generation.
Investing is one of the fastest ways to build wealth. Invest often, automatically, and leave your portfolio alone. One of my favorite books on investing was written by JL Collins, titled “A Simple Path to Wealth.” He also has most of the information on his stock series blog posts, but the book is succinct and easier to digest.
My investing strategy is simple. I contribute to tax-advantaged accounts like the 401k, 403b, IRA, or thrift savings plan. The key here is to make sure that every dollar contributed to one of these retirement accounts is invested.
Call your plan provider and ask for a list of funds that you can direct your money to go in. Simplicity is key for me. I like for my retirement accounts to be invested in target-date funds, total stock market index, or an S&P 500 index fund. Find a strategy that works for you.
I like using a simple calculator to determine when I’ll reach certain financial milestones like accumulating the first $1,000,000.
Check out this post on your financial independence number.
What you’ll need to use the calculator:
For example, if you are 28 years old and don’t have any money saved yet, but begin to invest $2,100 a month for the next 22 years, by the time you’re 50 years old you can have a little over $1M.
Why $2,100 a month? The maximum allowable amount you can save in your 401k is $19,500 per year, $1,625 a month. The maximum amount you can save in a Roth IRA is $6,000 per year or $500. If you contribute the maximum to both accounts, it’s about $2,125 a month.
You don’t have to stop there, if you are a high earner you have other options available to you including investing in taxable brokerage accounts. By investing, you put your money to work and make more money in order to increase your wealth. Use the power of time and compound interest in your favor.
Investing in the stock market is just one way of accumulating wealth. Building a business and investing in real estate can also provide ways to build wealth.
The important thing here is not to get overwhelmed. Generational wealth is building wealth that will outlive you so that you can pass it down to the next generation. Focus on your retirement goals and as your income increases, save beyond what will meet your needs.
For communities of color, the intergenerational passing down of wealth is just a fraction of what it is for whites. We must acknowledge that generational wealth has an effect on things like buying a car, paying for education, starting a business, or even purchasing a home.
If you have generational wealth a simple gift of a used car to go to school or as a way to get to work can give you advantages that others don’t have.
My family moved to Florida when I was a junior in high school. My mother worked full time so I didn’t have easy access to transportation. I depended on the school bus to take me to and from school. I missed out on after school programs, extra-curricular activities, and other educational opportunities because I had no way of getting home. But it’s a little more complicated than just a lack of transportation. My mother worked full time.
As the eldest of five children, my mother depended on me to be home when she was working. I had to be home to care and watch over my younger siblings when they got home from school. It was my responsibility to help with homework and cook dinner. My college applications lacked the necessary extras that schools want in a well-rounded college applicant.
It’s important to understand the impact of generational wealth. Understanding how students can start off way behind simply for being born in a certain neighborhood.
I don’t have the perfect solution for solving the wealth divide for everyone. But I have decided that I can do my part by:
Generational wealth can provide a financial cushion at the most expensive times for future generations. Helping the next generation have an even financial playing field, brings me comfort. It gives me the motivation to continue to work on my financial goals.
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Maria @ Handful of Thoughts | 4th Jun 20
Well said Mrs. Miller. You make a great point about how generational wealth provides opportunities- it opens doors that may have previously been closed or undiscovered.
I had never thought about the missing life lessons during certain “milestones” that do or do not occur for people loving in poverty. Post-secondary is such a massive hurdle right now (especially financially) and that can be seriously compounded by income like you have explained. Thank you for shedding light on this. As a high school teacher I am now more aware of gaps in knowledge my students may be facing and I can work to fill these gaps.
Ivana | 7th Jun 20
I agree with your article. FIRE gives you time. Too many of us are in a cycle of work, home, repeat.
The Sunday Best (6/14/2020) - Physician on FIRE | 14th Jun 20
[…] What’s Your Why of FI? The Millers on FIRE are striving for something bigger than themselves. Generational Wealth: My reason for Financial Independence. […]
J | 14th Jun 20
This is a really great post.
I’d not thought so much about generational wealth before. Although it was clearly on my mind, as when reading this I concurred with every point. When did you first decide you’d set up wealth for future generations?
Mrs Miller | 14th Jun 20
Thank you for reading! A couple of Christmases ago I decided that rather than giving my nieces and nephews toys, I’d open up 529 accounts for them. I began contributing not just on Christmas but included birthdays and such. In addition to the college fund, I began to think about what leaving an inheritance for future generations would look like. Could I increase my saving and investing contributions to give each money for a down payment on a house, would it be possible to provide starter funds for entrepreneurial endeavors? Only time will tell, but my focus now isn’t just reaching a magic FI number.
sonu singh | 5th Nov 21
Very practical, relevant and potentially life changing advice.
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