If there’s anything that the last two years have crystalized for us, it’s that money matters. It affords us health, stability, opportunity, and the ability to take care of the people we love.
Unfortunately, the United States has a well-known wealth gap—and that gap has been exacerbated during the pandemic. According to a 2021 report from the Federal Reserve, Black and Latino households typically earn half of what the average white household earns, and only have 15 to 20 percent of the net wealth of white households.
Economic experts have agreed that large-scale, systemic changes may be necessary to address that gap. But such changes take time—and in the meantime, we need to take action so that we can maximize our earnings, support our loved ones, and ensure that our wealth passes to the next generation. Simply put, we need to start building generational wealth.
According to finance experts, there are two basic steps to building generational wealth: 1) establishing a solid financial foundation and 2) diversifying your assets. Here are some of the experts’ top pieces of advice for executing on both of those steps:
Establishing a Foundation
1. Invest in Personal Finance Education
“I experienced the lack of generational wealth in my family,” says Luis Rosa, a certified financial planner at Build a Better Financial Future. “My grandfather passed away and the ‘success story’ was that he had enough money to pay for his own funeral.”
A key to building generational wealth, Rosa learned, is financial education. He recommends surrounding yourself with literature and content from certified experts to learn what options are best suited to your financial goals. Below are just a few of the available options:
- Bola Sokunbi, Clever Girl Finance
- Tori Dunlap, Her First 100K
- Jully-Alma Taveras, Investing Latina
- Rita-Soledad Fernández Paulino, Wealth Para Todos
- Kara Perez, Bravely Go
- Giovanna Gonzalez, The First Gen Mentor
Next, Rosa says, you need to make sure you’re bringing your family with you. If your intent is to build wealth for generations to come, you need to check in with those closest to you and bring them along on your financial journey.
2. Look at the Big Picture
When people start giving advice about how to save money, they often focus on minor expenses like food delivery and coffee. But those expenses are not really what makes or breaks our ability to build generational wealth.
Instead, we need to focus our energies on big-picture expenditures and opportunities. “You can make significant progress if you focus on big financial moves. Increasing your income, lowering housing costs, and evaluating large spending categories like travel can help you maximize how much you save and invest,” says Tanya Menendez, cofounder and CEO of Snowball Wealth.
One of the most important areas to focus on is cost of living expenses—the biggest expense category for many households. There’s even a term used to describe this—“rent burdened,” which is defined by the HUD as households that spend more than 30 percent of their income on housing. If you aren’t able to lower your housing costs, try to increase your income by advocating for pay raises, making career pivots, and diversifying your assets (more to come on that below).
3. Get Rid of High-Interest Debt
In general, paying down debt is a great idea. But any debt that bears an interest rate of more than 10 percent should be prioritized, Menendez says.
If you need to take out a loan, try to find one with an interest rate that is low and fixed. To learn more, you can check out NerdWallet’s assessment of good and bad debt.
4. Work Out a Retirement Plan
Retirement accounts—including 401(k), Roth IRA, and Traditional IRA accounts—are basically investment accounts, and thanks to the power of compound interest, you can realize a lot of earnings if you start investing early. Contributions to some retirement accounts are also tax deductible, and many companies offer a matching program for 401(k) retirement accounts (aka, free money).
Despite all these advantages, many young people aren’t planning for retirement: more than 55 percent of millennials don’t have a retirement account. This is a huge mistake, says Aquiles Larrea, AIF, the founder and CEO of Larrea Wealth Management. “The same way you go and spend on clothes, your retirement is an expense that you can’t afford not to make,” he stresses.
Even if you aren’t able to make large contributions, start a retirement account as soon as possible. Contribute whatever you can on a regular basis: over the years, compound interest will work its magic, and you’ll have greater peace of mind as you approach retirement.
Once you and your family have a strong financial foundation, you can take the next step: diversifying your assets and growing your nest egg.
Diversifying Your Assets
1. Invest in Real Estate
While owning the home you live in would certainly be nice, Larrea—who runs his own independent financial advisory firm—encourages clients to think bigger. Real estate is a perfect example of an asset that will grow in value over time, he explains.
“Take for example a four-unit complex,” he says. “You’ll probably cover expenses with two rents, and you could pay yourself the dividend or use the equity (with what’s left). You can look for another multifamily property or opportunities to grow.”
2. Invest in the Stock Market
Investing in the stock market is helpful for a number of reasons: it can help you generate long-term wealth (particularly if you diversify your portfolio with low-cost index funds), and it can also help you hedge against inflation, which is currently at a forty-year-high.
3. Start a Business
Whether you use your business as another stream of income, sell it, or pass it on to the next generation, there are many ways to win as an entrepreneur. In fact, a recent study by JP Morgan Chase & Co found that liquid wealth for small business owners is over 40 percent higher than that of wage earners before they start their businesses.
Of course, the wealth gap does also exist in the start-up world, and aspiring entrepreneurs should be aware of the challenges they might face.
4. Set Aside Funds for the Next Generation
Many of us have at some point worried about how we’re going to pay for school, whether it’s college or post-graduate education. But the next generation doesn’t need to carry those same worries.
“Give kids the gift of not paying student loans,” Rosa advises. In his experience, one of the best ways to achieve this is to plan ahead and begin saving early through a 529 plan. Those plans are tax-advantaged and are thus a great way to start saving for the next generation’s educational expenses.
This article is for educational purposes only. This material is not intended to constitute investment or financial advice.