Of the things most precious to us in life, money ranks high, but one factor is even more important: Our children. During their lifespans, all parents want to do whatever they can to take care of their kids, spouse, and family. But what happens after you’re gone? Are you comfortable with what would be left to your kids if this was your final year?
Retirement plans for high-net-worth individuals are an absolute necessity, but even if you don’t have a lot of money to throw around, there are steps you can take that will make the estate process easier for your loved ones. While very few people are able to create true generational wealth, there’s a science to it, and anyone can learn the policies and best practices to maximize their estate.
Explore the science of generational wealth, including its fundamental principles, critical tips, and major pitfalls, while learning to use these concepts to set your own kids up for success.
This article answers these questions regarding generational wealth:
- Can you explain the difference between wealth and income?
- Why don’t most millionaire athletes have generational wealth?
- Which founding father left $2000 to his city and how much did it grow?
- What is the LEGACY acronym, and how can you apply it to your own estate?
- What are the three biggest threats that are most likely to drain your estate?
- Are there benefits to relying on the same CFP® for your entire family?
What’s the Difference Between Wealth and Income?
To understand how wealth can be passed to future generations, it’s first necessary to know exactly what wealth is. You may see your favorite athletes, outspoken doctors or lawyers, or even famous actors or musicians and assume that they’re very wealthy. While they may be making a lot of money in this lifetime, it’s extremely rare, even among the rich, that they’re creating generational wealth.
Just because a person is drawing a high income does not necessarily mean that they have any wealth at all.
Income is defined as the money you’re receiving on a regular basis, whereas wealth is the amount of time you can go without drawing any income. That means that if your favorite athlete is making $10 million a year, but spends it on a mansion and several sports cars, he has little wealth because he needs to keep that money coming in to support his lavish lifestyle.
When you think of income, the primary thought that comes to mind is probably the wages you receive from any work you do. However, by using the concept of inflation and other principles to your advantage, you can generate passive income that continues to grow over time.
Ideally, you want to build wealth from having as many sources of income as possible. When you’re able to supplement your primary income with various sources of passive income, you’re on track to vastly increasing your wealth.
One way to remember the fundamentals of generating passive income is by learning the HXII formula. Comprised of four proven methods of building and expanding wealth, this formula is worth remembering and passing on to those in your life who may need financial guidance. Let’s explore the four parts of the HX11 formula and how each is a potential source of income.
- H (Home) – Purchasing a home is one of the most reliable ways to build wealth. Whether you’re living in a home that’s increasing in value, or renting out a home that you own, real estate is typically a great investment.
- X (Put 10% of Your Money into a 401(k)) – It’s a well known rule of thumb that 10% of each paycheck should go into your 401(k) or other suitable retirement fund. A key benefit of a 401(k) is that it decreases annual income, thereby decreasing your tax burden.
- 1 (1% of Your Income into Accelerated Debt Reduction) – Paying off debt as efficiently as possible is an absolute necessity for building wealth. By simply devoting a small portion of your income towards ADR, you can realistically be debt free within 6-8 years.
- 1 (1% of Your Income into Million Dollar Choices©) – A concept founded by BYU professor, Scott Marsh, a Million Dollar Choice© is a decision you only have to make once that eventually results in a million dollars. An MDC may include wise financial decisions regarding your house, car, business, or other assets.
Planning for the End and Beyond
It’s one thing to plan to have enough money for your own lifetime, but it takes a higher-level of foresight to ensure that you have enough for your family after you’re gone. By taking certain measures while you’re alive, you can make your money grow so it’s available for the next generation, thereby setting them up with major advantages.
One of the key reasons this is possible is because of the concept of inflation. Inflation implies that the cost of goods and services will go up over time, and that the same amount of purchasing power will be worth increasingly less every year. It’s because of inflation that it’s always a good idea to invest your money in a way that makes it grow, since letting it sit in a savings account will leave it stagnant.
A prime example of the vast power of inflation is shown in this story about one of America’s founding fathers, Benjamin Franklin. Upon his death in 1790, Franklin left $2000 to the cities of Boston and Philadelphia. What’s most interesting is his condition for claiming the money: The recipients had to wait 200 years before the cities could receive the full amount.
Due to inflation, the initial $2000 investment grew to $6.5 million. This remarkable story highlights the importance of understanding inflation and the way it affects any investments you choose to make.
There are many detailed ways to invest your money in a way that promotes generational wealth, but it’s just as important to understand the fundamental principles. Within the acronym LEGACY lies some of the most crucial tips for setting up your estate and accumulating wealth that outlives you:
- Loans – Building good debt can help you accumulate wealth, as in using mortgage loans to buy real estate for example.
- Endow and Grow – Endowments are charitable donations given to organizations you value most. They come with many personal and legacy-related advantages for the donor.
- Give to Organizations you Care About – Donating is a great way to support your values, benefit your community, and receive valuable tax deductions as well.
- Affirming Great Choices – Choosing to take advantage of great offers like matching your 401K or focusing on reducing debt are excellent ways to increase wealth for you and your family.
- Capping Targeted Expenses – By deciding to put a cap on certain expenses in your life, you’ll mitigate the chance of wasting money and overspending.
- Yardstick – Making focused, decisive distributions ensures that you’re truly making wise use of your funds while considering your financial resources.
Beware: The Three Estate-Draining Expenses
To fully understand how to maximize your estate, it’s vital to know the most common pitfalls as well. Take care to avoid these three factors that are most likely to negatively impact your estate:
- Probate – When someone dies and assets are distributed, probate refers to the law where the probate court decides which interested parties receive assets. With proper planning, you can avoid unexpected losses during the probate process.
- Estate Taxes – Depending on the laws in your area and the amount of a particular estate, an estate tax may be levied, reducing the total by a significant amount.
- Confusion – Forgetting an important part of your will or leaving anything else unanswered regarding your estate can create confusion for loved ones. Avoid this by planning every detail of your estate and leaving no stone unturned.
There Are Major Benefits to Choosing One CFP™ for Your Family
If you’re considering the services of a CERTIFIED FINANCIAL PLANNER™, there are noteworthy advantages to choosing one that serves your entire family. First off, a long and trusting relationship is beneficial. When your kids receive your inheritance and meet your financial advisor, you’ll want it to be someone who knows everything about you and your finances. This familiarity will make the experience easier for everyone involved.
That familiarity is useful in other ways as well. For example, relying on one CPA you can trust means they already know the unique types of taxes you have to pay for your area, and have knowledge of your investments and other assets. Ultimately, if you’re able to stick with one professional for your family’s finances, it helps everything go smoothly for both you and your descendants.
CPA™ and CFP™ Services are Available In One Office
Choosing one office for your family’s finances isn’t the only tip for maximizing your convenience. At Scott Marsh Financial, you can get all of the CPA™ and CFP™ services you need in a single office. Since you have all of your financial services under one roof, it saves significant time while building trust with the professionals who handle your investments.
When you’re ready to hire a CERTIFIED FINANCIAL PLANNER™ in Utah, it’s crucial to pick one with a record of knowledge and success in the industry. Scott Marsh has been teaching financial principles and techniques since 1980, and is currently an active professor at BYU.
Why take a chance with your investments when you can work with a renowned expert? We invite you to enlist the help of one of the best financial advisors™ in Utah. Contact Scott Marsh today and discover how to make your finances work for you.
Ready to continue your financial education? If you’d like to learn more techniques for building wealth and making Million Dollar Choices©, visit us at the Scott Marsh Education Institute. You’ll find videos and resources on a wide range of investment topics that will help you plan your estate and build generational wealth.