Rule #1 Finance Blog

With Investor Phil Town

How to Build Generational Wealth and Keep it!

You have likely thought about generational wealth whether you know it or not. It means wealth for you, your children, your grandkids, their grandkids and so on all the way down generations of family members.

Worrying about our kids is second nature. If you have considered how your own parents provided for you, or have thought about how you will make sure you have enough in the bank to sustain your family after you’re gone, you have mulled over this concept of generational wealth.

With the right planning, you can set up your family business or investment portfolios to bring financial success for hundreds of years.

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What is Generational Wealth?

Generational wealth is not a new concept. Maybe you have heard it more commonly referred to as “Old money” or “Family wealth”.

Examples of Generational Wealth

Think of popular families you hear about in the news or see on TV like the Rockefellers, the Kennedys, or the Walton family. These families are just a few examples of generational wealth, and I’m sure you can think of many more.

But you don’t have to make a fortune to create wealth that will last.

You too can leave a legacy like they have for your own children…and their children…and their children’s children. Sounds nice, doesn’t it? Today, we’re talking specifically about the financial legacy you pass on to your family.

We’ll also go over some effective ways to invest money that will have a generational impact, rather than short term financial success.

But this is so much more than an inheritance. This is not just a nest egg big enough for them to live off of—no. It is also the mindset surrounding money and the financial skills you share with them that can last longer than your dollars will.

I’ll show you how you can build wealth, but also how to hang onto it, and most importantly, how to equip your kids with the tools and know-how to sustain and build upon the wealth you have created. Are you ready?

4 Methods to Create Generational Wealth

First things first. You need to understand that building generational wealth is attainable for everyone. It’s not hard. You have the tools to help you and your family maintain and grow wealth for generations to come and I’ll show you how to use them.

1. Create Multiple Sources of Income

Start with a Full-Time Job

Get to work! A full-time job provides you with stable income that you can funnel into saving and investing. Plus, hopefully it provides benefits like a 401K and Health Savings Account, which are great investment tools.

But, and there is a BUT, your full-time job isn’t enough to help you create long-term, lasting, generational wealth. In order to do this, you have to have multiple sources of income.

So how do you create multiple sources of income? There are a few ways.

Consider a Side-Hustle

Wouldn’t you like to have a little extra money coming in, especially if it comes by way of doing something you love? What comes to mind for you?

Maybe it’s driving for Uber or opening an Etsy shop to sell goods online. These are a couple of common examples of a side-hustle but there are a lot of ways you can work a little more to make more.

Side-hustles have become popular with self-help gurus and millennials for good reason. They can have a big impact on your income in the long run if you leverage your money and time wisely.

Here’s the key to making the most of the cash flow from your side hustle: don’t think of this money as extra. If you use this money the right way, by investing it, you can set up yourself and your family for a rewarding financial future.

How do you do that? Make a plan.

Maybe you want to invest this money back into your side-hustle to expand its possibilities for the future. Maybe you want to invest this money into maxing out your retirement account.

This cash isn’t just extra spending power. If you think of it that way, you will lose it. You should consistently utilize the cash from your side-hustle as an important part of your greater financial plan and invest it in your goals.

If you do this, the additional funds you make can help you build wealth and the impact will be monumental for future generations.

But do you need to work more to make more?

Pay attention to the effect your side-hustle is having on your long-term goals, but also on your current happiness. Weigh the pros and cons. Is your side-hustle really benefiting you and your family?

If the answer is “NO,” it is time to think critically about how you can better invest your time.

If nothing comes to mind when you think about a side-hustle, or if you are looking for a side-job that won’t take up too much of your time, consider this. Investing.

Investing is a relatively low-commitment side-hustle that doesn’t require a large amount of effort to be successful.

When most people think of investing as a job, they think of day-trading. A practice where people make risky choices in the stock market that often don’t work out. That’s not what we are talking about here.

Remember the founding investing principle of Rule #1: Don’t lose money!

Rule #1 investors focus on long-term investments that won’t lose money. This smart type of investing allows you cash flow now, and a big return on your money in the long-term.

You can learn how to invest this way with our free smart investing Cheat Sheet. Once you learn the basics, you will be able to buy the right kind of companies and provide income for you and your family with very little effort.

We call this income from investing passive income. Passive income is crucial in building generational wealth.

Create Passive Income

Passive income is money you don’t have to work for in the traditional sense. You don’t have to go into an office or complete certain tasks to earn it.

This is the stream of income that some of the wealthiest individuals like Warren Buffett and Bill Gates rely on.

Investing is the best generator of passive income.

With a little bit of work on the front end, you can sit back and watch your money generate more money all on its own. It’s a little bit like planting a seed in the ground. You do the work to plant the seed and then watch it grow, and it can grow in an exponential way.

When it comes to investing, we ensure exponential growth by investing in companies with a high compounding rate of return. The seed you plant is your initial investment in a wonderful company that has a high CAGR or “Compounding Annual Growth Rate”.

For Example…

If you invest in ABC company, the “work” you put in or “seed” is your initial capital. That company, then, without any other involvement from you, uses your capital to generate growth.

And because you have done your research and know that ABC company is led by a team of geniuses, and has a durable competitive advantage in its industry, the company can grow that initial capital at a high Compounding Annual Growth Rate.

If your money grows 20% each year, in just three and a half years, your money will double. And if it continues to grow at 20% each year, your doubled money will double again in three and a half more years, and so on!

By investing in wonderful businesses that will continue to grow your initial investment year after year, you are creating passive income for yourself.

While having passive income and multiple streams of income, in general, are the basis of creating wealth, they aren’t the only tactics necessary to building generational wealth.

2. Continue to Learn New Things

Like most things in life, when learning how to invest, the more you put into it, the better you will be. Creating wealth that will last from generation to generation is not a task for the lazy. It is important to continue to learn new things both in investing and in general.

When you get comfortable, you stop paying attention to how your decisions are affecting your well-being and the well-being of your family. So pay attention, and keep learning. Staying up to date will not only impact your success as an investor but also your happiness in other areas of your life.

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3. Spend Your Money Wisely

Now that you have earned money, both actively and passively. How do you hold onto it? No amount of money will keep a fool rich. So spend it wisely.

There are a few common money traps people fall into when it comes to spending money.

You don’t want to be one of them.

  1. You don’t have enough emergency funds saved to rely on when things go wrong
  2. You don’t have enough money invested in the stock market, which is the single best option to get a return on your investment.
  3. You buy things you don’t really need—a flashy new car, a bigger house, a grand vacation.

Here is how to avoid these traps:

  1. Pay yourself first! Put the first 10% of your paycheck into savings vs investments.
  2. Invest in stocks by following the simple steps of our Free Smart Investing Cheat Sheet.
  3. Think long term! Do your best to avoid the material things that are here today and passé tomorrow. Buying the flashy new car this year is going to cost you way more than buying the same model a year later. Buy when you need to and invest the rest.

Whether you have fallen into one or all of these traps, you are never too far gone to make a change.

The sooner you start to shift your mindset and learn to spend wisely, the better off you’ll be.

4. Start Your Journey to Financial Freedom Now

Once you have your spending under control, it is time to start investing the funds you have saved up. Don’t wait for a financial advisor or a fund manager to tell you to put your money in the stock market. You have the know how! And you can start right now.

Why start now? Let’s look at The Rule of 72. This is a famous rule of investing that tells you how long it will take to double your money given a fixed interest rate.

For example, if you want your money to double in three years, you can figure out the average annual rate of return you will need to get on your money each year by dividing 72 by 3.

The answer? 24.

So you are looking for an investment that can give you a 24% annual return on your investment.

Let’s look at it another way.

Say you can expect an annual interest rate of 12%. How long will it take you to double your money?

Divide 72 by 12 and you’ll get 6.

So, it will take you 6 years to double your money with a 12% annual rate of return on your investment.

The sooner you invest in a company with a high annual rate of return, the sooner you can double your money.

In the words of one of the greatest investors of all time, Warren Buffett, “Time is the friend of a wonderful business investment and the enemy of a lousy business investment.” So don’t wait!

Investing now is the quickest and easiest way to build wealth over time. If you choose to invest in businesses with high compounding annual rates of return, your money grows for you, without you having to actually do anything!

This brings us back to passive income.

Types of Passive income

There are several types of investments to choose from. But not all investments can help you generate passive income.

Investing in Stocks

Investing in stocks is the best way to consistently create generational wealth.

If you own wonderful businesses, you are going to have a compounding machine, and that compounding machine will continue to generate wealth. If you look at the richest people in the world, take Warren Buffet or Bill Gates, for example, you can attribute a great deal of their wealth to the businesses they own. And you too can be an owner of businesses by simply making an investment in stocks.

Let’s take Apple for example, which Warren Buffet bought over 2 million shares of back in 2019.

Apple is compounding money at a rate of 30% per year.

If you invested in Apple ten years ago, your equity would have doubled every 2.4 years for the past 10 years.

There is nothing else on the planet that compounds money as quickly or greatly as that. This is the most perfect way to generate passive income. But it is just one great example.

Investing in Property

Investing in property is another viable way to create generational wealth. However, it requires a lot of effort and a great deal of luck. People who invest in real estate are basically speculating that the property they are buying will go up in value and hoping they will sell it at the right time.

Rule #1 investors like to look for investments that are selling at only half of their actual value. That’s hard to find if you are buying real estate, where the selling price is usually close to the value.

While property can be a smart investment, it likely won’t offer you the same return on your money as the stock market.

Investing in Gold

Investing in gold is a bit of a gamble. The price is based on demand, and demand is often based on fear or uncertainty.

This makes it difficult to predict when the demand for gold will go up or down.

Investing in 401K

Investing in your 401K is smart if you have control over where the money is invested and if your employer matches your investment. Most 401K packages are invested in mutual funds, which can’t match the growth of individual stocks if you are investing in wonderful businesses. Instead, put that money in an IRA where you have more control over the stocks you’re invested in.

If you aren’t investing, you are essentially losing money. With the rate of inflation, the money sitting in your bank account is decreasing in buying power. Have you ever heard someone from a generation before you say something along the lines of “Back in my day, a can of Coke cost ten cents.” If so, you have heard an example of inflating prices.

Ten cents can’t get you today what it could 50 years ago. The interest rate you are getting on your money in the bank can’t keep up with the inflation rate of prices in the real world.

But a company that is compounding at a high rate of return, which has a competitive advantage in its industry, and is priced at a discount will always outperform inflation. By using smart investment strategies, you can invest in the right businesses that will grow your money for you and build wealth for generations to come.

Why it is Difficult to Keep Multi-Generational Wealth

Now that you have mastered how to build wealth, how do you hang onto it?

Let’s discuss the reasons it is difficult to keep multi-generational wealth in the first place.

There’s a saying that hard times create strong people. Strong people create good times. Good times create weak people. And weak people create hard times.

Building wealth requires hard work. So the first generation of a family who experiences wealth often has to work through hard times in order to make money to provide for their family. They understand the value of money that comes from working for it.

So a cycle begins. The second generation spends all the parents’ money likely because they don’t have to work as hard to earn it and don’t have to learn the value of it. So, this leaves the third generation to make it back again. So the cycle continues.

As parents, it’s often our goal that our children don’t have to work quite as hard as we did to get by. But that doesn’t mean our children have to be weak. We can teach them the value of money and hard work so that they can carry on in our wake.

How to Keep Wealth for Generations to Come

So, how do you avoid losing the money you or your parents worked so hard to create?

Staying rich requires the right strategies and the right mindset. Those who stay wealthy for generations, growing their money, and passing even more down to their children than they were given, know the value of money.

They know the value of investing it, saving it, and growing it rather than blowing through it.

Invest in Your Child’s Education

If you want your children to be able to provide for themselves and their children, even better than you did for them, invest in your children’s education.

Send them to college. Provide them with all of the education and resources they need to be successful on their own.

At the very least, this background will provide them with the work ethic and understanding they need to successfully manage the money they inherit.

If worst comes to worst, it will also provide them with the resources they need to make it on their own if the wealth they inherit dries up for any number of reasons.

Teach Your Kids About Personal Finance

As parents, it’s our job to make sure our children are taken care of. And while that means investing in their education and providing for them financially, it’s so much more than that. We want to be able to train them up in the way they should go so that they won’t stray from it when they grow up.

This couldn’t be more true when it comes to teaching them about money. You can leave your kids with a nest egg, sure, but the tools you provide them with are crucial in ensuring they will be able to sustain and grow that wealth for generations to come.

If you truly want to create generational wealth, it is essential that you pass down more than just money to your heirs. You must also teach them all of the same lessons that allowed you to become wealthy in the first place.

What are the skills you utilized to create wealth? Hard work? Perseverance? Resourcefulness?

You can teach your kids some of these skills by example and some by sitting down with them and having a conversation. Anything less and your wealth may not last more than a single generation.

Spend Quality Time with Your Children

How do you expect your children to know how to preserve money if you don’t teach them? Most importantly, you have to teach them the value of money.

Then, you can teach them the skills to save, invest, and manage their money wisely.

The best way to pass on these lessons is to spend quality time with your children. Time when you can have a conversation about all the different ways you can invest, and how to handle money conservatively so they don’t squander what they have been given.

Show them what type of life good financial planning can provide. Take the time to talk with them about how you got here. And let us remember, there are more important things than money. The simple act of sitting down with your family to discuss these topics in and of itself can provide a priceless connection.

How to Pass on Generational Wealth

When it comes down to the control you will have over your family’s wealth and well-being after you’re gone, an estate plan and will are essential. With these tools, you can set up your kids, grandkids, and future generations with the tools they need to handle the wealth you built.

Create an Estate Plan & Will

You worked hard to build wealth that will carry on through the generations, so it’s important to create an estate plan with a lawyer to outline your wishes. This plan will provide your relatives with instructions about how wealth should be handled and will encompass all of your assets, including your investments, property, and businesses.

Your will is a portion of your greater estate plan and should detail your exact wishes to a T. The more specific you are, the less your kids will have to worry about.

Set up Custodial Accounts

You don’t have to wait to pass down wealth until after you are gone. You can and should also set up custodial accounts for your children. A custodial account is an investment account that you manage on behalf of your child until they reach a certain age.

This is typically at 18 or 21. These are a great way to set money aside for your kid’s future. The money can be used for college, a starter home, a business, or any other major financial goals you want to help your children meet.

Name Beneficiaries

Any time you open a financial account, you have the opportunity to name a beneficiary. This is the person that will receive the funds when you pass away. Naming a beneficiary is essential and can save your family unnecessary stress.

How do you want to set your family up for a better financial future? What steps are you taking to get there? If you follow this path and take a holistic approach to pass down wealth, providing your heirs with everything they need to succeed in addition to the money itself, you and those you leave behind will be far better served.

They will know how to build wealth—and keep it! This is how you become a Rule #1 family.

Ready to Build Generational Wealth?

As I mentioned earlier, the way to start building true wealth that lasts for generations is to make sure you’re learning the absolute best methods for creating streams of passive income and that you then teach those principles to your family as well.

I would love to help you build a solid foundation of investing knowledge, backed by principles used by some of the best investors in the world such as Warren Buffett and Charlie Munger.

That’s why I’d like to invite you to my 3-Day Virtual Investing Workshop to get interactive help from me and my team. Hope to see you there!