How to Manage Money as a First-generation Wealth builder
Updated: Sep 5, 2020
The term first-generation wealth builder refers to someone who does not have any financial inheritance and builds wealth, starting from $0, or even less in some cases.
For this article, I will add to the definition of a first-generation wealth builder to include someone who is building wealth to support themselves, their family, and future generations of their family.
In 2013, I finished graduate-school with $50,000 in debt, $600 in the bank, and a mission to begin my journey as a first-generation wealth builder. Every major financial decision I’ve made since that point has had the express purpose of accomplishing two goals:
Improve my personal financial situation.
Improve my family’s financial situation. That goes for my current family members and future generations of my family.
With that in mind, here is how I manage money as a first-generation wealth builder.
Two of the most important factors to consider when building an investment portfolio are your risk tolerance and your time horizon.
The higher your risk tolerance and the longer your investment time horizon, the more you might weigh your portfolio towards riskier investments like stocks.
I know that I have a very high-risk tolerance. I’ve watched my portfolio decline in value by more than 30% in a manner of weeks. When that happened, I never thought about selling while the market was down. I had the opposite reaction. I was trying to find ways to get more money into the market.
Being a first-generation wealth builder with the goal of leaving an inheritance for my kids and grandkids means I have a very long investing time horizon.
My goal is to maximize wealth for the next generation over the next 50–100 years. That means I don’t care about what is happening in the stock market on a daily basis.
What happens this week in the market will have no impact on the final value of my investments in the very long-run. The stock market has always experienced periods of extreme short-term volatility, but in the long run, it has consistently produced strong returns.
In the 21st century, the S&P 500 is up nearly 110%. During these first 20-years of the century, we have had our fair share of volatility.
The Dot-Com Crash of the early 2000s.
The September 11th terrorist attacks in 2001.
The financial crisis of 2007–2009.
The U.S-China trade war which started in 2018.
COVID-19 in 2020.
Despite all of these events, a dollar invested in the stock market 20-years ago would have more than doubled.
It’s important not to focus exclusively on the next generation. There needs to be a balance between funding your own retirement and leaving an inheritance. You must always put your own oxygen mask on first.
My wife and I are in a privileged position to both have Defined Benefit pension plans at work. This will provide us a predictable stream of retirement income that is not impacted by daily volatility in the stock market.
The bigger retirement planning problem for first-generation wealth builders to solve will be funding their own retirement and leaving an inheritance.
Investing is not the only way to leave an inheritance. Life insurance can be the missing piece of the puzzle that helps first-generation wealth builders balance their own retirement needs while ensuring their kids and grand-kids are taken care of financially.
There are two types of life insurance coverage:
Term life insurance.
Permanent/whole life insurance.
Term life insurance covers you for a predetermined period. After the term runs out, you can reapply for a new term or let the policy expire.
Permanent life insurance covers you for your entire life.
Term insurance is much cheaper, and for most people makes more sense.
Here is how I think about life insurance as a first-generation wealth builder. While I am young and healthy, I am loading up on term life insurance. I am doing this for two reasons:
Term life insurance is cheap for young, healthy people.
I have fewer assets when I am young than I will when I am old. Therefore, I need more life insurance coverage right now to ensure my family is financially taken care of if anything were to happen to me. As I get older and my wealth grows, I won’t need as much insurance.
Until I have enough wealth built up to fund my lifestyle, fully I will only consider term-life insurance.
However, once I build up enough wealth, minimizing tax liabilities will be one of my top financial priorities. Since life insurance payouts are generally not taxable, it can play a critical role in transferring wealth to my kids and grandkids in a tax-efficient way.
I may consider permanent life insurance once I have accumulated enough wealth, but until that time, it makes more sense for me to buy lots of cheap term insurance and focus on investing.
Many people will tell you that debt is “bad” and should be avoided at all costs. That is far too simplistic of a worldview, especially if you are a first-generation wealth builder.
Taking on debt simply means you had to borrow money to pay for something because you did not have enough cash available. Whether debt is good or bad depends on what you are financing and the terms of your loan.
Consumer debt is always “bad” and should be avoided at all costs. Consumer debt includes credit cards, payday loans, and car loans. If you use debt to buy “stuff,” you are shooting yourself in the foot.
If you use debt to fuel investment, that debt has the potential to grow your wealth. When I talk about using debt to invest, that could have lots of different meanings.
Getting an education.
Buying a house.
Investing in rental properties.
Starting a business.
Investing in the stock market.
I took on $50,000 in debt to complete my Master’s degree in economics. That allowed me to more than double my income and has already been paid off. Going to graduate school was one of the greatest financial decisions of my life.
As a first-generation wealth-builder, it was worth it to invest in me by taking on student debt. As a second-generation wealth builder, my son won’t need to worry about student loans because my wife and I are fully funding his college fund.
Taking on debt to invest does not guarantee things will work out. If I borrowed $50,000 and I flunked out of school, that would have been a bad use of debt.
Debt is simply a financial tool. It increases risk, but if used wisely, it can act as leverage to increase wealth. People who come from wealthy families don’t need to take on that risk as they have family money they can fall back on.
Debt is a tightrope that many first-generation wealth-builders are forced to walk. They may have no choice but to use debt to fuel investment in themselves, a business, or an asset. However, they also have a lower margin for error and no safety net to catch them if they over-leverage themselves.
If you’re a first-generation wealth builder, you’re going to have to work a lot harder and smarter than most people.
I’ve always had a side-hustle or a second job since my early 20s. Even as I have progressed in my career and earned more money, I maintain a side-hustle of writing and selling online courses.
This obviously allows me to earn a lot more money than if I relied only on my day job. It also allows me to diversify my income.
We all accept that it’s essential to diversify your investments. Your income is the most valuable asset you will ever have. So, in my opinion, it’s important to diversify your income.
I’ve been able to build me side-hustle to generate enough money that it could cover my basic living expenses. If I ever lost my job, I know I could keep a roof over my head and food on the table.
Right now, I take every penny from my side-hustle and invest it. As my side hustle grows, so will my wealth.
Investing in my family
After investing in yourself, there is no investment more worthwhile than family. I don’t mean giving money to family, I am talking about investing in your family.
A few years back, my parents were forced to leave the expensive apartment they were living in. So, Trish and I bought a second house in my hometown for my parents to live in. That was an investment in the family.
It gave my parents a stable living situation they could afford.
It is a great family home that we spend most of the summer visiting.
The house continues to increase in value, helping Trish, and I grow our net-worth.
We also opened a college fund for our son the day we brought him home from the hospital. This will allow him to obtain a college education without having to take on debt.
Sad as it is to say, starting out with a $0 net worth after college is a massive advantage these days. By sparring our son the burden of student loans, he will be in an excellent position to quickly grow his net-worth.
Which brings me to my greatest money challenge and most important duty as a first-generation wealth builder.
Teaching my son how to manage and value money
Here’s the biggest challenge facing any first-generation wealth builder, making sure the second-generation doesn’t screw it up.
There can be no greater failure than spending my life building wealth, only to have it undone because I never taught my son the lessons and principles I used to deliver him that wealth.
To be clear, if my son never learns how to manage money that will be my failure, not his. It’s my job to teach him to value money and how to manage it to grow the family wealth.
Teaching him how to manage money should be easy. The technical aspects of managing money are relatively simple.
The challenge will be ensuring he values money. I value money and the power it holds over our lives because my family did not have any of it during my formative years.
How do I teach my son to value money if he grows up never having to worry about it? I haven’t figured that out yet. Luckily, my son is only three months old, so I have some time to think about that problem.
My ambitious goal to build generational wealth
In this article, I’ve discussed how every financial decision I make as a first-generation wealth builder serves the dual purpose of improving my personal financial situation and the future financial position of my family.
If that goal seems vague, then allow me to share my specific and ambitious financial goal. Which is to have built enough wealth before I die that my family can be live off half of the interest and dividends generated from that wealth and donate the other half to charity. That means never having to touch the principal and allowing that wealth to continue growing and supporting future generations of my family and society.
I realize that is an ambitious financial goal, and I may not get there. However, if I’ve done my job as a parent and a first-generation wealth builder, my son certainly will.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.