- Personal finance pros Echo Huang and Kelly Lannan joined Insider’s Master your Money virtual event, presented by Fidelity.
- Financial literacy and hiring the right experts are key. Building wealth takes smart planning.
- Generational wealth is passed down in different ways, and some communities face barriers.
- This article is part of a series focused on millennial financial empowerment called Master Your Money.
One out of five households in the US has zero or negative wealth, meaning they owe more than they own, according to the Institute for Policy Studies. Additionally, more than two-thirds of Americans think their children will be financially worse off as adults than they are, and most don’t have money saved for them, according to the Pew Research Center.
There is a wealth gap in America, and the coronavirus pandemic has made the disparity even more pronounced. Insider’s recent live virtual event, Master Your Money: How to Create Generational Wealth, presented by Fidelity, addressed head-on how to start creating generational wealth that outlasts you.
During the event, panelists Kelly Lannan, vice president of Young Investors for Personal Investing, a unit of Fidelity Investments, and Echo Huang, a financial planner and founder and president of Echo Wealth Management, outlined how to start building generational wealth that lasts.
How wealth is typically passed down
Generational wealth is usually passed down through:
- Life insurance
- Trust fund
- Family business
Homeownership is how most Americans pass down generational wealth. The home your parents bought 40 years ago appreciates in value and is passed on to the next generation.
Being a beneficiary of a life insurance policy is another way generational wealth begins. The proceeds can be used to pay off debts or start a business. Unfortunately, a recent study showed 43% of Americans don’t have life insurance.
You don’t have to be wealthy to have a trust fund. A revocable trust or irrevocable trust can hold real estate, stocks, bonds, and other assets that can be passed down.
Obstacles to creating generational wealth
A Pew Research study showed that “incomes of first-generation college graduates lag those of other graduates.” This is a barrier to wealth creation because many first-generation college graduates carry massive student loan debt to afford their college education. The income lag, coupled with student loan debt, are obstacles to homeownership and wealth creation.
The wealth gap exists in America. Pay inequality and institutional racism, through housing segregation and redlining, continue to create barriers that disparately impact Black and Hispanic communities’ ability to generate wealth via homeownership.
A study by Life Happens and LIMRA showed that although African Americans are more insured than any other group, they are underinsured, meaning they don’t have enough life insurance to act as a replacement for income, debt, or to build wealth.
2 steps to take now to start building generational wealth
1. Financial literacy is key
During the Master Your Money event, both Lannan and Huang emphasized that teaching your children to be good stewards of their money is key to passing wealth down through generations. To put it simply: Ignorance is not bliss when it comes to money management and creating wealth.
You don’t have to be an economist, but you — and your kids — should know the basics of budgeting, savings, retirement planning, and investing. You should understand the difference between assets and liabilities, and the importance of a budget worksheet and a good credit score.
Before writing her own book, “Own Your Future,” on financial literacy, Huang said she read “The Millionaire Next Door” by Stephen J. Stanley. It inspired her learn more about wealth building, and she now says it’s important for financial literacy to be taught in public schools. She recommends Jumpstart Personal Finance Education for children in grades K-12. Additionally, the Council for Economic Education has national financial literacy standards for grades K-12.
Huang also said it is important to understand how compound interest works and why having your money just sit in the bank at a low interest rate is diminishing your wealth potential over time.
Lannan shared that her parents owned car dealerships as their family business. Although her parents managed money for their business and taught her the importance of saving, she didn’t learn about investing until her job out of graduate school when a coworker explained a few basics: why she should max out her 401(k), how to make the most of her health savings account (HSA), and how to use an IRA investment account.
If you are the first in your family to start generating wealth, it is up to you to educate yourself and your family. It is detrimental to your wealth creation if you are not sharing your financial knowledge and experience with your children.
Start with your bank or credit union. Most banks and
have financial-planning services that are free for customers.
The FDIC, too, offers free resources for financial literacy and money management through its Money Smart program that teaches you how to save and invest.
Your community college or state university may offer free personal finance and investing courses, like the ones offered at the University of Illinois at Champaign-Urbana, Duke University, Purdue University, and Missouri State University.
2. Build a team that helps you grow your wealth
Creating wealth is like losing weight. You need a plan and a team that helps you along the way. Your financial plan needs to be adaptable as you age. And you need to consider children, marriage, divorce, retirement, and caring for aging parents.
Initially, you may start investing on your own or by using a robo-advisor, like Fidelity Go, with no minimums and low fees. However, as your wealth grows, there will be tax implications and estate planning concerns you’ll want to address. Huang said that at some point, you will need to talk to a financial advisor, accountant, and estates attorney to ensure your financial plan and investments adapt as your life changes.
To find a financial advisor or planner, Huang recommends Let’s Make a Plan. Representation matters, especially when it comes to trusting your financial advisor. The number of Black and Hispanic financial planners is low, but they do exist. To find financial advisors of color, use Brokercheck or the CFP Board site as a resource.
Lannan said regardless of where you are in your career, the important thing is to start now. Just like
doesn’t happen overnight, neither does generational wealth. It is the product of persistence and constantly reviewing your financial plan to see what’s working and what needs to be adjusted.
Ready to take control of your money? Join our #MasterYourMoney Bootcamps!
Master Your Money Bootcamps are month-long challenges broken into simple one-week exercises to help you take control of your money. So far this year, we’re working on organizing our finances and putting price tags on our dreams.
Use hashtags #MasterYourMoney and #MasterYourMoneyBootcamp to share your thoughts, progress, and connect with others across our Twitter, Facebook, LinkedIn, and Instagram as you make your way through each exercise.
Over the course of 2021, we’ll conduct four Bootcamps, each culminating in a free, live, virtual discussion among experts about how to make the most of the tasks you’ve already accomplished. You can take all four Bootcamps this year, or pick and choose.
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