Steps to Encourage Financial Independence in the Next Generation
By: Wayne Patterson, Senior Advisor
Most clients have legacy plans as part of their long-term financial goals. But quite a few clients also express concerns about enriching their children without preparing them to handle wealth. It’s not that they don’t love their children. But, they fear that a large inheritance could leave immature heirs dependent and unmotivated. They dread the old maxim that “the first generation creates the wealth, the second generation spends it…”
The ultimate goal for these clients is to gift their children financial independence by instilling habits that will help them create and handle their own wealth. The following seven key lessons are a good place for future generations to begin.
1.) Develop a strong work ethic and a passion for improving skills - As the first step in creating wealth, it is important to understand how to generate an income. Whether working for somebody else, or creating your own opportunities, passion and determination are indispensable for success.
2.) Remember, income is not wealth – Income is a key component of building wealth. But a large paycheck won’t guarantee financial independence, and a small income won’t keep you from achieving wealth. Instead, wealth will depend on that portion of your net worth - assets (savings, stocks, bonds, real estate, etc.) minus liabilities (mortgages, debt, etc.) - that can be invested for capital appreciation, dividends, and income. In most cases, this is the real root of financial independence.
3.) Spend less than you make – All financial success starts with good savings habits. You can only invest the money you keep, so learn the difference between needs and wants, and avoid spending to impress the rest of the world. Review spending regularly. If your paycheck doesn’t last through the month, you need to revise your lifestyle.
4.) Minimize debt – Debt can be a sign of poor savings habits, especially if used regularly to fill the gap between income and lifestyle. Use debt to fund appreciating assets like a house, not to boost daily spending. Pay off credit card debt fully every month, and college and auto loans quickly. If a loan is needed, look for low interest rates. Maintain high FICO scores by learning how credit rating services work.
5.) Maximize savings – Set aside ten to twenty percent of your income for an emergency fund and retirement savings. Building an emergency fund worth 3-6 months expected spending and keep the assets safe in a bank or money market account. When starting work, begin making automatic payments to tax-advantaged retirement accounts (401K, Roth IRA, Traditional IRA, etc.) and invest the assets. You will enjoy the benefits of dollar-cost-averaging and the magic of compounding (earnings on earnings). When kids come along, set up tax-advantaged 529 plans to fund college education.
6.) Invest for the long-term - Don’t make investing complicated. Understand your investment time horizon and risk tolerance. Maintain a diversified portfolio of quality stocks, bonds, real estate, and alternative assets. Invest for growth when young and your time horizon is long. Reduce risk and invest for income and safety when you approach retirement. Avoid being overly greedy or fearful. Rebalance your portfolio yearly, but don’t try to time the markets by jumping in and out. Stay invested.
7.) Build a team of experts to help – Financial independence can’t be achieved alone. Ultimately you will need advice regarding insurance, taxes, estate planning, and investing. These subjects are complicated and are always changing. Hire a team of experienced professionals who are more concerned with your needs than their fees.
Those who make these suggestions habits and follow them steadily will almost surely create the wealth and financial independence they desire.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.