Much has been said about the United States being on the brink of the biggest generational wealth transfer in history. However, the reality is that some communities aren’t reaping the same benefits.
There are still issues of generational poverty facing communities of color, and generational wealth transfer doesn’t have the same meaning for underserved communities.
Most of us want to be able to pass something on to our children. As a result, it’s important to tackle the issue of generational wealth transfer in an active manner. If you’re looking to build something for the future, here are three ways you can increase the chances that your children will have something from your legacy.
1. Start a College Savings Plan
Generational wealth transfer doesn’t have to be about doing everything for your kids. In fact, sometimes it’s about helping them get the best start.
Student loans can be a huge drain on future wealth prospects. If you can help your children reduce (or even eliminate) the need for student loans, that can take them a long way down the path to prosperity.
Consider setting up a college savings plan for your children. This plan might include a 529, which allows you to set aside tax-advantaged savings for the future.
With a 529, the money you contribute grows tax-free as long as your child uses it for qualified educational expenses. With the help of a 529, your child might need to take out smaller student loans. Or, with the combination of a 529 and a part-time job or other student aid, they might be able to avoid student loans altogether.
A good education can be a springboard to a better, more lucrative future. While it’s not the only path, it does have its benefits.
Set aside money for college automatically
Make college savings an automatic habit. You can set aside money each month in a 529. It doesn’t have to be a lot. However, the earlier you start, the better you’re likely to do. If you start saving when your child is a year old, you’ll have 17 years to contribute and take advantage of compounding returns.
2. Make Sure YOU’RE Investing for Your Future
One of the reasons generational wealth transfer can take place is due to excess funds. However, it’s hard to get those excess funds if you aren’t building wealth through investing.
Investing is one of the best ways to build wealth over time — and you need to make sure you’re investing in your future as well.
Use tax-advantaged retirement accounts available through your work or open an IRA on your own. Use our Wealth Calculator to figure out how much you need to set aside each month to reach your long-term investing goals.
Once you have your retirement sorted, you can consider taxable investment accounts to grow your wealth and meet other goals. I have different investment accounts set up for long-term emergencies as well as for travel. Because I’ve consistently contributed for years, these are accounts that continue to grow — and will likely provide mean excess money down the road.
Set aside money each month for investing. And, as your finances improve, increase how much you invest. As you get used to investing, you’ll find that your wealth grows exponentially. You’ll then have something to pass on.
3. Work on Improving Your Credit
How will improving your credit contribute to your ability to provide generational wealth transfer to your kids?
One of the items contributing to the racial wealth gap is credit inequality. If you have poor credit, it’s costing you — and your ability to grow and pass on wealth.
With poor credit, you pay more in interest for everything, from home loans (if you can even get them), credit cards, and personal loans. In fact, if your credit doesn’t allow you to get favorable loans, you’re likely to turn to payday loans and other fast cash loans that lead to interest rates above 300% APR.
When all that money is going to interest, it’s not going to your future wealth-building efforts. On top of that, in some states, insurance companies are even allowed to charge you more in premiums based on your credit. That’s even more money not helping you build wealth.
If you make an effort to improve your credit, you can bring down some of your costs and divert the savings to your future investments. Plus, you can teach your children valuable lessons that will help them better their own financial futures.
We all want to pass something to our children. Unfortunately, people of color have greater hurdles to overcome when it comes to generational wealth transfer.
And, while it’s not fair that people of color have to work harder to overcome these hurdles, it’s still possible. Hopefully, by the time you transfer wealth to your own children, the world will be a juster place.