How to Build Generational Wealth + Where to Start
By: Brian Seay, CFA
Desiring to build a financial foundation for your children, in other words, “multi-generational wealth”, is more common than you may think. Generational wealth is about building assets that provide opportunities and flexibility for future generations of your family. That does not mean you need to become a Rockefeller, a Vanderbilt, or have your name on a library. It also doesn’t mean your children will be automatically spoiled or that they will never work. In fact, this is probably the opposite of a compelling, sexy guide to acquiring more stuff. In this series of articles and podcast episodes, we explore how to build, maintain, and transfer generational wealth in a way that empowers your family with opportunities, flexibility and generosity.
Building Generational Wealth
Key Takeaways:
Focus On Assets Over Income
Increase Savings By “Building the Wedge”
Debt is Not Good or Bad
Assets to Consider
Diversify Over Time
It Takes Time!
Perhaps we should start with how generational wealth is NOT built, which is by flipping trading or quick wins. Youtube and Instagram are not real-life. If there is a private jet included in a social media video, that’s a good sign that you should just turn it off. Generational Wealth is occasionally built with ideas that turn into public companies, unique creative abilities, or superior talents. But more often it is built over years of hard work, diligent saving and investing. So, where do you start building wealth if you don’t have a unique skillset? And how does wealth become generational?
1) Focus on Assets over Income
The first step is to reframe your mindset from “growing your income” to “growing your assets.” You may have heard the phrase that entrepruners stop “trading time for money”. They build assets that produce income whether they show up or not. Assets still need to be managed and stewarded properly, but assets don’t involve “clocking-in” or “clocking-out.” Even if you are highly compensated, you still likely get paid to show up and perform a job. Think about your current investment portfolio. It goes up (or down) even while you are on vacation. Assets can be real estate, portfolios of publicly traded investments or businesses that you own and operate. But assets produce without a direct time tradeoff.
2) Where to Start: Build the Wedge
Building assets requires creating a gap between your expenses and your income, otherwise known as saving. You are probably already saving for “retirement”, but saving to build generational assets requires a different approach. Saving for retirement starts with projections of required retirement income and then identifies a savings target of 10%-15% of your current income to meet your goal. The goal is to save as little as possible but to still meet your goal. Building multi-generational wealth requires a different approach. Don’t ask “how little can I save to replicate my income in retirement?” Instead, the operative question is “how little can I spend so that I can save the rest?” So much for the private jet anyway. Starting a business, acquiring real estate or building an investment portfolio that will provide income for your family before you are in your 60s requires saving much more. Start by increasing the “wedge” between your income and savings.
Saving more is hard. We recognize that. Before you start this journey, make sure you are personally committed to making short-term trade-offs to achieve long-term results. Nothing comes free and without hard work. The hard work and trade-offs are easier if they are connected to a purpose larger than your own financial goals. Consider the impact on your family over decades and generations. Consider how you can be more generous in your community with both your time and resources. Long-term purpose may make the short-term sacrifice worthwhile.
Your savings goal will depend on your situation and the types of assets you intend to buy or create. You don’t need to save enough to buy 100% of a rental property or a business, you can use debt. But, when you buy a home for your family, you can often put very little down and borrow the rest. Rental and other investment real estate will require at least 15% in down payments, and likely significantly more on your first property. SBA loans for small businesses usually require at least 10% in down payments. Local community bankers are happy to talk about the kinds of financing available and requirements, all you need to do is set up an appointment to ask!
Also remember that profitability and payouts to owners take time. We will discuss this more below, but plan to cover your household expenses for 2-3 years without income from investment assets. That may mean savings more than you need to invest in the business. Once you start buying assets, building a perpetual investment portfolio means that you can’t use all the profit for spending. You need to balance growing your portfolio or business with using income and gains for your own spending.
3) Debt is not all bad
We just spent a paragraph discussing using debt. Frequently we meet clients that desire to pay off debt and believe that being “debt free” is the right approach. Often in personal finance we are taught that debt is “bad.” Debt is not good or bad, it’s a tool. If the tool is used incorrectly, it’s dangerous. If I gave my toddler a drill, bad things would happen. But I can use the drill to make improvements to my house. Excess spending on credit cards and other consumer debt destroys wealth. However, if used correctly to buy assets in moderation, debt can help create wealth. Think of debt as a tool, not a moral prerogative.
4) Assets to Consider
Building multi-generational wealth requires acquiring assets and investing differently than employees that are focused solely on their own retirement. There are lots of choices, but typically generational wealth building requires starting a business, buying an existing business, or buying real estate.
Starting a business is a great foundation. Contrary to popular opinion, a new business doesn’t require a novel idea. A great business may be something that already exists but perhaps is unavailable in your community. Our firm is an example of this. We aren’t the only fiduciary investment firm, but we are the only one in our community focused on generational wealth. Your community has lots of businesses that are not new or novel ideas. Consider things that you have seen elsewhere that don’t exist in your neighborhood. Sectors or services where existing supply doesn’t meet demand. Those might represent great first business opportunities, either as a new concept, or by bringing in a franchise new to the community.
However, keep in mind that most new businesses fail. According to the Small Business Administration, 20% fail by year 2 and 65% close by year 10. So instead of starting a business, really think hard about buying an existing business with a proven model. Going from $0 in cash flow to $10 in cash flow is much more difficult than going from $10 to $100. Once you buy the business, you can shape its culture and grow it over time as if you started it from scratch. You can find businesses for sale in your network or online. Check out bizbuysell.com.
Real estate also makes a great early investment. You can use debt to help buy the property and even pay a separate property management company if you choose. Real estate, like all businesses, still takes work. Work at night, on the weekends and other times when you may not want to work. So don’t be fooled into thinking that you can buy a property, rent it, and forget it. But if you are willing to spend time on your properties, the income stream from a real estate business can grow materially over time. Real estate also has unique tax benefits that make it a great asset to pass to the next generation.
5) Diversification principles still apply
At the beginning of the process, you will likely own only a couple of assets. Your wealth will be tied to the performance of that business or piece of real estate. Generational wealth is usually built by taking this kind of concentrated risk. However, it is wise to diversify over time. If you started with rental real estate, buy a small business. You can pay someone to run it if you aren’t an expert in that industry. If you started with a small business that you operate, buy investment property or publicly traded stocks and bonds. Some assets will perform better than others and diversification minimizes the risk that one bad decision or changing circumstances will end your generational wealth journey.
6) It takes time
Think about the real families with wealth that you know or have heard of in your community. How often was it built quickly? The media makes it difficult because often we hear about “overnight” success stories. Really, the owner was building the business for years. They finally reached the tipping-point where the masses became aware of their work seemingly “overnight.” Publicity and awareness can occur quickly, building assets takes time.
The truth is that it takes time to build wealth and assets. According to the Bureau of Labor and Statistics almost half of all new businesses fail within 5 years. So many entrepruners fail once or twice before they find success. Once they find some success, data from accounting software providers shows that it takes 2-3 years for a new business to become profitable.
Success does not come overnight. But over time, your assets can provide a foundation to enable generosity and flexibility for your family over generations. If you have questions about any of these concepts, or would like to discuss your generational wealth journey, feel free to schedule a call with our team.
Transcript:
Hey everybody. Welcome to the Capital Stewards podcast. We're excited to be back with you today to talk about building multi-generational wealth. I don't know if you ever do this, but last night I sent Brian a reel about how Jay-Z and Beyonce have hired their children.
I think Jay-Z hired Blue on day two of her life, and they have been paying us her a salary ever since then, so that by the time she's, I don't know, a very young age, she'll have millions and millions of dollars. He used her vocal sounds in an actual work product,, that they recorded on an actual song that they get wealthy from. So. She can get royalties from that. So you can't just hire your two year old and pay them to cry that doesn't work. Uh but we'll talk about some of the things that you can do all that to say, we're talking about building multi-generational wealth, whether you hire your children as employees or not, how you can build a legacy for your family and pass that on through generations.
So I want to start with maybe what not to do. Because I think to your point about Instagram reels, generational wealth is not built by flipping trading or quick wins. . What really, Yeah, what you see on YouTube? However, unfortunate is not real. Life. Instagram is not real life.. If there's a private jet in a social Media video it's probably A good sign you should just turn that off but I really wanna be Grant Cardone or whatever his name is.
Yeah..
Generational wealth is occasionally built with ideas that turn into companies or with unique creative abilities or superior talents. And sometimes that can happen pretty quickly. But often it takes years of building assets, building a business. And sometimes, and we'll talk about this more in detail later in the episode. But at sometimes it becomes apparent to people quickly or people learn about someone's wealth pretty quickly. But the building process actually took years and years and years. And so we want to do here is talk about how do you start building wealth?
If you don't have one of those sort of unique creative abilities or superior talent in something, or an idea that's going to become the next fortune 500. Company.
I, I appreciate this question so much because as, as much as I might. Well, I don't actually aspire to it, but if I was a person who did aspire to it, I don't think I'm gonna wake up tomorrow and be Elon Musk or bill Gates or any of the other. You know, innovative billionaire CEOs, So you don't have to be, and that's kind of where I wanted to start. In this first section I call an assets are more important than income. Assets are greater than income. The first step is to reframe your thinking about growing your income to growing your assets. So you may have heard that entrepreneurs stop trading time for money. They build assets that produce income, whether they show up or not.
A good way, give us an example of some of those assets. So think about your current investment portfolio, right? It goes up or it goes down even while you're on vacation. It can go up while you're sitting at the beach. It can also go down while you're sitting at the beach. But you showing up to do something is not required for, to continue to grow and produce income. Real estate's another example of that, right. And house prices go up. They go down. If you own real estate, it's probably going to appreciate it over a long period of time, regardless of whether you show up or not.
You're, yeah. It doesn't portfolio inherently mean it's passive, correct. Your, your investment portfolio still needs to be managed portfolios of publicly traded companies or businesses that you own and operate. Those need to be managed, so it doesn't mean that you sort of can do nothing but those assets are continuing to grow, produce income, and create long-term value in a way that's disconnected from the time that you are putting into it.
I think this can be really difficult for, there's a lot of barriers, I guess I would say, in order to start down this journey because to your point, so many of us are trained to go through the milestones of life and end up in a, in some kind of role job that is a clock in, clock out, whether you're an hourly or a salaried.
Employee, it's really still an exchange of time for money. How do you think about people getting started on building assets instead of income, especially given that, you know, usually someone does need an income to survive today. Yeah. And balancing those responsibilities, because, you know, I imagine most of the people, all of the people listening to the show, Have, have really full lives.
Yeah. Yeah, and I think, I think this is a really important concept. So it starts with something I call building the wedge. And that means that you're increasing the wedge or the gap between your expenses and your income. So otherwise known simply as saving more money you're probably already saving for retirement.
But if you're gonna build generational wealth and generational assets, you've gotta kind of take a different approach. So when we think about retirement saving, or the saving that you're probably doing today, you're putting money into your 4 0 1 k, all that's good stuff, right? But that starts with projections about how much income you're gonna need in, you know, 30 or 40 years.
And then maybe you're gonna do some things along the way, like send your kids to college and then you sort of work backwards to take a haircut off your income or 10 to 15%. And you're gonna save that 10 or 15%. You're gonna invest it in over 30 years. You're gonna have this nest egg that's gonna be there for retirement.
Building multi-generational wealth requires a completely different approach. Instead of asking, how little can I save to replicate my income when I retire in 20 or 30 years, the operative question is more like, how little can I spend now so that I can save the rest?
? Correct? Yes. Massive philosophical, kind of like mindset shift. Yeah that makes sense. , so you just said basically to take on the mindset of building multi-generational wealth.
I should save everything that I can. So you mentioned previously this idea of saving in. It wasn't for the intent of necessarily just having a set of dollars at the end, it was saving the money so that you could invest in or acquire assets.
So imagine now I'm in a scenario, Brian, where I've, I've been saving up enough money that I am ready to, you know, take action. How do I get started? What are some things that I could, should consider as I want to move from having like dollars to having
Yeah, so. So building multi-generational wealth involves investing differently and acquiring assets differently than most folks that are simply saving for retirement as their primary goal, because you're trying to build a larger pool of capital. That's going to span longer than just, you know, your own lifetime.
Right? So I think there's a couple of things that you can look at that start to do that you can start a business, you can buy an existing business, or you can buy real estate. Starting a business is a great place to build from what you have savings contrary to popular opinion. It doesn't require a novel idea. I think a lot of folks. Think of starting a business and they're like, well, I'm not going to create the next Uber or the next Facebook. Or whatever, but at first business might be something that already exists maybe in the world. Maybe it doesn't exist in your local community. Maybe you can bring something you've seen somewhere else into your neighborhood. Maybe it's a franchise you've seen somewhere that doesn't exist in your local community.
It could be something that you feel like is in demand. Maybe it already exists there, but there's just not enough of it. In your particular space. Maybe the population is growing. People are moving in. It doesn't have enough of. A new sort of local service business. So it doesn't have to be new or novel. In order for it to be effective, but. When we start talking about starting new businesses, it's important to know that most new businesses fail 20%. Of new businesses, don't make it out of the first two years. And then another 65% don't last a decade. So if you're going to start a new business, you've got to do. A lot of research and a lot of preparation. Lot of analysis upfront to make sure that you're really confident about the idea that you have in the direction that you're going to go so that you can make sure that it works. I think a lot of folks that are thinking about starting a business should maybe also consider buying. An existing business instead of starting from scratch. I like to say that it's much harder to go from $0 in cashflow to $10 in cashflow. Than it is to go from $10 in cashflow to a hundred dollars in cashflow. And the reason for that is just, just very difficult to create something from nothing it's much easier to take a proven model that already exists somewhere and make that better and grow it. And when you think I also talked to a lot of folks that say, well, how do you even go about buying a business? Where do I even start? There's lots of business brokers. Online, so you can take some of the capital. That you saved plus a small business loan. And you can go to any number of business listings that are online and look at folks that are in your community today that are looking to sell their business. They have an existing business. Maybe they want to retire. Maybe they want to move on and do something different. And and so there are, there are lots of ways for you to buy existing businesses. And then the other thing is real estate. Obviously you can buy rental property. Not just short-term rentals, but long-term rentals, smaller commercial properties, lots of things like that. And real estate is another place where you can use debt. Plus the savings that you've accumulated. To start to acquire assets.
You know, it's interesting, Ryan, because you've bought up this idea of debt and leveraging debt in order to. Build multi-generational wealth. I feel like I hear from two very opposite ends of the spectrum when it comes to debt. There's the thou shalt never have any debt ever. Yeah. In all system. It's a camp of folks and this idea of you snowball your debt and pay off all your debt, you actually end up, you know, living a, a, a more financially favorable life.
The second group and quite honestly, I see the second group actually having more assets during their observable life are people who leverage debt as an instrument to acquire assets and they actually advocate. Using debt as an instrument. Yeah. Versus the thou shall never touch debt camp. It sounds like you are kind of like in the pro debt camp.
Tell us a little bit about maybe pros and cons of both sides or why you think about it the way you do.
Yeah. So I wouldn't say I'm in the pro debt camp. I do talk to a lot of folks who are really passionate about being debt-free. And when we peel back the onion a little bit, a lot of that is because in personal finance, when we come up, we grow up. Maybe our parents taught us things. We learned things in school, but we're taught that debt is bad and we want to pay off all of our debt. And that's true for the majority of folks, the vast majority of folks experience with debt is consumer debt. It's the stuff that we buy, we consume immediately. It has no value in the future. And then we're just left with the debt at the end of the day. So when we talk about debt that we're using as a tool to buy assets, we're talking about something that is completely different. And that kind of debt. It's not good or bad. In and of itself, it's just a tool. It's like any other tool, if you use it incorrectly, it's dangerous. If I give our two year old, a drill or a hammer. Bad things are gonna happen with a tool or some kind of knife from the kitchen. Right. I don't even want to imagine what he's, what he's going to do. However this doesn't apply necessarily to me because I'm not particularly handy. But someone can use a hammer or the tools and they can build something that is really useful and beautiful.
So just like tools can be used for good. They can be used for bad excess spending on credit cards and consumer debt destroys wealth. But if you use debt correctly, it can help create wealth. You can use that to buy assets that are going to over time, make you your family, your local community, better off. I think an interesting example is Warren buffet, right? Which a lot of folks I know from pop culture, know who that is, but if you don't, he's the CEO of a company called Berkshire Hathaway. He's a legendary investor. They in lots of businesses, Berkshire Hathaway has $400 billion in debt. They have more cash than that on their balance sheet. They could pay off other debt tomorrow if they want it to. But they choose not to. And it's because it helps generate better financial outcomes for Warren and for the other owners of Berkshire Hathaway. So I think it's important to think about debt as a tool that we can use. Properly and not as a moral prerogative.
You, earlier you mentioned the word diversification. This sounds like if I was going down this journey, that I would have the opposite of diversification because I might only be able to afford to start like, One asset type or mm-hmm. Even if I, if I was going down this journey, then I might want to replicate that asset type over and over again.
So talk to us a little bit about diversification principles when it comes to building multi-generational wealth and kind of in that, with that set of assets that you might have over
time. Yeah, so at the beginning of the process you're likely only going to own a couple of assets. Maybe you buy a business or you buy a property.
You're, a lot of your wealth is going to be tied up in a small number of things. And that's okay. That is often how wealth is built as in concentrated positions. But over time, It is wise to diversify. You, if you start with rental real estate, buy a small business and pay somebody else to run it.
If you start a business, then buy an investment property or buy a portfolio of, of stocks and bonds. Some assets are gonna perform better than others. And when you diversify, it minimizes the risk that one bad decision in a business or on a, on a piece of, you know, property or something like that changes the circumstance of your sort of long-term generational wealth journey.
So diversification is still really important. After you get through that, that kind of initial period of, of buying your first asset, when you start to think about asset two, asset three, asset four.
Got it. Any other principles that you wanna share with our audience? As we think about potentially getting started in building multi-generational
wealth?
So I think the last thing is that it takes time. Think about the families, you know, that have Accumulated significant wealth in your community or maybe even people that you just heard of, was it built quickly? I think the media makes it difficult to understand what really is going on here because we hear about overnight success stories.
But in reality that family was probably building a business for years and then they finally just reached the tipping point when more people became aware of what they were doing seemingly overnight. Publicity and awareness can occur really quickly, but building the assets takes a lot of time. And so the truth is it takes a long time to build wealth and assets.
We talked earlier about how a lot of new businesses fail, so some entrepreneurs may fail once or twice before they find success. You may have to, you know, you may buy a property and break even and then sell it and buy another one before you start to really sort of get things right. And so it takes some time.
So you have to be patient and be willing to give time.
This seems like a good place. Speaking of time for us to pause and kind of recap the things that we've talked about and kind of the bow on things for our listeners. So when you think about recapping everything that we've talked about thus far, what would you summarize for our listeners, Brian?
Yeah. So as you start building generational wealth for your family, I think there's five principles to think about. Number one is that assets are the goal. You want to use your income to start buying assets to you need to increase your savings to buy more assets, not just sort of think about retirement savings, but really think about how much can I possibly save to increase the asset level that I have to go acquire. Businesses real estate. Stocks bonds, investment assets, et cetera. Third is don't be afraid of debt we just talked about debt being a tool not a moral prerogative and then lastly diversify appropriately when you get to the point where you've got lots of cash flows and have the capability to do that and then you've got to just give it time it takes time to build wealth nothing's going to happen overnight and so i think you've got to give a time to be successful
awesome. Well, thanks for getting us started on our conversations about multi-generational wealth. Look forward to coming back with a little bit more content in our next episode. Sounds great!