Katia Chesnok is a Latina money expert and coach and the founder and content creator of Economikat, a personal finance educational platform. She educates Latinx on all things money and empowers them to earn more, save more, side hustle and start investing to build wealth.
You have probably heard of the term ‘generational wealth’ recently and while it sounds sophisticated, it’s basically the financial legacy that you leave to your children or family that will be passed down from generation to generation. The main purpose of creating generational wealth is to build a legacy that will benefit the family in the long run. This sounds simple, but yet complicated at the same time, especially for immigrants and children of immigrants who are building from the ground up.
As a first-gen Latina in the US, I didn’t grow up hearing about the term generational wealth let alone exposed to that level of financial security. But I do recall my parents’ conversations after they bought their first house: “This house will be a legacy to our children” is one of the phrases they would say the most. While owning a home and investing in real estate is one of the most common and tangible ways of building generational wealth (especially for us as immigrants in the US) it’s certainly not the only way we can do it. Growing up, I thought that buying a house was the ultimate investment we could make in our lifetime, but there are definitely other effective ways of building generational wealth, if you don’t have plans of buying a house.
Without a doubt, people who inherit generational wealth from their parents or family members have financial advantages over those who do not inherit any wealth. We can pass monetary and non-monetary values to our family. Non-monetary values are skills, education (financial and general) and they are equally important. The monetary value, on the other hand, includes assets such as money, family businesses, real estate and stock market investments.
Before we start thinking about building generational wealth for our children we should have our own finances in order, meaning that we should already be investing for our own retirement first. In our community in particular, and especially as parents, we tend to put our hijos, sobrinos, familia before ourselves; but in the case of investing for our future we should take advantage of our time first. Remember that the amount of time we keep investing is much more important than the amount of money we have available to invest.
Once we have our financial systems in place, we can start thinking about investing for our children. This can seem intimidating, but once we start the process gets easier.
How to start building generational wealth:
Invest in the stock market
While this is not a tangible investment, such as buying a house, this is a great way to start creating wealth as we can start with a small amount of money and grow our wealth long term. If we are new to investing, one way to start is buying index funds – they are low risk, low cost and you’re investing in many stocks at the same time meaning you’re diversifying your investments. Focus on long term investments, one way to start investing tax-free (if you have a small business) is hire your kids. You have to be able to prove their hours worked in the company etc. and pay them $6k per year, and open a custodial Roth IRA account, places like Fidelity, Vanguard and Charles Schawb are good brokerage options. The most important part: invest your children’s $6k in index funds/etfs. Something very important to know is that if we open a Roth IRA, for example, it doesn’t mean that we’re automatically investing; in order for us to invest and grow our money we have to invest in investment vehicles such as stocks, bonds or index funds for example.
Invest in real estate
Real estate is more of a long term investment. When we buy properties, we’ll grow our real estate portfolio and our property will increase in value over time. While we won’t be wealthy right away, this is a very common and powerful way to build wealth for our future generations. Buying real estate is not only an investment, but it can turn into a source of passive income as well, when our property is paid off and we operate a rental later on. We can start receiving rental income and there are also many other benefits to that, including tax benefits and deductions.
“Hispanic home buyers accounted for 51.6 percent of total US net homeownership growth. In 2018, the US Hispanic population contributed $371 billion to the housing share of gross domestic product, or 10.9 percent, compared with $100 billion, or 6.5 percent, in 2000,” according to a study by The National Association of Hispanics Real Estate professionals (NAHREP).
The Latinx community is one of the fastest growing groups of homeowners in the US and we have become a very important force in the American real estate market. “More than 8 million Hispanic new homeowners have injected $371 billion into the national gross domestic product through the housing market”, NAHREP reported.
Invest in creating a business that you can pass down to next generations
This is self explanatory, but not easy to achieve as we need a solid business that can last multiple generations. According to the U.S. Bureau of the Census, about 90 percent of businesses in the U.S. are family owned, but most of them don’t last to a second or third family generation. Many factors can affect this such as the business model, how profitable the business is, how involved our children are in our business and if their abilities and interests are aligned with our business. Working on achieving success means taking those various factors into consideration.
Invest in Your Child’s Education
Saving college funds for our kids is another great way to invest for their wealth. One tax-advantaged way to start investing for our kids is through 529 educational savings plans. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs for your children. If you can pay for your children’s education, you’re setting yourself up for success, as many people, especially in our community, are struggling with student loans. By keeping this financial burden of student loans away from your children, you’re paving the way for them to build and keep generational wealth for your family.
Invest in financial education for your family
This is part of the non-monetary value you can give your family, that will certainly help them obtain and maintain generational wealth. Financial education is critically important, just as or even more than financial assets. Why do you think that most of the new millionaires who win the lottery lose it all in less than 5 years? Because they don’t know how to handle big sums of money and don’t have financial literacy. Learning about money ourselves first is critical, so we can teach our children. Start changing your financial life and calculate your net worth for free.
Teaching our kids about money, savings, investing, budgeting, diversifying their income and more will give them the skills necessary to earn, protect and increase their generational wealth. A research by Money magazine shows that “approximately 70 percent of families lose their capital in the second family generation, while 90 percent of families lose it in the third generation”.
Invest in creating multiple streams of income
The millionaire has at least seven streams of income — you read that correctly. This is not a coincidence, creating multiple streams of income (especially passive income) will help us build wealth much faster than if we rely only on active income (our job, where we trade time for money). By building passive income streams, you’re setting up for earning income while you sleep. Some passive income ideas include: renting rooms in your house if you don’t have a place to rent out, starting an e-commerce store, creating a book or e-book and selling online. For more side hustle and passive income tips and ideas, sign up to my free newsletter at Economikat.com
How to pass down generational wealth
These are ways to start organizing our documents now if we plan on building generational wealth for our family:
- Consider buying life insurance if necessary for protecting your beneficiaries
- Creating an estate plan
- Create a will
- Naming beneficiaries for your financial accounts
- Set up custodial accounts
Creating generational wealth, especially as a Latina, is a revolutionary act. According to a survey of consumer finances by the Federal reserve, “One reason wealth-holding is relatively high among white families is they are considerably more likely to have received an inheritance or gift and nearly 30 percent of white families report having received an inheritance or gift, compared to about 10 percent of Black families, 7 percent of Hispanic families, and 18 percent of other families”. Moreover, “White families are both more likely to have received an inheritance and are also more likely to expect to receive an inheritance: about 17 percent of white families expect an inheritance, compared to 6 percent of Black families, 4 percent of Hispanic families, and 15 percent of other families”.
Building a financial legacy that will be passed down from generation to generation is not an easy task and it has many challenges, but it is possible. Remember, only one person, one risk taker, can change the financial future of his/her family for many generations to come. Will you be that person in your family?