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How To Create Generational Wealth
7 simple steps that will set you and your family up for life!
It only takes one person in your family to learn how to think differently about money and put a plan in place that will create generational wealth.
Following these 7 simple steps will help you become that person for your family:
1) Avoid High-Interest Consumer Debt
It’s important to understand that I didn’t say to avoid all debt. I’m specifically referring to high-interest debt via credit cards or personal loans.
This is because not all debt is bad. Utilizing low-interest debt to buy assets such as real estate can actually be used to your advantage. Many people leverage debt to buy rental properties that not only increase in value over time, but also provide an additional passive income stream (more on this later).
The debt that you need to avoid at all costs is high-interest consumer debt. Many people use their credit cards to buy things they don’t need with money they don’t have. But that outstanding debt balance quickly becomes a huge weight on their personal finances.
Suddenly they can only afford the minimum payments on their debt every month which means most of their monthly bill is going straight towards interest instead of the principle debt. This can lead to a never-ending cycle of debt payments that seem to never go away.
The best thing you can do is to avoid this issue entirely by only spending money you currently have and always paying off your credit card balance in full at the end of every billing cycle.
2) Build An Emergency Fund
Having an emergency fund to cover any unexpected bills that may arise is absolutely essential to your financial well-being. This is what will save you from being forced to take on high-interest debt to cover those same unforeseen expenses. An emergency fund is your financial safety net.
How much money should be in your emergency fund?
I recommend saving 4-6 months expenses to be safe. To find out how much you need, look at your monthly budget and add together all of your costs (rent/mortgage, food, entertainment, car payment/insurance, etc.) Then multiply that number by however many months you wish to save for. I personally choose to keep 6 months expenses in my own emergency fund.
Where to keep your emergency fund:
Your emergency fund is not meant to be invested. You don’t want to subject your emergency savings to the volatility that naturally comes with investing.
You can choose to keep your emergency fund in a normal checking or savings account if it makes you more comfortable, but it will constantly be losing its purchasing power there due to inflation. Banks offer extremely low interest rates on normal checking or savings accounts (as low as 0.05%-0.10%). This means your savings will earn next to nothing over time as inflation eats away at its value every year.
I recommend keeping your emergency fund in a high yield savings account (HYSA) of some kind. There’s many great options out there that you can find and compare with a simple Google search.
The biggest things to keep in mind when researching which one to use are:
making sure its FDIC insured
comparing the APY (higher APY means more money for you)
checking for hidden fees
Lastly, be aware that many HYSA options are online and don’t have ATMs for you to easily withdraw funds from whenever. So to get the money, you must transfer it to your regular checking account (which can take 2-3 business days depending on your provider).
3) Evaluate Your Spending Habits
Most people will live their entire lives with a consumer mindset. They believe that all the money they make is meant to be spent.
First they pay all the bills because that’s mandatory. But then the money left over is looked at as ‘treat yourself’ money. They’ll spend it all on unnecessary materialistic items because it makes them feel good.
You must learn to think differently!
You shouldn’t look at money left over after paying your bills as money to be spent, but rather as money that can be used wisely.
Any time you go to buy something that you don’t absolutely need you should think to yourself: ‘Do I NEED this, or do I WANT it?’
Just because you don’t need it doesn’t mean that you shouldn’t buy it. But learning to have that internal conversation with yourself before every major purchase is how you can become intentional with your money and spending.
Effectively budgeting is much easier with this mindset.
4) Increase Your Income
You can only save so much money by cutting down your spending and sticking to a monthly budget. But the amount that you can increase your income by is limitless.
It took way longer than it should have for me to realize this truth. Since I finally did, increasing my income has become a top priority.
If you’re effectively getting by on whatever amount you’re making now, just imagine how much better you could be doing if you made more money.
So start a side hustle, ask for that raise at work, or get a higher paying job in general. Just find ways to make more money!
5) Invest Your Money
Inflation is higher than ever and we’re all feeling the effects as pretty much everything has gotten more expensive. This means that your uninvested cash is losing more of its purchasing power every year.
Investing into quality assets such as stocks, index funds, and real estate is the only way to ensure that your money is protected from the negative effects of inflation.
You must learn how to invest so that you can put your money to work for you. If you don’t, you’ll forever be stuck working for money.
“If you don't find a way to make money while you sleep, you will work until you die”
- Warren Buffett
6) Automate Everything
Automating as much of your finances as possible is a great way to stay consistent with healthy money habits.
Automate your bills to be paid on time with a card or automatic withdrawal to avoid late fees.
Automate your credit card bills to be paid off in full at the end of every billing cycle to avoid owing extra money in interest payments.
Automate your investments to be made every month without you needing to do it (example: a 401k contribution through your employer).
Automation is a wealth hack because removing the need to remember to do things yourself improves your ability to stay consistent with doing them.
7) Find A Healthy Balance
Lastly, its so important to find a balance between spending money on things that help you enjoy the present day while still planning for your financial future by investing.
You do only live once, but your retirement is a big part of that ‘one life’.
You can spend money on nice things and experiences now while still budgeting to invest for your future. Don’t ever think that planning for retirement means you can’t still treat yourself today. Find the balance that’s right for you.
Creating generational wealth starts with changing your mindset around money and spending while also learning to implement healthy financial habits that you can stay consistent with!
These 7 tips are a great place to start when it comes to getting your personal finances in order. I hope you can find ways to implement these lessons into your own life and that they help you start down the path to building generational wealth for you and your family.
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