Experts Share the 10 Moves People Make That Hold Them Back From Earning Generational Wealth
The total cumulative amount of wealth in the U.S. across all generations is $156 trillion. This wealth is split between multiple asset types, including real estate, businesses, equities, pensions and durable goods.
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Generally speaking, building generational wealth is something anyone can do. However, there are certain money moves people make that either prevent them from accumulating wealth or that hold them back. Here are some of the biggest ones.
Waiting To Invest Until They Have Money
Investing is one way to build generational wealth, but many people don’t do it at all, or they wait for a long time to get started. There are many reasons for this, such as the fear of risk or a lack of investing knowledge. But many people wait to get started until they have what they consider to be enough money. This can be a mistake, though, as it limits potential returns.
“It’s common for people to wait until they have more money to start investing,” said Shinobu Hindert, a certified financial planner, author of “Investing Is Your Superpower,” and creator of Empowered Planning, LLC. “Investing early helps you compound the growth because you make money on your money. Don’t worry about how much you think is enough to start investing; just get started and add more over time as you can.”
Not sure where to begin?
“Find ways to start investing that don’t have cost barriers,” Hindert said. “Companies like Fidelity Investments and Vanguard offer investing options without account minimums so you can get started right away.”
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Taking on Risky Investments
On the other side of the coin, a lot of people fail to build generational wealth because they take on high-risk investments in hopes of accumulating wealth quickly. While this can occasionally work out, it’s much more likely to fail.
“It can be tempting to think that a specific trendy investment may help you build wealth, but really you should stick to the basics. Investing is based on the amount of time you have until you need to use that money and how comfortable you are with risk,” said Kendall Meade, certified financial planner at SoFi.
Meade suggested choosing your investments based on your goals and risk tolerance. “For long-term investments that you plan to pass on to the next generation, the best investments are a long-term, low-cost portfolio,” Meade said. “This money can be aggressively invested or even 100% in stocks because you are not needing to use this money. However, it is still important to make sure that it is diversified (not all in one stock or even one sector of the market).”
Spending Too Much Money When Investing
Some people spend more money than they need or ought to when investing, something that’s detrimental to building wealth for the next generation.
“Rather than paying high fees for your investments, which can cut into your growth, consider using a lower-cost alternative,” Meade said. “This could be either an active investing product that allows you to buy and sell investments on your own or an automated investing product that invests your money for you.”
Certain types of investment accounts are free or low-cost. This includes more active and automated or passive accounts.
Never Buying Property
“One of the biggest hurdles to building generational wealth is [the] lack of property to pass down, which will benefit future generations by either giving them a place to live or a large chunk of money if they sell,” said Scott Lieberman, founder of Touchdown Money.
Real estate has long been considered a smart investment opportunity, especially for those who want to have something to pass down to their heirs. And while renting can be a smart decision right now, it might not be as beneficial in the long run.
“If you’re trying to build generational wealth, it’s important to consider what you’re building to leave to future generations,” Lieberman said. “It may be more convenient in the moment to rent, but in the majority of cases, owning property benefits future generations, so it’s important to choose and buy wisely.”
Failing To Create a Trust
For people who have assets to pass down to the next generation, like a house, another mistake that can delay or even prevent the transfer of wealth is failing to put that property in a trust.
“Once you have a home and the ability to maintain it, the second major mistake people make is not putting their home/property in a trust. The main benefit to putting your home in a trust is to bypass probate when you pass away,” Lieberman said. “If your heirs go into probate because you didn’t have a trust, it can be a lengthy and expensive ordeal — and that’s the last thing you want if you’re trying to build generational wealth!”
Avoiding Money-Related Discussions
While many people don’t want to talk about money or one’s own longevity with their loved ones, refusing to do so can actually make it harder to create or pass down generational wealth. Even if you do leave behind an inheritance, not having transparent conversations about it can make it difficult to ensure long-term wealth for the family.
“Most people don’t want to talk about wills and trusts, but it’s vital if you want to continue to build generational wealth,” Lieberman said.
Trying To Go It Alone
Many people try to handle all of their financial affairs on their own, sometimes to avoid having to spend money on professional insight or assistance.
The issue with this is that everyone has their strengths and weaknesses. Trying to manage everything by yourself can increase the risk of missing out on opportunities that can either build wealth or save money. This becomes even more likely when you’re dealing with large amounts of wealth or multiple types of investment accounts.
“Recognizing your strengths and areas you need professional insight is important. You want to build a team of trusted advisors that you can lean on to discuss the short and long-term impacts on decisions you make with your money,” Hindert said. “Speak with financial professionals about how they work with their clients. This means involving an estate attorney, financial planner, and accountant. Start building your team so they can get to know you over time and you can build that trust.”
Earning More but Also Spending More
As people start earning more money, they often start spending more on things like their rent or mortgage, car, hobbies and other aspects of life. This is what’s known as lifestyle inflation, and it can make it increasingly difficult to build lasting or generational wealth.
“This is a double whammy because not only are they not saving, but their expenses are growing so the lifestyle they are accustomed to will cost more in retirement. A way to avoid that is by saving [or] investing the majority of any raises or bonuses you get,” Meade said.
Saving or investing this money “prevents lifestyle inflation and keeps your expenses lower now, meaning you will need less money to replace your current lifestyle in retirement,” Meade said. It also “allows you to save more money now, which can be invested and grow over time.”
Becoming Car or House Poor
People become house or car poor when they spend too much money on their housing or vehicle-related expenses. This reduces how much money is left for saving and investing. It can also result in people taking on more debt to cover their current bills.
“If your car payment and rent or mortgage are too high, you will not have the available funds to save or invest for the long term,” Meade said. “I recommend trying to keep your total debt payments around 36% to give you room in your budget for savings/investments. This includes car payments, housing, student loans, and any other debt payments such as credit cards.”
Another way to avoid becoming house or car poor is to take some time before making major purchases.
“I also recommend implementing a waiting period of a month or longer to make sure you really want this purchase and avoid any buyer’s remorse later,” Meade said. “I see far too many people buy an expensive car and realize a year down the road that this is causing them to fall behind on their other goals like retirement savings.”
Relying on Debt To Sustain Their Lifestyle
While there is such a thing as good debt, far too many people become reliant on debt to pay for their lifestyle. The more debt you have, the more you’re likely to be paying in interest. Any interest payments could be going toward building generational wealth.
“Many consumers may be unable to save currently due to tight budgets and high-interest-rate debt,” Meade said. “As of Q2 2023, credit card balances increased by $45 billion to reach a high of $1.03 trillion. While higher interest rates are great for high-yield savings accounts, it has also caused debts such as credit cards to get even more expensive. High inflation has also caused tighter budgets, leaving many consumers struggling to save.”
If you do have high-interest credit card debt, or any other type of consumer debt, you might need to pay off that debt before you can build generational wealth.
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