How can a person accumulate enough wealth so that it’s passed down for generations? Before we directly answer that question, let’s talk about financial literacy and address some practical tips we should all be doing.
- Get out of debt, and stay out of debt. If you are unable to pay-off all your revolving or installment debt, try to at least keep your revolving debt balance no more than 35% of your limit.
- Open a savings account and have at least six months of your gross monthly expenses in an emergency fund. Get in the habit of saving!
- Invest 12-15% of your income into retirement accounts — 401(k) and Roth IRAs. Max them out annually if possible.
- As your income increases, resist the impulse to increase your standard of living. The two do not have to go hand-in-hand.
Once you’ve laid the foundation and practiced good financial habits, your personal credit score and income should be good enough to warrant a home purchase (assuming you have steady income). Purchasing real estate is one of the best ways to create generational wealth.
Start with a duplex, triplex, or fourplex
When you are ready to buy your first home, instead of jumping into a traditional single family home, think about purchasing a duplex, triplex, or fourplex with a government insured FHA mortgage (because the minimum required down payment is only 3.5% with a FICO score of 580 or higher). By owner occupying the duplex, triplex, or fourplex, you can then rent out the other units and use that income to pay your mortgage. Think about that for a moment. If someone else was paying your monthly mortgage payment, how much money could you save in 12-24 months?
If someone else was paying your monthly mortgage payment, how much money could you save in 12-24 months?
You will have to occupy that property for at least 1 year before you can move into another home.
After 12 months have passed, if you then wanted to move out of your duplex, Triplex, or fourplex to make room for yet another renter, you could. Then, on your next purchase you could get into a conventional Fannie or Freddie backed conventional mortgage with a minimum of 3% down payment (if you income qualify). In the event you make too much money annually for Fannie Mae’s HomeReady or Freddie Mac’s HomePossible low down payment program, no worries … you can still get into a conventional single family home for as little as 5% down (assuming you have the necessary minimum credit score of 620-640 needed for a conditional approval).
Following the best practices above, you could end up owning 2-4 rental units with minimal investment dollars down, earning you extra monthly income, as well as an asset that typically increases in value throughout the years!
Pass Down Knowledge
In conclusion, one of the most important things to remember when trying to help multiple generations within your family; pass down the knowledge you’ve learned. And remember, knowledge is NOT power until the knowledge is applied. Teach your children to work, earn, save, invest, and spend wisely. Proper financial literacy is typically not taught in schools. That in my humble opinion is one of the underlining causes pertaining to the homeownership disparity gap.
You don’t know what you don’t know
So it is your job to make sure each generation is armed with the necessary information to grow and preserve your families wealth. Because if you don’t come from a rich family, a rich family must come from you.