Everyone wants generational wealth for their family, and some of us may be closer than we think. Financial expert Rachel Cruze says the baby boomer generation will pass on a large part of its $80 trillion in assets to millennials.
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However, about 70% of wealthy families lose their status by the second generation. So, what can you do to avoid that fate and maintain more of your family’s money for your children? In a post on her Instagram, Cruze offered four suggestions.
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Get Out of Debt
Firstly, Cruze said getting out of debt is essential. It’s difficult to build and even maintain wealth when you’re losing hundreds of dollars a month or more to interest.
If you have multiple sources of debt to repay, consider whether the “snowball” or “avalanche” repayment plan is right for your family. Each involves making a list of your debts and paying them off one by one over time.
The snowball method, which is preferred by Dave Ramsey, entails paying off the smallest of your loans as quickly as possible. The avalanche method starts with the loan that has the highest interest rate instead.
Both options can make sense depending on the nature of your debt and broader financial situation.
Invest 15% of Your Income for Retirement
Next, Cruze said you should always invest 15% of your income for your retirement, which is in line with what most investors believe. Doing so will keep you on track for a bright financial future. But how should you invest, and what should you invest in?
Well-known finance expert, Warren Buffett recommends putting 90% of your money in the S&P 500 and the remaining 10% in government bonds. The S&P 500 has returned an average of about 10.5% per year since the late 1950s, making it a fairly reliable investment. Government bonds, on the other hand, keep a small percentage of your capital protected from market risks.
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Pay Off Your House Early
Cruze’s third tip for building generational wealth is paying off your home early. Ramsey shared a similar idea in the past, saying, “Paying off your mortgage early will rev up your wealth building.”
But why should you? The main reason is that paying off your home eliminates most housing costs from your budget. This frees up your income for investing and saving, which you have to do to build wealth over time. Paying off your home early can also reduce your stress and help you feel more comfortable financially.
But it’s not always the right decision from a purely financial perspective. For example, you might have locked in a low mortgage rate under 3%. If so, it would make more mathematical sense — based on history — to invest your extra cash in the S&P 500 instead of paying more on your mortgage. That’s because the S&P 500 returns just over 10% annually while you’re paying 5% to borrow money through your mortgage.
Teach Your Kids About Money
Cruze’s last tip is to teach your kids about money from an early age. This is a common idea meant to help children develop good financial instincts. It’s especially important when you’re thinking about generational wealth.
Remember, about 70% of wealthy families lose their status by the second generation. You may be able to avoid that fate by helping your kids understand financial discipline while they’re still young.
Can Rachel Cruze’s Strategy Really Build Generational Wealth?
Cruze’s tips are great pieces of advice that have been echoed by many other financial experts across the country. However, they likely won’t help you create generational wealth in the way most people understand it.
Getting out of debt and paying off your home early can create more room in your budget for investments. But you’re still probably working with a limited income, which puts a ceiling on the maximum amount you can save per year.
Following Cruze’s guidance may help you retire faster, but it probably won’t create a fortune for your children to inherit. For that, you’ll need to increase your income or improve your investment returns.
You can increase your income by advancing in your career and working side hustles. But if you want to improve your investment returns, you may have to assume an increased risk. That can look like investing in a single company you believe in instead of an index fund.
Just note that Buffett and other gurus recommend investing in the S&P 500 for a reason: It keeps your risk low while generating reliably good returns. Single stocks tend to fluctuate much more from year to year, which can lead to large losses.
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This article originally appeared on GOBankingRates.com: Rachel Cruze: Here Are My Top 4 Ways To Build Generational Wealth
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