How to create generational wealth.

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‘Generational wealth is wealth that is passed down from one generation to another. This is through the accumulation of assets for the future to provide financial security.’

Generational wealth is wealth that is passed down from one generation to another , in order to guarantee future financial security. Generational wealth is important because it allows future generations the opportunity to become richer and compound existing wealth. For generational wealth to be created three cornerstone principles need to be established in your financial planning.

1.Think long term 

When building anything you need to have a long term perspective ,especially  in the context of building wealth. There is no get rich quick approach that can be applied to wealth creation.Building wealth takes decades and perhaps if your able to build a very successful business you can build wealth in 7 to 10 years ,and that are exceptions to the rule, as most successful business take long to build, just as all great things do. This long term commitment to building generational wealth may mean sacrifices short term gains and benefits. For example you may have to re-think purchasing an expensive car or living a luxury lifestyle against the possibility of building wealth that can be further developed by generations to come.  This mindset needs to be adopted into your lifestyle for all the next steps to be able to have effect. 

The best way to secure a long term financial perspective is to have a financial plan in place. Have it clearly set out what your goals are, and the timeline you wish to achieve these financial goals as well as the way you wish to achieve these goals.

2. Invest from day 1 

It is best to have time in the market then to spend time “timing” the market. This is the general rule of thumb, with the exception of certain market conditions , mainly financial bubbles, you definitely do not want to invest into a market bubble. However, other than bubbles, time spent in the markets is money earned even if there is a financial crash. The longer you are in the market the better chance you have to hedge against risk. With that said investing has inevitable risks and you may be unfortunate to invest in a company that becomes entangled in scandal and subsequently you loose a lot of your money – however if you follow our investing principles and use them as a guide on how to pick sound investments and manage risk, you will can avoid any losses. If you wish to learn more on how to pick an investment vehicle feel free to use the following link : ().

I am a strong believer that examples are the most effective in demonstrating the value of time and compound interest in investing , and that is why we are going to look at some examples, that demonstrate how time impacts your wealth.

X has R 2500 a month which he can start investing. At the age of 40 he starts to invest this money for the next 10 years, and earns an average return of 7% per annum. After 10 years he decides to increase the amount of money that he commits towards his investment portfolio since he got a promotion at work. X now invests R 5000 per month for the next 10 years and earns and average of 7% per annum . At 60 X decides to increase the contributions into his investment portfolio to R 7500 per month and he does this for the next 5 years and he earns and average of 7% per annum . In total over a period of 25 years X has invested R 1 350 000, and due to a compounding effect and the average return earned on his investments X’s portfolio investment is valued at R 2 943 397.35.

A break down of X’s investing is demonstrated in the table below:

Age of X  Amount invested  The gross value of the portfolio 
40 – 50  R300 000,00 R434 965,08
50 – 60  R600 000,00 R1 715 736,56
60 – 65  R450 000,00 R2 943 397,35

X has earned a nice amount and this amount is in line with the average recommended amount needed for retirement in South Africa.Now we are going to compare the results with someone who invest the same amount, and returns per annum, but they start investing earlier than X.

Y starts investing at the age of 18, they have a limited investing budget so they start with investing R 500 per month into their investment account and they do this for the next 5 years and earn 7% per annum. At the age of 23 Y starts working and decided to increase the amount that they invest into their investment account , and they start to invest R1000 into their account every month and they proceed to do this for the next 2 years. Y has had a good performance at work and she gets a promotion , due to this promotion she decides to increase her contributions to her investment portfolio to R 2500 per month and she continues to do this for the next 10 years. For these 17 years she continues to earn an average return per annum of 7%. At the age of 35 Y is in a better financial position earning more money , and because of this she starts to again increase her monthly contributions to her account R 5000 per month and she continues to do this for the next 10 years and earns an average of 7% per annum.  At the age of 45 she decides that she wants to invest in other projects, so she reduces her monthly contributions and starts to invest R3 300 per month and she does this for the next 10 years. At the age of 55 Y has invested R 1350 000 the same amount as X, and she believes that she has invested enough money so she leaves the money in her investment account to incur an interest of 7% per annum for the next 10 years. So at the age of 65 Y’s investment portfolio is worth an impressive R8 765 142,53.

A break down of Y’s investing is demonstrated in the table below:

Age of X  Amount invested  The gross value of the portfolio 
18 – 23 R30 000,00 R36 500,48
23- 25  R24 000,00 R67 561,51
25 – 35 R300 000,00 R562 950,92
35 – 45 R600 000,00 R1 976 504,08
45- 55 R396 000,00 R4 455 754,00
55- 65 R0,00 R8 765 142,53

Compound interest remains one of the wonders of the world, to really drive the message home we are going to look at one more example, and this really demonstrates how generational wealth is created.

At 45 Y’s decided to create an investment portfolio for her child Z. She invests a monthly amount of R 1500 into this account for the next 18 years and the investment earns an average return of 7% per annum.  At the age of 18 years old Z has a net worth of R 640 000 from the account created for him by his mother. Z has been taught by Y the importance of compound interest and investing , so he takes the investment account of R 640 000 and makes further contributions to it of R 500 per month. He makes these R500 contributions every month for the next 12 years. At the age of 30 Z decides to be more aggressive in his investing and he contributes R 5000 a month into his account and he does this for the next 10 years. He then proceeds to increase his monthly contributions to R 5350 per month and he proceeds to do this for the next 10 years. He stops making monthly contributions to his account to focus on other projects. His investment continues to produce a return of 7% per annum. At the age of 50 Z will have invested the same amount as X and Y , however because he had the advantage to build upon wealth which was created for him and passed on to him his investment of R 1 350 000 grows to the value of R 12 091 301.69 at the age of 65.

A breakdown of how Z invested his money :

Age of X  Amount invested  The gross value of the portfolio 
18 – 30  R108 000,00 R1 552 760,88
30 – 40  R600 000,00 R3 914 610,09
40 – 50  R642 000,00 R8 620 931,00
50 – 65 R0,00 R12 091 301,69

Z is the most successful in his investing venture compared to X and Y who invest the same amount and earns the same average returns from their investments. What distinguished Z from the other two examples is that he starts at an advantage because he inherited assets to build upon. Also he was able to grow this money because he was financially literate and taught how to invest. This brings us to the next important step of building generational wealth.

3.Pass on financial education 

In order to secure generational wealth you need to pass down financial education. You need to ensure that you pass on financial literacy skills onto you children, family members and your community. Education is power and without being financially literate people cannot make use of investment vehicles and profit from the capital markets.The best thing is to teach people about financial literacy when they are young so that they can embed those habits into their lives and they can become second nature to them. Chris Sacca a famous venture capitalist billionaire teaches his two daughters who aren’t even yet teenagers to peruse the financial newspapers in the morning so that they can develop their understanding and appreciation for the financial markets. Financial education is the fuel that sustains generational wealth.

I hope from this article you have gained insight that you can use to change and redirect the tide of your financial future , and with these three steps you can successfully create generational wealth that will secure a good quality of life for your loved ones, your community and yourself.

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