Young families often face financial challenges when starting their journeys through life. These can be turbulent times as many are settling into their careers by getting jobs that pay decent money and figuring out what to do with them. Many young families are torn between digging out student loans and other debt while feeling the pressure of living it up or keeping up with the Joneses. Building generational wealth is so far-fetched that it’s hard to know where to begin.
Then, for families with young children, all kinds of other pressure, especially financially, come into play. But, all at the same time, the most critical time to start building wealth is when you’re young since you have the power of compounding interest on your side.
How do we balance it all?
Living with intentionality is critical. But let’s also be honest, so is having a good income. Often personal finance bloggers suggest cutting on the expense side instead of increasing the income side. It’s easier to mean eliminating cable or cutting out $5 coffee than finding a new job or building a side hustle. Both sides of the equation are critical, but you can make more money mistakes with a higher income.
Regardless of your income level, the guide below can help you set up a pathway to building generational wealth. It’s in some ways, very over-simplistic as each step has additional layers. With that being said, the concepts around personal finance are simple. It’s the doing that is hard.
One of the greatest gifts you can give your children and your children’s children is a strong financial foundation free from financial struggles. There’s a balance here, too, and we don’t want to raise spoiled kids.
After sharing a bit about my young family’s story below, the following sections provide thoughts on how to start building wealth as a young family. The first section includes three essential pillars to consider when starting. The second section offers some actionable tips to improve your financial life.
My Family’s Story
I’m embarrassed that I knew little about personal finance in my 20s. It is particularly embarrassing as I went to college to study economics and finance.
Up until age 25, I primarily worked in food service as a server, bartender, and caterer while attending school. Then, at age 23, I lived independently without support from my parents while attending grad school. The money wasn’t bad, but I never made more than $25k annually.
At 25, I got my first job in my study area, making $50k annually. Finally – real money! Now, it was time to live life.
During my late 20s, the debt continued to pile up. Weddings, houses, vacations, and student loans always had us burning through savings and taking on more debt. By age 30, my wife and I had accumulated about $100,000 in mortgage debt, $50,000 in student loans, and $25,000 in other miscellaneous debt, such as car payments.
That’s when we finally woke up.
I can relate when I read about individuals in their 20s who are frustrated about not making financial progress. However, if you’re reading a blog like this before age 30, chances are you will be more successful financially by the time you reach my age.
To start a family someday, have your finances in order. Engagement rings, weddings, children, insurance, mortgages, and so on can be costly if left unchecked. Did I mention that children are expensive?
The statistics show that while financial literacy is improving, there’s still a long way to go.
Money remains a top reason for fights in a relationship and one of the leading reasons for divorce.
Being on the same page as your partner is so important, and it’s frustrating that it’s not discussed more often in the mainstream. Don’t put yourself in a position to damage the state of your marriage or family by not being financially responsible.
How Do You Build Generational Wealth?
Reflecting on my family’s story, we’ve made many mistakes. In our late 20s, we thought we were doing everything right, but in hindsight, there was a lot we were doing wrong. Being able to rebound at age 30 was tough, but not as tough as it could have been. Yet, despite our challenges, we also did a few things right.
Below are three things we did right that helped us dig out of debt and continue building our investments in our 30s. Some may seem like common sense, but I believe they are critical to building a foundation to build your family’s generational wealth eventually. By making sound financial decisions early, you can set your financial foundation for a lifetime of success.
Minimize Lifestyle Inflation
Even though we were financially a mess heading into our 30s, one thing we did right was kept our lifestyle reasonable.
We owned a home but weren’t house-poor.
We had car payments but didn’t go out and purchase new cars every few years.
And even though we had about $50,000 in student loans, we weren’t saddled with high-interest credit card debt.
I’m unsure if this would have been the same if we didn’t wake up before our mid-30s. But now that we are in our late 30s, the pressure of keeping up with the Joneses is real. I struggle with it often. But, without a financial plan, it would be challenging not to give in.
Thankfully, when we had our “ah-ha” moment, it wasn’t too late to turn things around. Unfortunately, while it’s never too late to turn your life around financially, the further down the path of debt and lifestyle inflation you get, the longer it will take to dig out.
Becoming financially literate early will allow you to minimize the temptation of lifestyle inflation until you can afford the life you want without financing it.
Realize the Benefits of Investing Early
One of my earlier posts provides the benefits of compound interest through the story of Bill and Susan.
To summarize the blog post, investing $5,000 beginning at age 25 for ten years would leave you with more money at age 65 than a 35-year-old who invests $5,000 for 30 years.
Too often, young professionals say they will worry about saving for retirement later in life. This can be a catastrophic mistake.
Not only are you potentially leaving free money on the table through an employer-company match, but you also cannot get time back on your side to take advantage of compounding interest fully. The earlier you can start investing, the better.
If you have a young family, knowing that you have started investing early will provide more flexibility later in life if you lose a job, take a pay cut, or do something worse.
Find a way to start investing as early as possible, even if it’s only $25 monthly. First, become dedicated to creating a gap between your income and spending. Then, grow that gap by looking for ways to increase your income and reduce expenses. At a minimum, you should try to work your way to invest up to any matching provided by your company.
Set Your Financial Foundation
Becoming mindful of money early in life will allow you to set your financial foundation. A solid foundation will provide more flexibility as you grow your young family. Your financial foundation includes retirement savings, low expenses, a livable wage, passive income, or debt-free assets.
A solid financial foundation has allowed us to go from two incomes to one so my wife can stay home with our young children. But, of course, this wouldn’t have been possible without a solid financial foundation.
While moving to one income may not be the desired outcome for your family, something will come up later in life where you’ll need financial flexibility. It could be a job loss, divorce, sick family member, car accident, or an aging parent. So ensure you start getting your financial ducks in a row as soon as possible.
A Step-by-Step Process to Start Building Generational Wealth
Financial information can be overwhelming. If you are like many families and living paycheck-to-paycheck, below are a few actionable steps that you can take to start setting your financial foundation. Remember that none of this is easy, even though it seems simple on paper. That said, if you commit to improving your economic life, you will make progress. Not all of us will build generational wealth during our lifetime, but even if we don’t quite get to the finish line, following these steps will significantly improve our financial life.
1) Track Your Expenses
We all have to start somewhere. To make changes in your financial life, you must first understand where your money is going. Tracking your expenses for a couple of months so you know where your money is going is a critical first step.
The good news is that plenty of apps will help you track your expenses. We use Mint to track our expenses. After downloading the app, it only took a few minutes to link our accounts. Dozens of other apps will also allow you to track your spending.
Commit to tracking every penny you spend for two months and see what happens. This is simple yet hard to do. Regardless, the results can be powerful.
If your income and expenses are low, you may not have the opportunity to save much or pay off debt initially. However, tracking your expenses will allow you to take control of your financial situation. It will help you develop a plan. You will think twice about those impulse purchases we all make at times.
2) Establish an Emergency Fund
Personal finance is much more behavioral than technical. One of the most frustrating aspects of trying to get your financial life in order is the surprises that come up along the way. Nothing will derail and demotivate you more than your HVAC unit going out or an unexpected medical expense. After getting flooded this spring, we recently spent $11,000 to waterproof our basement.
Your goal should be to save three-to-six months of emergency savings. You can put this money in a high-interest checking or savings account or invest it in a money market account through a brokerage account.
If you have lots of high-interest debt, save an emergency fund of $1,000. This will give you some cushion during minor emergencies, such as a flat tire, broken dishwasher, or unexpected doctor’s visit. Now that you’re tracking your expenses, hopefully, you can find a hundred dollars or more to start building this cushion. This is so important early on as there is nothing more frustrating than having to go further into debt to cover unexpected expenses.
3) Automate Your Finances
This one is a bit more complex, but after tracking your spending for a few months and building a small emergency fund, consider automating your finances.
What is “automating your finances“? It simply means setting up systems to automatically invest, save, pay down debt, or pay your monthly bills.
We have automatic deductions for all of our savings and charitable donations. You can usually set up automatic contributions if you have a retirement account through your workplace, such as a 401(k). Then, when my paycheck hits our checking account, we automatically contribute to any charitable donations within two days, along with most of our bills. From there, we only have to worry about regular expenses such as groceries and gasoline.
If you’re starting, a detailed budget would be helpful. However, once you create space between income and expenses, you may not require a detailed budget if you automate your finances. We haven’t had a budget for years since we invest, give, and pay bills, leaving the rest to us to spend on whatever we want.
4) Pay Off Your Debt
Now that you’ve been tracking your expenses, planning to build a small emergency fund, and taking steps to automate your finances, it’s time to get laser-focused on paying down debt. We will focus on all debt in this capacity, excluding your mortgage.
Take an evening to find out all your outstanding debt and write it down. You can take a few different approaches to pay down your debt.
Debt Snowball Method
This involves paying down your lowest dollar debt first. Then, you would use the money to pay the first debt to pay off the second debt. The idea is that small wins will keep you motivated to pay down the higher dollar debt.
Debt Avalanche Method
This involves paying down your debt with the highest interest rate first. Then you move to the second-highest interest rate, and so on. This method makes more sense from a mathematical perspective, though it could be tougher to stay motivated.
My preferred method is the debt snowball UNLESS you have a high-interest debt of 8 percent or more. You should pay off your credit cards first with those higher interest rates. Like many, we started our debt-free journey by following Dave Ramsey. In addition, there are Financial Peace University classes across the United States, which is a great place to start.
5) Invest to Build Generational Wealth
You must invest your money in assets to build generational wealth for your family. When considering investments, you usually have three options:
- Stocks, bonds, or other securities
- Real Estate
- Small Business
For this post, we will primarily focus on number 1, which is the easiest way to invest in assets. By investing 15 percent in a retirement account, you can save for a comfortable retirement if you start early. The power of compound interest is incredible. Putting aside a little today can result in considerable gains in the future.
If your company offers a 401(k) match or another tax-advantaged account, you should always try to contribute at least up to the match. Don’t wait to pay off all your debt or build six months of savings, as you could miss out on free money from your company.
I repeat, always do what you can to invest up to your company match.
You should pay off all of your non-mortgage debt for other investments and build an emergency fund of at least six months before investing above a company match or considering other investment options.
My family’s goal is to build up enough money in investments to live off the interest and allow the principle to carry over to future generations. This is how you build generational wealth. This is easier said than done, but once you remove debt from your life and create a financial cushion, you will have room to invest in most markets, even on an average salary.
Improve Your Financial Life and Build Generational Wealth
The journey of a thousand miles starts with one step. So when we began to get our financial life in order about seven years ago, it wasn’t easy to know where to start. This was when I was still early in my professional career, and my wife was back in a school funded by student loans.
We barely had any gap between income and expenses, and in fact, the gap was probably negative as we were accruing thousands of dollars in student loans. Limiting lifestyle inflation, investing early, and setting a financial foundation will allow your family to get off to a great start financially.
Not sure where to begin?
Start small by simply tracking your expenses and building a small emergency fund. Once you’ve done this for a few months, look into options to automate your finances, develop a plan to pay off debt, and check into your employer to determine matching possibilities. Once you free yourself from the shackles of debt, you can consider other options to buy investments to help your family build generational wealth.
Like most personal finance-related topics, the concepts are easy, but the doing is hard. Paying down debt can be a long and grueling process. It took us seven years to become completely debt-free, including our mortgage. I don’t want to sell this as something that will come easily. Take the first small step to get started. You’ll be surprised how much you can accomplish over the next several years.
Mark is the founder of Financial Pilgrimage, a blog dedicated to helping young families pay down debt and live financially free. Mark has a Bachelor’s degree in financial management and a Master’s degree in economics and finance. He is a husband of one and father of two and calls St. Louis, MO, home. He also loves playing in old man baseball leagues, working out, and being anywhere near the water. Mark has been featured in Yahoo! Finance, NerdWallet, and the Plutus Awards Showcase.
Millionaire Mob says
It’s very important that never hurt anyone for money. You can make money, you can lose money but never make someone sad because for a period of time you had money. People change when they have money. They get utmost confidence and superiority. That’s the real worth of money and thanks for the posting.
I’ve heard others say that money is an amplifier and I’ve found that to be so true. Good people with money with do more good things. Bad people with money will do more bad. Thanks for commenting!
Moriah Joy says
I’m so thankful that my husband and I are on the same page when it comes to our finances. It’s made this first year a lot less stressful than it could be.
It’s so important to be on the same page with finances. Marriage is tough no matter what and money problems make it that much more challenging. Thanks for stopping by. 🙂
Tread Lightly, Retire Early says
I mean, she couldn’t *make* her daughter go through any kind of pre-marital counseling, but I definitely appreciate the sentiment. There are so many ways to do money, but being on the same page with your partner is most important.
Bah, I guess you’re right as usual. She was pretty adamant though!
You’re right there are many ways to do money. My wife and I still have separate bank accounts and it works for us. Even with her being a sahm now, part of my check goes directly into her account. Some will say that separate accounts are bad in a marriage but it works for us so *shrug*.
Tread Lightly, Retire Early says
You read my guest post on Get Rich Slowly, right? I’m all there with you on the positive aspects to separate accounts 😉
I hadn’t read it and didn’t realize you were a pro separate account’er (totally not a word). 🙂
I just read through it and we are totally on the same page with separate accounts. It’s a little more complicated now since we are a one income family, but since the timing of my wife stepping away from her teaching job aligned with paying off our mortgage, the two offset and not much really changed for us. Anyway, I loved your comment about being able to save a bit more on a strict budget, but that would not make you happy (and saving nearly 50% is amazing btw). Thanks for sharing. If anyone else wants to check out Angela’s guest post see the link below.
Tread Lightly, Retire Early says
I can imagine it’s a bit more difficult with a single income family, but I love that you still do it! Would love to read more about how it works for your family.
Added to my list of future topics. This is a great idea now that we’ve being doing it for about 6 months. Thanks for the suggestion!
Tread Lightly, Retire Early says
Make sure I see the post whenever you get around to writing it!
Chris Roane says
I wish I read this 15-years ago. 🙂 This quote is encouraging and depressing (for me) at the same time:
“To summarize the blog post, investing $5,000 beginning at age 25 for 10 years would leave you with more money at age 65 compared to a 35 year old who invests $5,000 for 30 years.”
I’m the 35 year old that just got debt free, lol. I just got to hustle more and try to do what I can to win back that lost time. This is motivating to help my kids not make the same mistakes I did.
Well to make you feel better, I was a finance major in college and didn’t pick on these personal finance topics until nearly 30 years old. Thankfully I’ve always invested in my company 401(k) at least up to the company match, but I wasted so much money in my 20s. I’m the 37 year old guy who became debt free and am just now starting to focus on building passive income. It’s never too late.
Abigail @ipickuppennies.net says
All good advice. After a while of being too afraid to track my expenses (when I was married to a spender) and then being too harried to do it, I’m finally getting my act together. I’m already saving quite a bit, but that doesn’t mean I shouldn’t know where the money I do spend is going!
We are still getting used to tracking our spending. I’ll be honest in that I haven’t looked at my Mint account in two months. Automating our finances has been the most important thing for us to stay on track with money. You can’t spend it if it leaves your account right away!
Mr. SR @ Semi-Retire Plan says
I’m in the same boat as you with college. I also studied business, and I realized one day that I still didn’t know the first thing about investing or financial planning! From there, I finally decided to take initiative on financial literacy.
Very cool to read some of your story and to see where your family is now. Love that you make a note to intentionally keep your marriage as a priority! — “Don’t put yourself in a position to damage the state of your marriage or family by not being financially responsible.”
Thanks for the kind words. I feel like a strong financial foundation is one of the greatest gifts we can give our families. We hope to some day get to a point where money is no issue, without going so far as to spoil our kiddos.
Baby Boomer Super Saver says
Congratulations on being debt free, including your mortgage! That is huge! Great resources listed, thank you for such an informative post!
Thanks so much! I’m still pinching myself a year later. We are very fortunate to be in this situation.
Great post! Having a “roadmap” and goal as a family in regards to finances and living intentionally is so important! It really helps you be on the same page which is so incredibly important for a successful relationship.
Thanks! The toughest part of this all is trying to help others see the why in following this roadmap. I know that was the most challenging part for us. The pressures of society are real and that’s something that’s difficult to overcome. I feel like personal finance bloggers are swimming up stream against these forces. Thanks for reading!
Rita Stewart says
This is an excellent article, really comprehensive suggestions. I’m curious about your thoughts on adding life insurance as part of one’s portfolio to build generational wealth.
Thanks, Rita! This is a great question. Insurance plays a big role in building wealth. I look at the role of insurance more from the defense perspective. Life, disability, health, home, auto, and other types of insurance are a must. Insurance should protect us from big unexpected events. There would be nothing worse than building up a big portfolio and losing it all to an accident.
As far as insurance as an investment vehicle, I’m always cautious. With life insurance for example, my family has a 20 year term life insurance policy that will hold us over until our kids are grown. Whole life insurance policies that have some type of investment included generally provide a poor return.