Generational_Wealth
00:00:00.000 | Hello everybody, it's Sam and Sydney and in this episode we want to talk about
00:00:04.560 | Generational wealth and why there's so much angst of the not rich enough class
00:00:10.420 | But before we do, please don't forget to sign up for our weekly newsletter at financial samurai.com
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00:00:29.160 | By this not that
00:00:30.720 | So the other week some parents had asked me whether I had read a column in The Washington Post
00:00:36.320 | Entitled the 400k conundrum and in the post it talked about how households making 400k and above were struggling to make ends meet
00:00:44.720 | They didn't feel rich
00:00:46.300 | Even though they had a top 2% income now if this sounds familiar
00:00:51.040 | Well, I've been writing about this subject since I started financial samurai in 2009
00:00:56.880 | Talking about earning two hundred thousand dollars not having much left over
00:01:00.860 | Making three hundred thousand dollars and living a middle-class lifestyle and even making five hundred thousand dollars and kind of scraping by that
00:01:09.320 | Was actually one of my most popular posts out of all time
00:01:13.020 | because there was a lot of pissed off people who read and said how can you make five hundred thousand dollars and
00:01:17.720 | Just scrape by and never be able to escape the rat race
00:01:21.160 | Well, I proved in each one of these posts with a budget a very detailed realistic a budget about
00:01:27.840 | How quickly money can go as a result?
00:01:30.920 | I think there is a lot of ongoing angst and anxiety
00:01:34.520 | From some of these high-income earning households that seem to have at all great jobs upward mobility everything
00:01:41.920 | However, based on my years of research, I think the three main reasons why there's so much angst and anxiety
00:01:49.280 | are the following one never-ending comparison to a lack of generational wealth and
00:01:55.440 | three having children
00:01:57.840 | so before we had children, I
00:01:59.960 | Didn't feel that much angst and anxiety while I was making six figures a year working in investment banking
00:02:06.640 | Did you feel that I had any anxiety or did you have any angst and anxiety before we had children?
00:02:12.040 | No, I think a lot of it all it pretty much started once the kids came
00:02:16.840 | Right, and so that's the thing
00:02:18.840 | When I wrote scraping by on five hundred thousand dollars a year, this was two years before we had children
00:02:24.760 | But I wanted to empathize with households who just couldn't get off the rat race
00:02:30.960 | I mean after all I had left a multiple six-figure job behind several years earlier
00:02:35.600 | And I was thinking myself. Well if I could do it, why can't you too?
00:02:40.640 | But the real difference between then is that back then I didn't have children
00:02:46.640 | And now we do so now I clearly understand why there is so much ongoing
00:02:50.640 | Anxiety with these high-income earning households and you find many of them many of them in some of our larger cities like New York City
00:02:58.640 | San Francisco, Los Angeles
00:03:00.720 | Where Seattle I think everywhere like for example if you get a job in tech
00:03:07.000 | You're starting comp is around
00:03:10.400 | 150 to 200 thousand dollars as a 22 23 year old and it's the same thing with finance and management consulting
00:03:17.160 | So and then and then if you couple
00:03:19.440 | Couple up then that's double the income, right? So I feel this anxiety comes from having kids and
00:03:26.040 | Worrying worrying that our kids will not have it as good as us
00:03:31.000 | because ironically the more you make the higher your income the harder it is for our kids to match that income and
00:03:39.520 | Potentially our lifestyle. So Cindy, I'm curious to hear your thoughts on
00:03:43.800 | Whether you have anxiety about our children's future and in terms of them making money and living a comfortable lifestyle
00:03:51.840 | Yes, if I start thinking about them having to apply to college and interviewing and finding a job I get stressed out quickly
00:04:00.520 | But then I have to remind myself, you know, they're not they're not at that age yet
00:04:06.840 | You know, we're trying to get through elementary school. So we still have a long runway
00:04:11.200 | but I think a lot of parents can easily start to worry especially as their kids get into the teenage years and
00:04:19.280 | College becomes closer and closer
00:04:21.640 | You know, not just the cost but actually getting in it is so competitive
00:04:26.400 | you know, you hear all these stories on social media about such and such student who had
00:04:30.860 | Straight a's did all these extracurricular activities, you know
00:04:34.720 | They had this amazing looking resume and then they didn't get into any good schools
00:04:38.180 | It's I think it causes a lot of anxiety for parents. What do you think? I think so as well as you know
00:04:45.600 | I've been obsessed with
00:04:47.840 | Colleges and college rankings and getting into college since you've known me. Yeah, the College of William & Mary. I just find it to be fascinating
00:04:54.600 | Because I got rejected at too many places and it didn't feel good, but things turned out. All right in the end
00:05:02.080 | I think things turned out better than expected and to me it feels like where you went to school
00:05:07.640 | Matters only for your first job and then after that it's about what you do
00:05:12.480 | How you communicate how friendly sociable you are and the network that you build the problem with college and
00:05:20.600 | Sending our kid to school is that we are injected back into society
00:05:25.140 | And so we meet a lot of parents and this is the comparison point, you know who are doing a lot
00:05:30.200 | They're sending their kids to four different sports sporting activities
00:05:33.880 | They're sending their three to four year old to go skiing when I'm like thinking really
00:05:38.840 | Why three to four years old it's kind of painful skiing and it's so expensive
00:05:42.640 | the tickets here up in
00:05:45.440 | Palisades Tahoe is
00:05:47.960 | $199 a day now, obviously you want to get the season pass but $199 a day is
00:05:52.940 | Crazy expensive and I don't know who can afford that comfortably
00:05:56.320 | And so when you hear about other parents spending so much and doing all these activities and flying everywhere
00:06:03.120 | You start naturally feeling some FOMO. I mean, do you feel any kind of FOMO?
00:06:08.060 | For me oddly not so much maybe later, you know when our kids are older. I don't feel like I'm
00:06:15.440 | Missing out from sports activities. We tried soccer for example with our son and he wasn't into it and I was okay with not
00:06:25.360 | Going for it or not signing him up for basketball. I think we're just focusing on our our kids interests and I
00:06:33.000 | Don't have that kind of anxiety with missing out on activities though. But what do you think? I
00:06:39.840 | Mean, I always question whenever a parent says, oh we took up our son skiing and he's four years old
00:06:48.080 | And I'm thinking I said, oh we haven't taken them up at all
00:06:52.320 | I guess it's because for me I didn't learn how to ski until the first time I tried it. I was in middle school
00:06:57.560 | Yeah, so and then I didn't learn how to snowboard until I was an adult in college
00:07:03.680 | So for me, I don't feel like we need to teach a five-year-old
00:07:08.120 | Snowboard. Yeah, especially if they're not interested. Yeah, and we're not big
00:07:12.480 | snowboarders either
00:07:15.640 | It just depends on I guess the family's interest. Yeah. Yeah, I mean
00:07:20.200 | It is interesting though because you don't really know how well you're doing, you know, whether it's making money in your career
00:07:27.040 | Or being a parent unless you compare yourself to other people
00:07:31.920 | And that's one of the reasons why a lot of the posts that I've written on, you know
00:07:35.680 | Like the average net worth for the above average person, you know
00:07:39.320 | How much did you have accumulated by age 401k savings by age five to nine plan amounts by age?
00:07:45.080 | these posts and
00:07:47.680 | Charts in my book by this not that help people
00:07:50.160 | Gauge where they should be or where they could be if they did everything
00:07:55.840 | appropriately and that's very important because I continuously tell people you shouldn't wing it when it comes to your finances because
00:08:02.760 | You'll wake up like ten years later and wonder where all your money went because you winged it and that's that's not the wise move
00:08:09.360 | so as parents
00:08:10.680 | I think we have this constant fear that if we don't do everything possible and
00:08:16.200 | If we just wing it by raising our children and just having them do whatever they want
00:08:21.120 | They're gonna miss out on opportunities or we might not be able to discover
00:08:25.480 | You know the hidden Mozart or that amazing composer or that artist we don't try everything
00:08:31.400 | Yeah, maybe so for those of you who don't have kids you might be rolling your eyes or thinking what the hell are we talking?
00:08:39.200 | About well, it's hard to know what you don't know and I'll tell you straight up before having children
00:08:44.840 | My anxiety and stress was focused on climbing the corporate ladder
00:08:48.880 | Saving and investing as much money as possible so I could get the hell out of investment banking by the age of 40
00:08:55.280 | that was where my stress anxiety lay and
00:08:58.080 | Also difficult clients who were super demanding at all hours of the night. It was just no fun
00:09:04.440 | But beyond that now it's not about me
00:09:08.220 | It's not about you and it's about our children who are
00:09:11.600 | Essentially helpless and starting from zero and trying to understand the world and they're gonna go through some growing pains some painful moments
00:09:18.280 | and we just have to be there and
00:09:20.280 | If you look at the landscape, ooh the competitive landscape of every single thing we're doing getting into college
00:09:27.880 | Getting a job
00:09:31.280 | Let's say starting a personal finance site
00:09:33.820 | Writing a book. Oh my gosh, the competition is
00:09:38.480 | Intense. Yes, and then when I look at the resumes of these high school students
00:09:43.200 | Congratulations to all parents and students who got into their colleges and if you didn't get into your dream college recently
00:09:49.120 | Well, it's okay things will work out fine
00:09:51.520 | If you learn practical knowledge and you network and you become a good person
00:09:55.360 | I'm saying like there's so much competition out there that if you don't have this intense focus. I
00:10:02.440 | Don't think people are going to get to where they want to go. What are your thoughts?
00:10:08.080 | Yeah, I feel like the landscape has changed so much even in just ten years
00:10:12.560 | You look at the acceptance rates for some schools like Tulane Tulane
00:10:17.800 | 20 years ago acceptance rate was like, I don't know. I was like 30 40 percent
00:10:22.160 | I think now the acceptance rate is 10%
00:10:24.720 | Huge change the same thing with schools like Boston University
00:10:29.680 | I remember that was like a safety school where a lot of rich families went, you know, who didn't get into Harvard and MIT
00:10:35.480 | It's Boston College. It's fine. And those are very hard schools to get into
00:10:38.800 | but I remember that that school that had an acceptance rate of like
00:10:42.280 | 37% or 40% and now the acceptance rate of Boston University is 10%
00:10:47.080 | And it's the same thing with USC USC 20 25 years ago acceptance rate was over
00:10:52.200 | 30% and now I think it's in the single digits. Oh my gosh. So what's going on here and
00:10:59.000 | given there's been this talk about a
00:11:03.640 | De-emphasis on merit so a lack of correlation with hard work and merit and getting in places
00:11:09.880 | That's also a cause of a lot of stress and anxiety. Yeah
00:11:13.640 | But I have a feeling and I think it's not a feeling I know this
00:11:17.880 | I feel like I think about the future and these things way more than you. Yes. I feel you're much more happy-go-lucky
00:11:25.200 | Let's see what happens. You are a long-term planner. Absolutely
00:11:29.120 | now
00:11:31.160 | It is the reason why you don't think so intently about these topics is because I'm already thinking about these topics
00:11:38.200 | Or it's just your personality. I think it's a bit of both
00:11:41.000 | I think I I tend to focus more on the short term, you know, like okay what's going on at school this week?
00:11:47.760 | What do we need to bring in?
00:11:49.760 | It's just separation of tasks I guess as we like to talk about
00:11:54.800 | so
00:11:57.720 | You definitely have a great strength at long-term planning. So I'm very fortunate
00:12:03.000 | But why don't we all think more long-term we think long-term about investing for the future?
00:12:08.280 | We think long-term about eating healthy now, so we don't suffer
00:12:11.800 | debilitating disease and health problems in the future
00:12:15.440 | Why don't we just think longer-term
00:12:19.720 | Maybe just the
00:12:26.320 | Desire to focus on now now now now as our as our preschooler loves to say I need it now
00:12:31.960 | Well, I suggest everyone to start thinking three years five years ten years fifteen years in advance
00:12:39.600 | Why because thinking is free and if you can create different scenario
00:12:44.440 | Analysis in your head. I think it helps when that time comes you won't be left wondering. Uh,
00:12:50.320 | What should I do? You know pre-mortem planning and analysis is so important
00:12:56.300 | Yeah now, so let's say you are one of the parents who feel stressed out about your children's future
00:13:02.380 | Well, here is the solution. There are three main solutions that I can think of
00:13:07.060 | One is to make generational wealth now
00:13:11.480 | What is generational wealth generational wealth to me is having enough wealth where you can pass down to your children and they'll never starve
00:13:18.700 | But I did a poll on financial samurai and you can participate in the poll if you are there's about
00:13:25.540 | 2,000 participants and it asked what is
00:13:29.160 | Generational wealth. What is the minimum threshold? I had six choices having at least 1 million net worth to pass down
00:13:36.320 | 3 million 5 million 10 million 20 million and 50 million and
00:13:40.980 | the number one vote getter is
00:13:44.180 | 10 million dollars 30% of the votes and the number two vote getter is 5 million with 23% of the votes
00:13:51.100 | The third is 20 million
00:13:53.700 | The fourth is 3 million. The fifth is 1 million and the last option is 50 million with 7% of the votes. I
00:14:01.380 | Personally voted for 10 million
00:14:04.460 | Which is close to the estate tax threshold now, it's twelve point nine two million
00:14:10.180 | What do you think is the right generational wealth figure?
00:14:14.960 | You say five and and how did you come up with five?
00:14:20.900 | I mean 1 million these days just doesn't sound
00:14:24.620 | It's a 1 million is obviously a lot of money, but it doesn't have the same
00:14:30.020 | Impact. I think you wrote a post that said 3 million is the new 1 million due to inflation. Yeah, so
00:14:35.860 | you know, I thought about 3 million as well, but I felt like 5 million was you know a
00:14:41.940 | Big enough bump up a 2 million is a big difference between 3 and 5. Yeah, what made you come up with 10?
00:14:49.700 | Well, what what made me come up with 10 was because one it's a nice round number the two
00:14:54.880 | It's very close to the estate tax threshold
00:14:56.880 | Previously, it was like twelve point two million and then eleven million ten million and the top a top 1% net worth
00:15:05.800 | Figure in America is now over 10 million. I think it's like over 12 million
00:15:11.260 | Basically the estate tax threshold is the top 1% net worth threshold. It's very close
00:15:18.780 | So I figured well if you can accumulate up to the state tax threshold and then give it to your children and other
00:15:26.740 | Institutions or whatnot and not have to pay 40% tax that seems like generational wealth
00:15:32.460 | Yeah, but the fear about giving all that money away is that you know from rice paddy field to rice paddy field in three generations
00:15:39.780 | Which means the first generation has nothing they work their butts off to accumulate wealth
00:15:45.220 | The second generation inherits the wealth and tries to maintain the wealth and then the third generation
00:15:50.580 | They didn't have to bust their butts accumulating any wealth and then they spend it all and it goes back to poverty again
00:15:56.420 | So there you have it the number one recommendation to feel less stressed about your kids future is to generate 10 million dollars
00:16:04.020 | Easy peasy. There you go. Now, of course, not everybody's gonna get there
00:16:07.880 | But with enough time we could get there, you know, it's just about time and compounding returns
00:16:14.980 | so maybe everyone should do an exercise where they take their net worth currently and
00:16:19.220 | Plug it into a calculator and run some different scenarios on how long would it take for their net worth to get to?
00:16:25.340 | 10 million based on different durations of time and different rates of return
00:16:30.660 | The second strategy to reducing anxiety for your children is to give them housing security now housing
00:16:38.380 | Almost in every single budget is the largest budget item generally
00:16:43.620 | Recommended 30
00:16:45.620 | 30% or less I recommend 10% or less of your household income goes to living but it's generally around 30 to up to 40%
00:16:52.460 | So if you can get that housing equation that expense out of the way
00:16:57.660 | By the time your children are adults. I think that is huge
00:17:02.900 | For no longer worrying about them because at least they'll have a place to live
00:17:08.340 | Everything else from clothing to food to transportation
00:17:11.380 | Transportation is not as expensive. So the one recommendation I have which other it's interesting
00:17:18.460 | This curved article from New York City wrote an article said said oh your landlord could be a baby and they highlighted
00:17:24.420 | My post on the suggestion
00:17:26.620 | But the idea is that when you have a baby or before you have a baby or before the baby the earlier the better
00:17:32.780 | basically buy a rental property and
00:17:36.180 | In 18 years the rental property could be paid off and it should definitely be spitting out a lot of cash flow
00:17:42.460 | So when your child is an adult if they don't go to college or even if they do go to college
00:17:47.300 | they could earn money from that rental property to pay for their living expenses or
00:17:52.420 | they could live in that property if their job so happens to be where that property is and
00:17:59.140 | Then if they were able to find a job that is not in the same city where the property is
00:18:04.740 | Well, that's fine. We parents can then use that property to fund our
00:18:09.740 | Retirement so it's a win-win scenario. What do you think about this strategy?
00:18:14.260 | I think it's very creative and definitely unique way to provide security for
00:18:20.780 | Your children in the future. I don't know how many people would actually be able to do it
00:18:26.500 | but I think it's it's a great way to
00:18:30.020 | Set a goal that can benefit benefit your kids and potentially benefit yourself as well if they don't end up
00:18:37.020 | Wanting to manage it or live in it
00:18:40.220 | So one property per child is my baseline recommendation
00:18:45.740 | So two properties two children and so forth one commenter did make a really good point though
00:18:51.820 | And he said don't buy a property when your child is born because that first year of life is chaos
00:18:59.300 | Crazy and you might be stuck with some tenant issues maintenance issues and it'll make your life a living hell
00:19:06.140 | and I totally believe that because in 2017 I
00:19:09.580 | Sold our old house and our old rental property because it was giving me nightmare headaches. It was always five four or five dudes
00:19:17.340 | throwing parties bashing at the place and
00:19:20.660 | Neighbors complaining and there's some deferred maintenance yet some leagues change some windows
00:19:28.660 | Turnover to turnover because we have four or five roommates. There's always turnover every single year
00:19:33.260 | So it's a real PIT a and I hear you. However, if you can get things through
00:19:39.580 | rental properties owning real estate is a war of attrition
00:19:44.100 | the longer you can hold on the longer you can survive the more wealth you will build for you and your family and
00:19:49.860 | Once you get to that maximum, I do like investing in public REITs and also private real estate
00:19:57.060 | Fundraise is my favorite platform. I've worked with them for years and check them out at financial samurai.com
00:20:01.940 | /fundraise it's a way for me to earn
00:20:05.140 | real estate income passively and diversify our expensive real estate holdings in San Francisco Lake Tahoe and Honolulu
00:20:13.420 | Towards the Sun Belt now the final strategy to help reduce anxiety
00:20:18.700 | for your children is to start and maintain a
00:20:24.180 | Lifestyle family business if you have a family business, you are the boss you can do whatever the hell you want
00:20:29.860 | Especially if you have no outside shareholders, what is you know, the thing that we worry about most
00:20:35.780 | Living expenses housing shelter, right and also whether our children will be able to get jobs
00:20:42.260 | and
00:20:44.060 | So if you have a family business
00:20:45.900 | Even if they don't want to work at your family business if they have no job and no way to make money
00:20:52.300 | Well, there's always going to be this career insurance policy for them
00:20:56.380 | And this is something really common with immigrants many immigrants own small businesses
00:21:03.200 | restaurants
00:21:04.820 | Laundromats things that don't really need a super high education
00:21:09.640 | But you can do by bypassing the gatekeepers
00:21:12.980 | So long as you have some money and some hustle and some ingenuity
00:21:16.500 | And the other thing is if you build your family business large enough, it could knock out something else
00:21:23.820 | Which is your goal to try to achieve?
00:21:25.820 | Generational wealth it could be three million for you five million ten million from my definition
00:21:31.860 | Whatever your definition is of generational wealth having a small business that generates income for your family and also generates
00:21:40.020 | equity that can be multiplied because businesses are
00:21:44.140 | Traded off multiple of revenue or of operating profits or of net profits
00:21:49.020 | Every single dollar you make from your small business actually boosts your equity by multiple fold
00:21:55.740 | Alright, so we have three solutions generational wealth owning rental properties
00:22:00.420 | Maintaining a small business and you can also teach your children as they grow up
00:22:04.580 | Here's a final point. I want to make
00:22:07.220 | Downward mobility is still a good life folks
00:22:10.660 | You don't need your children to earn as much as you to have the same lifestyle as you after all
00:22:16.940 | Our lifestyle middle-class lifestyle today is way better than a king and Queens lifestyle from centuries ago
00:22:23.940 | Our lifestyles continue to improve thanks to technology
00:22:28.140 | medical breakthroughs and more so don't think
00:22:32.380 | Each generation needs to earn more money and have a better lifestyle than the last
00:22:38.460 | Our lifestyles are pretty good as they are right now. I mean just speaking into my recording machine my iPhone
00:22:45.060 | I mean, wow, I've got this awesome
00:22:47.060 | Computer the size of nothing that I can carry around and do so many things with I mean
00:22:52.300 | This is a huge breakthrough over the past
00:22:54.460 | 15 20 years we will always worry about whether our children will get into a good school or get a good job
00:23:02.140 | But I think if we can spend a lot of time with our children
00:23:06.620 | Educate them on what we know about provide them practical knowledge. I think whatever they do
00:23:12.740 | They're gonna turn out. Okay, because at the end of the day our
00:23:16.660 | Current standard of living is pretty good compared to the past. Thanks so much everyone for listening
00:23:22.780 | We'd love to hear your definition of what generational wealth is if you have any anxiety and angst
00:23:29.060 | Currently despite making a high income we want to know leave a comment in the post shoot us an email and again
00:23:35.900 | Don't forget to sign up for the free financial samurai newsletter at financial samurai comm forward slash news. Take care everyone. Bye