Generational wealth speaks to when a family member passes an asset to another member of the family. While often confused with inheritances, the difference between the two is quite nuanced.
An inheritance is when an asset is transferred between family members, as with generational wealth; the difference between the two is around the timing. The transfer of an item happens after the giving family member is deceased. Inheritances come usually as by-products of a reading of the will or otherwise settling of the estate.
Generational wealth can happen at any time and can be sparked by any family or life event or no event at all.
The two differ colloquially as well. Inheritances refer to the items that are transferred while generational wealth is the act of transferring.
Generational wealth often manifests as a family member passing an asset, usually one of considerable value, to their children or grandchildren. It doesn’t have to be, though. Alternatively, it can pass from aunt to nephew or even linearly between siblings.
The items of transfer in generational wealth can be just about anything. It can take the form of cash, investment funds, stocks and bonds, properties, or even transferring entire companies. However, the most prevalent way that people inherit and pass on generational wealth is through real estate assets.
We reached out to Sandy MacKay, REALTOR ®, Founder of the sought-after MacKay Realty Network and Generational Wealth expert for his insights on why building generational wealth is such a hot topic currently.
"People sense that owning real estate in Canada is becoming far more difficult due to rising prices. They are realizing that if they don't take a stand now for themselves and the next generation, that next generation may really struggle to ever own a piece of real estate. So we have more people now seeking our help in building long-term generational wealth in real estate rather than a short term for quick cash."
Generational wealth is such a buzzword right now because of what seems to be a global phenomenon; the housing affordability crisis.
By all measures, people with less equity, often those just starting, are disproportionately disadvantaged. Those beginning their financial journey with a large debt burden also weigh the importance of generational wealth pretty heavily.
The transfer of that asset is often regarded as a Hail Mary manoeuvre to level the playing field or as a way for family members to allow their loved ones to ‘get in the game’.
Equity makes a huge difference; For most people, their crossing the middle-class threshold was enabled through homeownership. That’s building equity and many would argue that real estate is the most efficient way to build for the long term.
With the potential for steady cash flows in addition to increasing values over time, real estate can be a reliable path to generational wealth.
Conceptually at least, generational wealth is easy. One simply has to acquire assets or save cash that isn’t intended to be spent in retirement. I know, easier said than done!
Another element to wealth building that may be easier said than done is to do quietly, or in other words, building stealth wealth. It's not about building wealth to show off, instead, it's about building wealth to secure a legacy.
We turned again to Sandy MacKay for his thoughts on what the benefit is to self for building generational wealth. Here is what he had to say:
"Options. When you build wealth for yourself and your family, you are creating options for yourself and your family. Options mean freedom. A lot of people tie together wealth and freedom and that's absolutely correct. When you build financial wealth, you are really building more freedom."
It's imperative that before a person turns their mind to building generational wealth, they solidify and refine their own retirement plans, first. Once the financial trajectory to fund the golden years is mapped out, then it's time to start saving beyond that.
For those fortunate enough to have a steady source of income with discretionary funds to spare, take advantage of compound interest wherever possible. Furthermore, apply simple principles like “pay yourself first” even if it’s only possible in small yet consistent increments until the savings begin to grow.
Lastly, since this is MacKay’s forte, we asked him to share with Canadian Real Estate Wealth readers an inside scoop that saves exclusively for clients about how to maintain generational wealth once an asset is acquired.
"The most forgotten aspect of wealth is that wealth is meant to free up your time. It's about freedom because it's one of the first steps. But ultimately, it's about time freedom. Time freedom gets you closer to those experiential moments with your friends and family that, if missed, never come again to build time freedom, you need to add leverage into your world. When you work with great professionals, you gain leverage. A great property management team, for example, can be worth far more than their cost! Missing out on memorable moments with family to deal with tenant issues, is not our definition of wealth."
Success in generational wealth seems to come from working with the right folks from day one, being very thoughtful about the plan and mapping out the milestones to get there consistently and incrementally, and being agile enough to respond to changing life, family, and market conditions.
For more information on how to build a wealth portfolio for your family that included real estate assets, connect with Sandy MacKay of MacKay Realty Network or email him at [email protected].
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