Mother who built first generational wealth dancing with daughters.

6 minute read

Building First Generation Wealth for Long-Term Financial Power

First generation wealth can have a powerful impact on the financial health and stability of your family for years to come. Learn how to build it here.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Fun fact: the U.S. is home to the largest population of immigrants in the world. People immigrate to the U.S. from all over the world for a variety of reasons. Some reasons are grave, such as to escape from political violence or to be reunited with family. Many also come here with high hopes for building the “American Dream.” 

However, there is often the harsh, sobering reality of navigating a complex financial system while running into systemic oppression. Many families that come here without financial resources are just trying to survive, let alone build wealth. This can also be true for families that have been in the U.S for many generations. 

If you find yourself as the first generation in your family to be in a position to build wealth, know that we honor the generations that come before you. We are here to help you create a powerful impact on your financial health and for generations to come. Keep reading to get our top tips for building first generation wealth

What is first generation wealth?

The term “first generation wealth” describes wealth that is built by an individual who began their financial journey without any resources. They do not have an inheritance and are starting from scratch. They may even start their wealth-building journey with a significant amount of debt.

Anyone who fits this description is a first generation wealth builder. 

It is also important to highlight the representation of immigrant and first-generation individuals in this makeup. According to CNBC, the median income difference between foreign-born and native-born Americans is $8,000 per year, meaning that they have a significant wage gap to overcome.

Why does building first generation wealth matter?

A lack of generational wealth can arguably put an individual at an economic disadvantage relative to their peers who have access to generational wealth. 

Here’s a narrative we hear all too often:

Imagine that you have parents who struggle to make ends meet. You go to college on a combination of grants and student loans. Because you do not have an allowance for living costs, you start using credit cards. By the time you graduate college, you have a massive amount of credit card and student loan debt. 

You start your career with an entry-level position. Your credit score is poor, so you now have high payments on a car loan on top of monthly credit card and student loan payments. Housing costs are sky-high. You can’t afford to put money into savings or retirement because you, too, are now struggling to make ends meet. 

A decade flies by, and you notice that your peers are beginning to buy homes. You’re lucky if you put any money into savings that month. When you ask your friends how they bought a house, their common response is that their parents helped them with the down payment. You do not have access to this kind of financial assistance to help you get a leg up. They are well on their way to building wealth on their own through savings, property, and investments. You are not.

Wealth has a positive impact on an individual’s ability to access adequate education, stable and safe housing, sustainable food sources, and financial security. Further, this wealth can be passed down to future generations such that they can also enjoy the same privileges.

Without this wealth, individuals often encounter debt, instability, and financial insecurity. That is why building first generation wealth matters. Without it, families can be stuck in this cycle for generations. Despite unfair disadvantages such as wage gaps and systemic oppression, an individual must make the decision to put their money to work in order to build wealth. 

By building wealth, an individual is working to improve their personal financial health, as well as to help secure their financial future. Further, they are working to improve the financial health of their family, including current members and future generations.  

5 tips for building first generation wealth

This guide is provided with the intention of providing helpful and informational tips. However, it is important not to minimize the struggle of many American families that do not have access to financial stability and are not in a place to build wealth. Systemic oppression, economic injustice, and opportunity barriers are real issues that block marginalized individuals from building financial security, let alone wealth. 

Being the first in your family to build wealth is a tremendous feat. If it was easy, many of us would have done so long ago. Not only does it require discipline and sacrifice, it also requires access to education and resources that may not have been available to the generations that made sacrifices before us. 

With that said, here are our top 5 tips for building first generation wealth.

1. Open up a Roth IRA retirement account

If you’re in the position to save for retirement, we highly recommend contributing to a Roth IRA retirement account. 

A Roth IRA is a unique retirement saving tool because you contribute after-tax money. Yes, this means that you are contributing money after you already paid your taxes on your paycheck, and not before. Your contributions are invested and grow over time. After the age of 59 1/2 , you are eligible to begin withdrawing money from your account for retirement. Here’s why it’s so cool: because you already paid income taxes on the money you contributed, you do not have to pay income taxes when you withdraw the money in the future. This is extremely beneficial if you want to maximize your cash flow in retirement.

2. Invest in index funds (or other low risk investments)

Putting your money in a savings account is great, but investing your money is even better. That’s because you can get much bigger yields in the stock market over any interest interest income your savings account can provide. 

Although it’s typically recommended to keep a small nest egg in a liquid format (i.e. your savings account), any savings excess in that should be invested. Otherwise, you’re creating an opportunity cost.

The reason many individuals don’t invest is because they’re afraid of the risk. Yes, there is inherent risk when it comes to investing, especially when you pick the wrong stocks. However, you can invest in stocks that are safe and stable.

Index funds such as the S&P 500 are a great option. They historically earn an average of about 10 to 11 percent each year. This can be a great way to grow your wealth over the years.

3. Start an emergency savings fund

Earlier, we mentioned that it’s a good idea to build a nest egg that you keep liquid, such as your savings account. 

Your emergency fund is built to cover unforeseen expenses, such as if you lost your job, or get a flat tire. Surprise costs are a part of life, so you should expect them. If you have an emergency fund, you can cover the cost without having to take on additional credit card debt or take out a personal loan.

The reason you want to keep this fund liquid is because investment and retirement accounts have early withdrawal penalties. By keeping money in a savings account for emergencies only, you won’t have to pay any fees or penalties when you need the cash.

Financial experts recommend savings up three to six months’ of your expenses in the emergency fund. 

4. Seek out an employer with 401K matching

A 401(k) is a retirement savings account that is sponsored by your employer. You typically designate a percentage of your paycheck to automatically contribute to your 401(k) each month. These are pre-tax contributions, meaning that you’ll pay income taxes from funds you withdraw later in retirement. One advantage of your pre-tax contributions is that it will lower your taxable income today.

If your employer offers 401(k) matching, definitely meet the requirements so that you’re eligible. Otherwise, you are essentially leaving free money on the table. By matching your retirement contributions, your employer is doubling your retirement savings. 

This is such a strong financial incentive that it can cause an employee to switch employers so that they can take advantage of a 401(k) matching program.

5. Consider creating a Trust

Last but not least, consider creating a Trust to help protect your wealth for future generations. By creating and moving assets to a Trust, you are removing these assets from your estate. This has several benefits:

  • Greater protection from estate taxes that would reduce the value of your heirs’ inheritance

  • Trust assets do not have to go through the probate process, which is lengthy and costly (again, this reduces the value of your heirs’ inheritance)

  • Exercise control over the manner in which your assets are distributed when you pass away

Read more about how Trusts work and their advantages here.

Start your Trust with the help of Trust & Will

Building first generation wealth is no easy feat, but any financial expert will tell you that it is well-worth the discipline and sacrifice it requires. Financial insecurity creates stress that can impact our physical and emotional well-being, vis-a-vis our quality of life. If we cannot break the cycle of financial insecurity, then we are also setting a weaker financial foundation for our children. If we are able to overcome adversity and begin to create wealth, not only can we secure a better quality of life for ourselves, but we are also more likely to secure a better advantage in life for our future generations.

One key aspect of building and protecting wealth that isn’t discussed enough is the importance of planning your estate. An estate plan provides legal protection over our personal estate, which includes our assets and property. By exercising our legal rights today, then we have an opportunity to have a voice over what should happen to our property tomorrow. 

At Trust & Will, we made it our mission to create estate planning products that are accessible and affordable. Better yet, you can do it all online! That way, you can create an estate plan that allows you to control the future of your wealth and how it will be passed down to future generations. Further, it’s easy and convenient so that you can quickly get back to your wealth-building activities. Take our free quiz to see where you should get started, or compare our different estate planning and settlement  options today!

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