Rex Foster, Financial Advisor of Hantz Group discusses the importance of being debt free, building family wealth, and how the two go hand-in-hand.
Family Wealth Versus Inheritance
Wealth is simply the measure of the value of assets, minus debts and liabilities. Generational or family wealth refers to the assets, minus debts and liabilities, passed down by one generation to the next. These assets may be in the form of real estate, family businesses, cash, investments, stocks and bonds, and even life insurance policies.
It is extremely common for families to leave the next generation an inheritance in the form of a one-time lump sum payment.
However, in making this decision, Rex Foster encourages his clients to think about the impact they would like to make after they’re gone; and it starts with two critical questions: Who do you care about? What do you care about? All strategic decisions clients make should be anchored to these two questions. Rex Foster’s approach encourages clients to think of estate planning in terms of family wealth that can grow over generations as opposed to a one-time lump sum that may be spent before the next generation passes away.
Clients who wish to leave money to their children at various times of their lives must seriously consider whether the children will responsibly manage the money. The financial well-being of the next generation is often the client’s absolute top priority.
A common tactic is to anchor on a percentage to distribute to beneficiaries on an annual basis versus providing one lump sum. For example, a parent who has $1 million to leave behind may choose to distribute $40k each year for the next 25 years. This annual distribution not only helps their beneficiaries remain debt-free or as close to it as possible, but also in turn helps the beneficiary build their own family wealth. Imagine the benefits for the next generation if parents have the ability to, for example, fund their children’s’ college education so that instead of focusing on paying down student loan debt, they could focus on saving for their first home or retirement.
Moreover, the temptation for a beneficiary (often, an adult child) to spend most or all of a one-time $1 million lump sum is high – if they instead receive $40k every year for the next 25 years, learning how to responsibly manage their annual distribution will be a natural consequence. If they spend the entire $40k one year, they may realize the negative impacts of having done so and choose to instead save and/or invest a portion of their next year’s annual distribution.
And why is paying debt so important in terms of family wealth? Look no further than our national debt at $31 trillion and growing. Who is going to pay this? Future generations through taxes.
American Debt and the Current Economy
Everything from runaway inflation to supply chain issues to hiked interest rates to geopolitical tensions made 2022 a bumpy ride. And as the calendar flips further through 2023, recession fears and tightened security belts give rise to new trends. The importance of remaining debt free and building family wealth cannot be overstated.
Unfortunately, Americans are no strangers to debt, the average American holds a debt balance of $96,371, according to 2021 Experian data. Building family wealth and carrying as little debt as possible go hand in hand. The less debt a person has, the more they can grow their family wealth that can continue for generations to come.
Good Debt Versus Bad Debt
While Rex Foster generally advises his clients to become as debt-free as possible, there are certain debts that may help build wealth over time. For example, while a mortgage is a large debt, purchasing a home and taking out a mortgage will hopefully leave clients with a valuable asset once the mortgage is paid off. And, in general, people cannot afford to outright purchase a home without a mortgage, especially in today’s market.
On the other hand, carrying credit card debt is never beneficial since credit cards are usually high-interest and the products they are used to purchase are often consumer items that decline in value quickly. Unless credit card debt is paid off each month, the amount you owe continues to grow rapidly with interest.
How to Reduce Debt and Grow Family Wealth
Rex Foster advises his clients to prioritize paying down high-interest debt first, the “bad debt,” such as credit cards.
Tactics for growing family wealth starts first with good financial habits aligned with personal values. Next, an understanding of which assets to buy, whether those be stocks/bonds, real estate, or businesses becomes based on a plan of happiness and a sound financial plan for your generation and the next. Rex Foster also advises parents invest in their children’s education when possible to avoid student loan debt and enable the children to start building off the family wealth.
Conclusion
It is estimated that 70% of wealthy families will lose their wealth by the second generation and 90% will lose it by the third. Rex Foster aims to lower those statistics with the holistic journey he presents to his clients.
