HARNESSING THE POWER OF INCOME TO BUILD ENDURING WEALTH

There is something referred to as the “Three-Generation Curse” that goes along with the ancient Chinese proverb, “Wealth does not pass three generations” (or “rags to rags in three generations”). Behind this phrase and proverb is the phenomenon observed by a study that found 70% of families lost their wealth in the second generation, and 90% lost it by the end of the third generation. The pattern that tends to repeat is one where the first generation builds the wealth, then the second generation preserves and maintains the wealth, only to see the wealth spent or squandered by the third generation.

This recurring scenario should be a significant concern for all who are either building or maintaining generational wealth, and should be a focal point in planning to ensure that wealth isn’t squandered within one single generation. Aside from an intergenerational wealth transfer that is currently ongoing and consisting of inheritances being passed from one generation to the next, people can also become “instant millionaires” from the sale of a business or a property, or from a lottery win. No matter how that newfound wealth is acquired, if it is properly managed it can provide not just for one’s lifetime, but potentially for multiple generations of their descendants as well.

The normal mindset of someone who comes into a large amount of money is to spend that money buying things like a big house or expensive car and fancy vacations, or to pay off their mortgage or any other outstanding debts until the majority of the money has been spent. While this will leave that person with some potentially valuable assets, it is usually an “either-or” situation where they end up only having either the money they’ve recently acquired, or the things they’ve spent the money on, but not both.

There is a better strategy to both enjoy and manage wealth, which not only allows for someone to make large purchases with the money they have acquired, but also to retain most of their financial windfall. This strategy would be to keep all of one’s money invested with the objective of generating a high level of recurring monthly income, then using that income to buy assets and/or pay down debts, without withdrawing or spending any of the invested principal. This will result in being able to make and pay off large purchases without giving up a significant portion of your money to do so, leaving you with both the new asset you purchased and most of your investment capital.

To illustrate these two scenarios, let’s use the example of someone who receives a financial windfall of one million dollars and wants to buy a million-dollar house. They could choose to fully pay for the house in cash and own the house outright (with no mortgage payment), but no longer have their million dollars. They could alternatively invest the million dollars into income-producing investments, and potentially have more than enough monthly investment income pay off the mortgage over the course of 25 years. Once the mortgage is paid off, not only will they fully own that house, but they will also likely have the majority of the million dollars still invested, and they will also have the monthly income stream that it continues to generate as well.

Financing larger purchases instead of making them outright is a key part of this strategy, with larger purchases being able to be financed over the longer term and smaller purchases being paid off over shorter periods. The purchase of a home or property can be financed via a mortgage and paid off over 25-30 years, while a vehicle purchase can be paid off over 5-8 years, and smaller purchases can be put on a credit line and paid off over a few months or up to a year or two. Obviously, you would need to be earning a higher return on the investments than you are paying in interest on the debt, but that is quite possible with today’s investment landscape and interest rate environment.

What can’t be controlled is what future generations will do with the wealth they’ll inherit after the previous generation passes it on. But it should help the wealth to last longer if it can be passed down along with a blueprint for how to both manage and enjoy it for the long term. If you can also build up a more vast sum of wealth that includes assets like paid-off property or real estate (or other valuable assets), in addition to a large amount of investment capital, that increases the odds of the wealth lasting further into the future and it avoiding the three-generation curse.

This information has been prepared by Dennis Rubeniuk, who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.

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