3 Proven Strategies To Turn Middle-Class Earnings Into Lasting Family Wealth
Written by
Laura Bogart
Edited by
Kristen Mae
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Every day, you wake up thinking about ways to make your family’s lives better. You work hard to earn a comfortable income and save strategically, all to give the people you love security in their daily lives. But you want even more than security. You want to build a legacy — for your loved ones, even the ones in the future whom you haven’t met yet, so they can enjoy the financial fruits of your labor well into your retirement years, or even after you’re gone.
Turning middle-class earnings into generational wealth requires discipline, foresight and expert advice. With the right strategies, you can start the process of turning today’s income into tomorrow’s lasting wealth. Here are three tried-and-true ways to build that legacy.
Budget and Save Strategically
Naturally, creating a workable budget and savings plan is the first step for anyone looking to manage their finances. But for middle-class families aiming to build long-term wealth, having a budget in place that trims the fat off their expenses while maximizing savings is essential.
To start, divide your expenses into two categories: fixed and variable. Fixed expenses include static monthly obligations like rent or mortgage payments, car payments and student loans. Variable expenses, like utilities, groceries and entertainment, can fluctuate from month to month, making them good targets for cost-cutting.
As you look for ways to cut unnecessary spending, identify your short- and long-term financial goals. In the short term, focus on building an emergency fund in a high-yield savings account or paying down credit card debt. Long-term goals might include purchasing a home that can be passed down through generations.
Get Smart About Retirement
Many people are only peripherally aware of their 401(k). Maybe they know they have one, but they don’t actively manage it. To build serious wealth, that has to change.
Ideally, you’ll max out your contributions to your 401(k) every year and consider opening both traditional and Roth IRAs. The tax advantages of these accounts make them excellent wealth-builders.
With your 401(k) and traditional IRA, you contribute before taxes, reducing your current tax burden, and your investments grow tax-deferred until withdrawal during retirement. This means you don’t pay taxes on either the contributions or the growth until you withdraw those funds from the account, when they’re taxed as ordinary income.
Roth IRAs and Roth 401(k)s operate similarly, but your tax savings come on the back end. Your contributions are made with after-tax dollars, meaning you pay taxes on those funds now. The benefit is, your tax burden stops there. Your investments grow tax-free, and you can withdraw them tax-free in retirement, as long as you meet the account requirements.
The key is to avoid taking money out of these accounts before retirement age to preserve the compounding benefits and avoid steep early withdrawal penalties.
Look into Life Insurance and Estate Planning
One of the best ways you can protect your loved ones and ensure your legacy is by setting up a life insurance policy and an estate plan.
Life insurance payouts are generally tax-free for beneficiaries, allowing them to receive lump sums without having to contend with estate or income taxes. Working with a financial professional, you can find a plan that helps cover estate taxes and debts tied to assets you want to pass on, such as real estate, businesses or investments.
Proper estate planning protects your heirs, even from their own worst instincts. In collaboration with a legal or financial expert, you can develop a plan that allocates inheritances fairly, alleviating potential tensions or quarrels among beneficiaries. To ensure your wealth lasts for generations, consider establishing a trust, such as a dynasty trust that allows assets to grow tax-free across multiple generations, or a spendthrift trust that sets safeguards to prevent financially irresponsible heirs from mismanaging their inheritance.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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