Lots of people want to become a millionaire. But not as many are willing to do what it takes to get there. The lottery is not a viable option. Hoping for a random inheritance from an unknown uncle is also not realistic. So what hope is there?
It turns out, there is a lot of hope for building wealth in America today. In spite of the troubles we’ve experienced in the past decade+, we now have more millionaires than at any other time in history.
In fact, in 2022 there are nearly 22 million millionaires in America. As the data show, they primarily used their tax-advantaged retirement accounts to create their wealth. They also pay off their primary residence quickly to have greater wealth-building capability.
You can read more about how these people became millionaires in my article discussing our culture’s myths about wealth in America.
But how can we help our kids achieve that status even earlier? I have three specific things I recommend you, as a parent, can do to set your child up to become a millionaire.
1. Show Them How to Become a Millionaire with Good Financial Habits
Personal finance guru Rachel Cruze often says, “More is caught than taught.” Parents’ ways of handling their money is what kids learn by default.
Kids don’t have an independent frame of reference that enables them to compare and contrast different financial practices. What parents practice, kids tend to repeat. And that’s how generational cycles of financial struggle happen.
But practices like talking about money openly make the subject less taboo for kids.
Have your kids sit with you as you pay the bills. Show them that we have to stay on top of things and that mindless actions like leaving the lights on in a room no one is in cost money.
Talk about doing your budget and how your goals are informing spending decisions. If you want to see your kids become millionaires, they need to know how to make wise decisions each and every day.
A client of mine recently said that their daughter mentioned that an event they wanted to attend needed to be in the budget. She’s just seven years old! By watching the new habits her parents have put into practice with my guidance, she has been catching on and is thinking about money.
That’s the start of a generational transformation.
But perhaps the most difficult is to have the strength to sometimes say no to your kids. They need to be able to hear the word “no” early on so they can handle it later in life. We can have a lot of things in life. But we can’t have everything.
Saying no helps your child understand this and make decisions in light of the limitations we have in this life. On the journey to becoming a millionaire, realistic expectations of the world help to keep them on solid ground.
And sometimes that means the answer to our desire is no. That may be just for a season, but the lesson is that the ability to delay gratification is a critical skill. Just look at some of the data on this for yourself.
2. Open a 529 Account and/or UTMA
529 Account Overview
A 529 account is a tax-favored college savings plan. The federal tax code authorizes these plans and individual states run them. You can choose to open a 529 in any state; you do not have to be a resident of that state to open their 529.
Over 18 years, the amounts invested into these plans have tremendous growth potential. The accumulated funds are available for use at four-year institutions, but also at many trade and technical schools.
Funds used for non-qualified purposes are subject to ordinary income tax rates, plus a 10% penalty. But some states even levy their own tax on non-qualified withdrawals. So be aware of this possibility if you make non-qualified withdrawals from a 529 account.
The idea here is that by saving for their education early on, they can avoid student loan debt. When they graduate, they can then take full advantage of a 401(k) match and open a Roth IRA.
Remember, tax-advantaged accounts are a huge part of how to become a millionaire.
On the other hand, a UTMA (Uniform Transfer to Minors Act) account allows parents to transfer assets into their child’s name. But the parent remains the custodian until the child is old enough to mange it. UTMA laws vary somewhat state to state.
But you can specify an age at which the child becomes entitled to full ownership and use. Some states have a default age of 18 or 21. There are states that allow the UTMA custodian to specify an age of up to 25 years old.
A UTMA can hold many types of assets. But you need to be sure the transfer you want to make is permissible under state and federal law.
You also must understand that the child is the legal owner of the property held in the UTMA. If you are the custodian, you have fiduciary duties to the child to manage it for his or her benefit.
It is, therefore, important to consult with an estate planning attorney in your state if you plan on making large transfers and to understand how you need to handle these assets.
3. Teach Them That Becoming a Millionaire Requires Hard Work
Lasting wealth comes from providing value to other people. That means work. It is by working that we make life better for ourselves and for others.
It is critically important for kids to understand that money does not just appear. We have to serve others to earn and create it. In the process of seeking the well-being of others, we achieve our own prosperity.
Wealth hardly ever happens by chance. Becoming a millionaire is the result of hard work, avoiding debt, and making wise long-term investments. In order to make investments and avoid debt, we have to work.
Kids can gain this understanding through the use of a commission-based system. There are certain things kids should be doing as basic contributions to the household. But you can turn these additional jobs into opportunities for them to earn little bits of cash.
This will establish the connection between work and money while they are still young, a mentality that will carry into adulthood.
When your kids enter adulthood with this mentality firmly in mind, they are far more prepared to build wealth than they otherwise would be.
Closing Thoughts on Becoming a Millionaire
Becoming a millionaire is as much a mindset thing as it is a money thing. We have to believe we can have financial freedom and build wealth first before we can do so. By doing these three practices, you will set your kids up for long-term financial success.
I understand that not everyone has the financial margin to make 529 contributions or make transfers to a UTMA. But practices 1 and 3 will give your kids something that money itself can’t do.
These practices will help them know how to manage money. And that is far more valuable than money itself.
Setting up your kids for financial success is a difficult task. It’s even harder when you are experiencing your own troubles. I’m here to help guide you to financial freedom so that you can model the way.
To start your financial transformation, book your free Discovery Session today!