Many recent studies have been done on the economics of different generations. Researchers want to know if Millennials and Gen Z are in fact worse off than their Boomer and Gen X parents. There are quite a few ways to look at this data.
Some look at inflation, wage stagnation, and the cost of comparable housing. Some look at the cost of higher education, whether advanced degrees result in higher wages, and the level of outstanding student loan debt. While others simply look at whether younger generations have an emergency savings fund set aside.
What shocks me more than the conclusions of these studies is the way that people of all ages view their futures.
According to a 2022 survey by the Pew Research Center, 72% of adults were pessimistic about their children’s financial future. A year later, a Wall Street Journal/NORC poll showed that 78% of adults “do not feel confident” their children will be better off than they are.
The studies and surveys tell us it’s more important than ever to start building generational wealth to pass down to your heirs. And you can get started no matter how much money you have.
Math Is the Secret Weapon to Building Wealth
Albert Einstein declared compound interest is the eighth wonder of the world. He’s credited as saying, “He who understands it, earns it, he who doesn’t, pays it.”
Total household debt hit $17.8 trillion last quarter, up $109 billion from Q1! Mortgages, auto loans, student loans, credit cards… all of this debt will fall victim to compound interest. We’re paying the banks, and their interest income is growing exponentially.
But you can flip the scrip by simply checking a box in your brokerage account. Doing so means you will collect dividends on your dividends just like banks collect interest on your interest. It’s called dividend reinvestment or DRIP.
Your online broker should have a section where you can select which of your dividend stocks offer dividend reinvestment. Once you select this option, your broker will do all the work for you automatically. You should do this as soon as possible. The more time you have the more your money growth will be super-charged.
Here’s a great example of how time leverages the compounding effect. This chart shows the growth of $5,000 invested in McDonald’s Corp. (MCD) starting in 1990.
Right off the bat, you can see it takes about a decade for the reinvestment magic to really kick in.
Taking your dividend as cash, your $5,000 would grow into a hefty $150,000. Along the way, you would be tempted to spend that money, and divert it away from your heirs’ generational wealth.
By reinvesting your dividends into more shares, the value of your investment would nearly double to $295,000—and without the temptation to blow the money along the way.
That’s a life-changing difference over those 34 years. To see results like that, you need to also select stocks that you can hold for decades.
