The way to build wealth for your kids that nobody talks about

Key Concepts

Generational Wealth: Building and transferring wealth across generations, not just through inheritance but also through financial literacy and active participation in wealth creation.
Side Hustle/Entrepreneurship: Utilizing a business or side income to supplement traditional income (W2) and accelerate wealth building.
Financial Literacy: Understanding and effectively managing financial concepts like investing, saving, and taxes.
Custodial Accounts (UTMA/UGMA & Roth IRA): Investment accounts for minors managed by a custodian (parent) until the child reaches the age of majority.
529 Plans: Tax-advantaged savings plans designed for educational expenses, with increasing flexibility for other uses.
Reasonable Compensation: Paying a child for work performed in a business at a rate comparable to market value.
Tax Implications: Understanding the tax rules surrounding employing children, including standard deductions, FICA taxes, and contribution limits.

Building Generational Wealth with a Side Hustle: A Deep Dive

This discussion, featuring Janice Torres, author of “Financially Lit” and host of the “Yokiierro Dairo” podcast, focuses on strategies for parents with side hustles or businesses to build generational wealth for their children. The core argument is that in today’s economy, relying solely on a W2 income is insufficient for achieving the “American Dream,” and proactive financial planning, including entrepreneurial ventures and early financial education, is crucial.

The Limitations of Traditional Income & The Rise of Entrepreneurship

The conversation begins by acknowledging the difficulty of building substantial wealth with a traditional job. Janice Torres shares her personal journey from a 15-year career as an engineer – a path encouraged by her parents as a secure route to financial stability – to becoming a six-figure entrepreneur. She emphasizes that while her engineering career provided income, it lacked the control and potential for wealth creation she found through entrepreneurship. She highlights the often-glamorized, yet unrealistic, portrayal of entrepreneurship on social media, stressing that it requires hard work and dedication. However, the benefits of time and income control, particularly as a new mother, were significant.

Employing Your Child: A Strategic Wealth-Building Tool

A central theme is the innovative strategy of employing one’s child within their business. Janice details how she began paying her infant daughter for participation in content creation, specifically brand partnerships. This isn’t simply about giving a child money; it’s a calculated approach to:

Tax Advantages: Paying a child allows the business owner to write off the wages as a business expense, converting profits into employee wages.
Early Financial Education: Introducing children to the concepts of earning, saving, and investing from a young age.
Building a Financial Foundation: Establishing investment accounts for the child, including a high-yield savings account, checking account, Roth IRA, UTMA (Uniform Transfers to Minors Act) brokerage account, and a 529 plan.

Specifics of Child Employment:

Reasonable Compensation: The pay must be commensurate with the work performed, based on market research (e.g., content modeling rates).
Documentation: Maintaining detailed invoices and records is crucial for potential IRS audits.
Tax Withholding: FICA and social security taxes are not required to be withheld if the child is under 18.
Income Limits: A child can earn up to the standard deduction ($16,100 in 2026) without filing a federal income tax return. However, contributions to a Roth IRA cannot exceed the child’s earned income.

Maximizing Investment Opportunities for Children

Janice outlines a comprehensive investment strategy for her daughter, including:

Roth IRA: Maxing out the annual contribution limit ($7,000 in 2025, $7,500 in 2026) to leverage the power of compound interest and tax-free growth.
Diversified Portfolio: A 50/50 split between a US-based broad market fund and an international fund, providing exposure to the global economy.
529 Plan: Utilizing a 529 plan for education savings, with the recent flexibility to convert up to $35,000 into a Roth IRA.
UTMA Account: A brokerage account allowing for investment flexibility.

She projects that, with consistent contributions and compounding returns, her daughter could become a “retirement millionaire” by age 30.

The Importance of Financial Literacy & Breaking the Cycle

Janice emphasizes the importance of breaking the cycle of financial illiteracy, noting that she did not receive financial education growing up. She advocates for open conversations about money with children, making it less taboo and empowering them with financial knowledge. She believes that instilling a sense of financial power in children is crucial for their future success.

Key Quotes

Janice Torres: “Money is power and we should instill that power in our kids.”
Janice Torres: “What’s better than building generational wealth because I mean what’s better than that?”
Host: “One of the important points to remember here about building generational wealth is to not get trapped in a box of the only time we give generational wealth to our children is when we pass away through investments or a home, but that we can actually help build generational wealth as business owners by employing them and helping them build their own financial security.”

Logical Connections & Flow

The conversation flows logically from the limitations of traditional income to the opportunities presented by entrepreneurship. It then delves into the specific strategy of employing children, outlining the practical steps, tax implications, and investment options. The discussion consistently reinforces the overarching theme of building generational wealth through proactive financial planning and early financial education.

Conclusion

The core takeaway is that parents with side hustles or businesses have a unique opportunity to build generational wealth for their children by combining entrepreneurial income with strategic financial planning. Employing children, while requiring careful consideration of tax laws and reasonable compensation, can be a powerful tool for both wealth creation and financial education. The emphasis on early investment, diversified portfolios, and open communication about money are key components of this strategy. This approach moves beyond simply leaving an inheritance and focuses on empowering the next generation with the knowledge and resources to achieve financial independence.