How to Build Generational Wealth
Some people inherit things like clothes, furniture or knickknacks. Others inherit a legacy they can build upon for generations to come.
If you’ve been around the personal finance niche at all, chances are you’ve heard the phrase “generational wealth” thrown around a few times. Generational wealth is any assets you leave behind or pass down to the next generation.
This includes cash, real estate, a family business and financial securities like stocks, bonds or other investments. It also includes any other type of inheritance, whether that’s a trust fund, custodial account or something else.
If the very idea of generational wealth makes you nervous, try not to worry too much. It isn’t something you have to try to create overnight. And you don’t need to be a millionaire to build it.
Done right – and with a little consistency and grit – generational wealth can be built up over the years or decades and through the generations.
Importance of Generational Wealth
When you think of inheritance, one of the first things that probably comes to your mind is money. Although people don’t always inherit money, that does tend to be the way of things.
And there’s no denying the importance of money, or of generational wealth. It’s something that could help your family out immediately, but it could also help them down the line.
But how can building it now help future generations? Why should you even bother?
Well, think of it this way.
If your family had built up generational wealth over the years, they may have been able to pay for your college education. They may have been able to help with a down payment for a house. Might have even been able to help with your early retirement.
If you were to inherit a successful family business, which you also knew how to run, you could be set for years to come (if not for life). And if you were to receive money to start your own business or start investing, what couldn’t you do?
Even if you weren’t fortunate enough to have generational wealth, you can still set up your family for future financial success. So many people – especially young people – make costly mistakes that could have otherwise been avoided. Not just because they don’t have money, but because they were never taught about how to use the money they do have.
If your kids (or future kids or nieces and nephews) were to learn about money matters now, think of all the mistakes they could avoid. No more playing catch up on student loan or credit card debt. No more struggling just to get by every month.
Generational wealth, an inheritance of monetary assets and knowledge, is invaluable for your family. It’s a tool to be taught, understood and used well for the immediate and long-term benefit of your loved ones.
How to Build Generational Wealth
For many people, the idea of saving enough money for retirement is a farfetched goal. It can be difficult to even get a good budget together for a vacation or an emergency nest egg, much less create something you can leave for those who come after you.
But the beautiful thing about generational wealth is that, as far as concepts go, it’s pretty straightforward.
Save and invest money over time until it builds into something of value for future generations.
So, where should you begin? Start small. Small goals. Small actions. Big impact.
Educate Yourself
Before you start picturing more student debt and years of college, wait. You can educate yourself freely on matters that, well, matter. One of those things? Personal finance.
Check out a good book or free online course on personal finance. Start educating yourself on money management, budgeting, saving, investing and spending. There are many ways to obtain financial security, but unfortunately, we’re not often taught about them as kids. It’s never too late to start learning though.
Listen to personal finance podcasts. Watch videos. Read books or blogs. Consume a little bit of content a day. You’d be surprised by how much you end up learning.
The more you learn about money, the more control you have over it. Learn to understand how money works on a small scale, and in the big picture. Once you do that, you’ll start to see how you can make it work for you. And, since you need to set yourself up for financial success before you can set up anyone else, educating yourself in personal finance will go a long way in helping you build generational wealth.
Ready to start learning more about money management? Consider getting a financial advisor.
Invest Wisely
Investing.
For someone who’s always lived paycheck to paycheck, or who was taught the power of the savings account, investing may be the furthest thing from your mind. But a wise investment or two can bring you a lot more money than a simple savings account.
Here are some of the areas you can invest in.
Stock market
Stocks and bonds. The stock market is mainly for long-term gains, though many stocks pay out dividends. These dividends can either be taken out or reinvested to grow your portfolio. If you’re a beginner to investing, the stock market can seem pretty daunting. And it’s certainly not a place you want to aimlessly throw all your money at.
Consider investing in low-cost index funds. Or, if you’re not quite ready for that yet, start watching how certain stocks perform over time. (Hint: Watch stocks from companies or brands you already shop at)
Mutual funds
Instead of investing in stocks and bonds, you can invest in mutual funds. This allows for more portfolio diversification and can be less risky (depending) than the stock market. Companies like Vanguard and Fidelity make for great investment options, especially for those starting out, because they manage your portfolio based on your risk tolerance and desired gains.
Angel investing
If you’ve already accrued a decent amount of wealth, you may want to think about becoming an angel investor. An angel investor is someone who invests in – or completely funds – a startup company by contributing their own capital. As the startup grows and begins to turn a profit, the angel investor usually gets a cut (between 20% and 25%). Of course, it does depend on the wording of the contract and the success (or failure) of the business.
Angel investing can be risky, but it could also result in high monetary returns.
Further education
As you probably already know – and have known for years –, accredited degrees and recognized certificates are a great way to improve your career prospects. A better job (usually) means a higher salary. It may even mean other, less tangible benefits like an employer match 401(k) contribution or the company’s stock options. It goes without saying this can all be turned into generational wealth over time.
But it’s not all about educating yourself. It’s also about educating your family. Your children, yes, but also your nieces or nephews. As the saying goes, give a man a fish and he’ll eat for a day. Teach a man to fish and he’ll eat for a lifetime. Start the young ones off right by teaching them the importance of education and how to manage their money.
College is an investment, to be sure. The average cost of in-state college tuition in the USA was a little more than $25,000 this year. This is a 300% increase from 20 years ago. Luckily, you can start building generational wealth now by setting up a custodial account for a child in your life and letting it grow over the next 10 to 20 years.
Real estate
When starting out with investing, anything is a risk. Real estate is no different, but there are certain invaluable advantages of investing in real estate. For one thing, you have to live somewhere. And, unlike with renting, you can build equity while paying for the place you live in.
As you pay down your mortgage, your return on investment grows. And as cities, towns and neighborhoods develop, your property may gain value.
Buying property isn’t a short-term investment strategy, but it’s worth committing to for the long-term financial gain – for you and your family. Plus, if you get really into it, you can do other things like house flipping, rentals and more.
Make a Budget and Start Saving
This is one of the first things you should do, both for yourself and for future generations. Budgeting and saving are essential parts of personal finance. Without a budget, you’ll have a hard time saving or investing much money. And without savings, you may be in a tight spot when the next financial emergency comes up.
Make a weekly budget first, then a monthly budget. Once you get really comfortable with that, make a yearly budget. Be sure to include all your fixed and non-fixed costs in the budget for a clear idea of where your money is going.
Get Life Insurance
Around 54% of Americans had some form of life insurance in 2020. Contrary to popular belief, life insurance doesn’t actually cost quite as much as many people think it does. Many policies range from around $20 to $30 a month, depending on things like the age of the insured and their medical background.
Life insurance is beneficial in many ways, from paying off existing debt upon the insured’s death to taking care of funeral expenses. Life insurance policies can pay out anywhere from a few thousand to a few million dollars. While not ideal for you, the person who has the life insurance, this is a huge benefit to your loved ones.
Create a Small Business (or any size, really)
If you’re an entrepreneur, or if you have the opportunity to cofound a business, consider doing so. Business isn’t for everyone, but it’s something that can be passed down to your kids, your kids’ kids and beyond.
Ways to Pass Down Generational Wealth
Generational wealth isn’t all about getting some money together and handing it over. This is probably one of these efficient ways to go about building it.
By establishing an account like a custodial account or a trust fund and creating an estate plan, you can avoid some of the common pitfalls that come with money. Plus, you and your family can benefit from certain things like compound interest.
Set Up a Trust Fund
A trust fund is essentially a legal entity used to hold assets like investments, real estate or monetary funds until the time comes to give it to the beneficiary (or beneficiaries). There are a few types of trust funds out there.
Revocable trusts, which can be altered at any time
Irrevocable trusts, which cannot be changed once set
Living trust, which is gifted to the beneficiary while the grantor (you) is still alive
Education trust, which is designed for academic or formal purposes
Spendthrift trust, which is where the trustee (one who manages and administers the trust) calls the shots in deciding how the trust is used. This is typically set up when the beneficiary is unable to make responsible decisions with the assets in the fund.
With a trust fund, you have the right to decide how the assets are used, when the assets are distributed and under which conditions (such as upon the completion of college) any beneficiaries receive them.
Trust funds can be a little complicated to set up if you don’t have professional or legal guidance. Consider speaking with a financial advisor on how to go about it. Just getting started? Try searching for “trust fund companies” or “trust fund financial services” online.
Create a Custodial Account
Custodial accounts are a fantastic way to make your money work for you. This is because they rely on regular contributions, time and compound interest to grow. A custodial account is designed for a child, whether it’s your own son or daughter, another family member or even a close friend’s child.
With a custodial account, you (the custodian) control the account until the minor (beneficiary) reaches the age of maturity (18 or 21 years old, depending on the state). At that point, you must transfer the account over to the beneficiary for them to use the account as they see fit.
An account like this is unique in that any adult can contribute to it, usually without limits. Some custodial accounts are also tax-advantaged.
If you’ve ever thought of building a legacy and handing it to the next generation, a custodial account is one of the best ways to do it.
Write a Will
Anyone with anything of value (whether it’s sentimental, economical or otherwise) should write a will. You don’t have to be on your deathbed to do it either. You can write a will at any age, and really, for any reason.
With a will, you’re able to ensure that your assets go where you intend them to go upon your passing. All too often, family members fight over who gets what when a relative passes away. In some cases, people come out of the woodwork to get their piece.
Not only is this unneeded stress during an already tough time for the family, it’s a surefire way to cut down how much you can pass on to your loved ones. An estate without a will may be subject to taxation.
Plus, depending on where you live, the estate may be divided amongst your kids and spouse. If you were hoping to leave behind a set portion to the next generation, you need a will to protect your assets.
Create an Estate Plan
An estate plan is essentially a bunch of documents that safeguard your assets and any other personal property while detailing how you want them distributed after you die. Just like with a will, you can create an estate plan as soon as you reach legal age. You can also update your estate plan every few years or whenever you experience a major shift in assets.
You will probably need a lawyer to help you create an estate plan, especially if you have a large estate (say hundreds of thousands or millions of dollars’ worth of assets or property).
But once you have the estate plan, you can rest easier knowing your beneficiaries will get what they’re intended without unnecessary complications.
How Not to Lose Generational Wealth
Unfortunately, the majority of families lose their wealth over the generations. Usually, it doesn’t even take that long to lose it. It also doesn’t even matter how much your family initially had. It disappears just as easily either way unless you take steps to ensure it doesn’t go away.
Statistically, around 70% of all families lose their wealth by the next generation, while 90% lose theirs by the third generation.
In other words, if Grandpa Bill left behind $500,000 to his son, William, there’s a 70% chance William will squander it. If William is smart and uses the money wisely enough to pass it on to his kids, there’s a 90% chance they’ll spend or lose it all.
The most common reasons?
Avoiding money talks (as important as they are to establishing financial literacy and good money management habits)
Entitlement, laziness or just poor financial habits
A general lack of understanding about the intricacies of personal finance and wealth
But one of the best ways to ensure generational wealth lasts beyond the first or second generation?
Teach Financial Literacy
Financial literacy isn’t something they really teach you in school. But, like many things they don’t teach at school, it’s critical that you learn it. (Bonus: It’s never to late to learn financial literacy)
So, what is financial literacy?
Put simply, it’s all things money. Budgeting, saving, investing and spending are all parts of personal finance. Understanding how to handle your money responsibly is huge in making sure you not only become financially stable, but that you keep generational wealth going.
If you have kids or other young family members, teach them about money management.
Establish Open Communication
There’s nothing quite as detrimental to a relationship as poor communication. This goes for a person’s relationship with money, too.
Establish open communication with the younger members of your family and teach them about personal finance and the inheritance they’ll be receiving. The earlier you start this, the easier it’ll be to maintain the communication.
Make Decisions Together
If you plan to leave an inheritance to a son, daughter, niece, nephew or anyone else, don’t try to make every decision without them. Bring them in on the decision-making process.
This is especially helpful if you want to ensure the wealth you’ve accumulated continues on past just one or two generations. It also helps if you’re leaving a business to an heir/heiress. By letting them in on the decision-making process, you’ll be able to leave the business in good hands.
Make a Solid Financial Plan
If you’re leaving behind a massive legacy of savings, investments, property or otherwise, you need a good financial plan.
The more assets you have, the more difficult it is to keep track of everything and determine where it all goes. That’s where a financial advisor comes in. They can speak with you on your estate plans and where you want everything to go.
If you don’t want to go the route of a financial advisor, speak with someone you trust – friend, family – to help you figure out the future of your finances. A little extra perspective never hurts. Besides, that third-party could become an impartial trustee later on and help you manage your wealth and any tangible or intangible assets you may have.
Bottom Line
As with anything else you build, you want your wealth to continue to grow into something worth passing on. More than that, you want it to be something that lasts for generations to come.
Even if you’re just starting out, you can build a legacy that will last. That will benefit your descendants for decades or even longer.
So, don’t be afraid to talk about money. And don’t just talk – plan and think smart. Be honest with those involved, especially your spouse (if you have one) and any beneficiaries, about how you want to handle matters of your estate.
And remember, you don’t have to wait until you’re gone to see what happens with your legacy. You can take an active part in deciding what to do with it here and now.
Whatever way (or ways) you decide to build generational wealth, make sure you pass on your financial knowledge to your loved ones. Even if you can’t leave behind millions of dollars, that knowledge will put your children and children’s children ahead of the game when the time comes for them to start on their own financial journey.