How To Build Generational Wealth

Generational wealthGenerational wealth

You may have heard the term ‘generational wealth’ and thought, "Wow, that sounds important." But at the same time, you might have pushed it to the back of your mind because you have more pressing issues.

For instance, you might be focused on getting out of debt, saving money, or pursuing other financial goals. It may be that creating generational wealth is not on your immediate priority list while you tackle your current finances. But with that being said, you can still build it into your long-term financial goals.

Not quite sure what transitioning generational wealth means exactly? Don’t worry! I'll be sharing exactly what it is and how to build it for your family.

So, what is generational wealth?

Generational wealth meaning: Generational wealth is basically wealth that is passed down from one generation to the next. You may also hear this called family wealth or legacy wealth.

If you are able to leave something behind for your children or grandchildren (e.g. an inheritance), then you are contributing to the growth of generational wealth in your family.

Of course, you may leave many things such as good memories and healthy genetics behind for your family. However, I'm specifically referring to the financial resources that you are able to leave behind.

This wealth can come in many forms, such as real estate assets, stock market investments, or a financial education to carry forward into the future.

Why is generational wealth important?

If you are starting from scratch with your finances or starting out with a large debt burden, then you should realize the importance of generational wealth.

What if your parents had the ability to fund your college education? This single action could have a tremendous effect on your financial future. Instead of playing catch-up to pay down your student loan debt, you could be saving for your first home or your future retirement.

As you continue your personal finance journey, you have likely discovered that it is not always easy to recover from your financial mistakes.

What if your parents had been able to offer solid financial guidance as you stumbled your way through? It could have prevented spending beyond your means or started you on a budgeting habit much sooner.

The more you think about your own financial life, the more you realize how important generational wealth can be. If you have kids or plan to have kids, then you may start to think about how their financial futures will play out.

Imagine how differently things could turn out if you take the time to educate them on personal finance and set up vehicles to add security to their financial future now.

Keep in mind that brown and black families are behind when it comes to generational wealth-building compared to white families. This is due to the racial wealth gap. So if you are a minority, building generational wealth is even more critical for you.

That said, let's get into how to create generational wealth!

How to build generational wealth

The concept of building generational wealth is easy. You simply have to acquire assets or save cash that you don’t intend to spend in retirement. Then you pass those assets along to your younger generations when you pass away.

This sounds easy in concept but can be difficult to put into practice. If you are struggling to build your savings, then saving for the next generation can sound overwhelming. And that is completely understandable!

It is critically important to nail down your own retirement savings plan and other financial goals before you start to save for generational wealth. Once you have a handle on your current finances to fund your golden years, then it is time to start saving beyond that.

So how should you start to save for generational wealth? Here are some of the best ways to start preparing to leave a legacy of wealth behind for your children and grandchildren.

How to build generational wealth infographicHow to build generational wealth infographic

1. Invest in the stock market

The stock market is how to create generational wealth over the long term. If you are aiming to build generational wealth, then it is a great option because it has the potential to continue growing for decades.

Investing in the stock market might sound scary if you’ve never tried it. However, it is an important way to build wealth in your lifetime and beyond.

If you are a new stock market investor, the best place to start is with low-cost index funds. These funds can offer low fees and long-term growth. If you want to learn more about stock market investing, we have a completely free course to help you get started.

2. Invest in real estate

Real estate is another major way to build wealth for the long term. With the potential for steady cash flows in addition to increasing values over time, real estate can be a reliable path to wealth.

The idea of building a real estate empire can be intimidating. But it doesn’t have to be! You may have already waded into the world of real estate by getting a mortgage to purchase your first home.

If you continue to buy properties one at a time throughout your life, then you might be surprised at how quickly your real estate portfolio can grow.

Consider this as an option for building wealth for your kids.

3. Build a business to pass down

Family businesses have the potential for great success—more than 30% of family-owned businesses transition to the second generation. Imagine being able to hand over the keys of a successful business to your children.

Although not all family businesses make it to the second generation, it is possible that yours can. If your interests and abilities align with your children’s, then it is very possible they will want to take over the business you build.

For a great chance of a successful transition, you should include your child in the business from a young age. They need to know how the business operates and how to successfully continue in this business.

Don’t expect them to take over if they show no interest in the business you’ve built. If they are unable or unwilling to take over the operations, then you could consider selling the business to fund generational wealth in another form.

4. Take advantage of life insurance

Life insurance provides the opportunity to protect your family in the event of your untimely death. Without your income, your children might be forced into less than ideal financial circumstances.

If you make the effort to invest in a life insurance policy now, then it could prevent financial tragedy for your children. Plus, they will already have enough to cope with if they lose you.

Aren’t sure what life insurance coverage should look like for your family? Take our free course to find out more about life insurance and how you can use this financial tool to safeguard your family’s financial future.

5. Invest in your child’s education

In many cases, education can provide a way for your children to support themselves. With a college degree, many frequently have the opportunity to pursue high-paying jobs that can help them navigate their own finances.

Anyone with an education will always have that education. Although other things in life can come and go, no one can take away your education. If you have the ability to help your children make it through college without any debt, then you are helping to set them up for a brighter financial future than many of their peers.

In 2019, the average student loan debt for college graduates was $30,062. It is possible that the number will climb even higher in the future. Imagine the amount of financial pressure you will be able to lift from your children’s shoulders with the ability to pay for their education. Investing in your child's education is how to create generational wealth that will set them up for financial success!

6. Teach your children about personal finance

It is estimated that 70% of families lose their wealth in the second generation. And 90% lose it in the third!

With statistics like that, it can seem pointless to save for a legacy of wealth. However, in many cases, the loss of generational wealth can be prevented through financial education. After all, it is easy to lose generational wealth if your kids have no financial literacy.

That would be like asking your child to maintain a classic antique car after you pass away without teaching them any mechanical skills. It is likely that the car would eventually break down.

In a similar way, if you teach your kids nothing about personal finance, then it is likely the wealth you leave for them will dwindle throughout their lifetime.

Since you are interested in passing on family wealth, then you likely have a fairly good understanding of personal finance. Make it a priority to pass this knowledge down to your kids. This knowledge will be the best way to build and protect generational wealth.

There are many ways to broach the topic of money with your kids. You can buy children’s books about money, teach them through games, or show them by allowing them to listen as you talk through financial decisions.

You can even help them to set up their own bank accounts from a young age to instill the importance of saving for the future. Our course on teaching kids healthy financial habits is a great place to find resources to share money knowledge with your kids.

7. Create multiple streams of income

When it comes to how to build generational wealth, creating multiple streams of income can make it easier. In fact, the average millionaire has seven streams of income!

There are a variety of income streams, but one of the best is known as passive income. Active income is when you trade time for money, such as a job or side gig.

Passive income is when you earn from your assets after the initial set-up without much time. For instance, rental properties, book royalties, peer-to-peer lending, etc. So you do have to put in the work upfront, but once the initial foundation is laid, you continue to earn from your efforts.

So you could write a book and continue to earn income on the royalties years later or buy a house to rent out and make rental income. Start setting up passive income streams to build generational wealth!

8. Pay yourself first

Saving money for the future is key for how to create generational wealth. The easiest way to save more money is to pay yourself first. For instance, as soon as you get your paycheck, you deposit money into your savings and investments before anything else.

This way, you don't spend your hard-earned cash, and you can build up your savings much faster. Of course, it's best to earn money on your money, so be sure to find a savings account that pays interest.

You should seriously consider investing some of your savings so you can earn a higher return and in turn build long-term wealth.

How to pass on generational wealth

Now you know how to build generational wealth, but you’ll also need to create a plan to pass it along. Here’s what you will need to do to ensure a smooth ride for your financial assets as they transition to the next generation.

Create an estate plan

An estate plan is absolutely essential to securing an easy transition of your assets. The larger your estate, the more complicated this plan will become. At any stage, I would recommend consulting an attorney about how to create your estate plan.

The plan will vary widely based on your goals and assets. With the expertise of a legal professional, you can craft a plan that will allow for your assets to move through to your kids with minimal headaches.

To find out more about the importance of estate planning, check out our podcast episode on this topic!

Write a will

A will may be included in your estate plan, but it is important to create one even if you don’t have an estate plan. The will should include your exact wishes. The more specific you can be about your plans for any assets you have accumulated, the better.

Without a will, it is not uncommon for things to get ugly between surviving family members. Emotions are high because they’ve already lost you. You can prevent a lot of ugliness and financial trauma with clear guidelines in your will.

Set up custodial accounts

Custodial accounts are important vehicles for any financial legacy that you hope to build. Custodial accounts are investment accounts that you can control for your children until they are no longer minors. In most states, they receive control of the account at age 18, but in some states, they will have to wait until they are 21.

You can fund these accounts for your children for future financial goals, such as paying for college or buying their first home. However, they may have to pay taxes on this money as they withdraw it.

Another option is a 529 plan. It is a tax-advantaged savings account that is tied to paying for your child’s education costs. These plans are state-sponsored ways to efficiently save for your child’s future.

There are pros and cons to each option, but you’ll need to determine which is best for you and your family.

Name beneficiaries for your accounts

A simple way to ensure that your accounts pass easily to the next generation is to name them as beneficiaries on your accounts. In most accounts, you can name a beneficiary.

If you were to pass away, the beneficiary would receive the funds with minimal effort. It may only take a few minutes to add your intended beneficiaries to your accounts, but it can save countless hours for your family later on.

Learn how to build generational wealth for the financial success of you and your loved ones!

So that's how to build generational wealth! Building wealth to last for generations is no easy feat, but it is an admiral undertaking. After you have your own financial situation under control, safeguarding your family’s future is the next step.

Take the time to implement a wealth-building strategy that works for your family. Not everyone wants to invest in real estate or build a business, so find something that works for your situation.

Whatever strategy you choose, make sure to pass down your financial know-how to your children. Armed with the personal finance knowledge you can provide, your kids will already be one step ahead of the game as they make their way into the world.

Learn more about increasing your income streams, investing, and saving money with our completely free financial courses and worksheets! Also, be sure to follow Clever Girl Finance on Instagram, YouTube, and Facebook for top financial tips and motivation to reach your money goals!

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How To Build Generational Wealth