Have you ever heard the term, “Generational Wealth” before?
If you are actively working on your finances and building financial independence, then the idea of generational wealth has probably been on your mind or something you have at least thought about.
But, you might have also put that concept on the backburner until you reached some of your other important financial goals like paying off debt, saving money, or just getting started with investing.
No matter where you are in your journey, it’s still important to understand generational wealth and how you can build a great financial legacy for your family.
What is Generational Wealth?
Generational wealth is any kind of financial asset that families pass down to their children or grandchildren, which continues to repeat throughout future generations. These assets can be in the form of cash, trust funds, stocks and bonds, properties or even entire businesses.
Many times this is referred to as “family wealth” as it continues to be passed down.
The goal is that each generation educates the next carefully so that the family wealth will pass from one generation to the next, with your money helping provide for your great-great-great-grandchildren!
Think about some of the wealthy families who have continued their generational wealth through well-known businesses.
Of course, not every family dynasty will be billionaires, but generational wealth comes from anything you leave behind for children or grandchildren.
Why is generational wealth important?
Generational wealth is important because it puts your financial situation into perspective and helps you plan for the future. It can give your children an edge for education, less debt, or lead them down a path of entrepreneurship if passing down a business.
And by offering financial guidance and education to your kids, they hopefully won’t make similar financial mistakes that you made and they’ll potentially learn much faster to build and retain wealth.
When you think and plan for the future early on, you’ll help set up your family for financial stability and ensure that your children don’t live a life of financial stress.
How much money is generational wealth?
So how much money is generational wealth? Well if you are looking for a specific number or range, you won’t find one exactly. The answer depends on your personal situation, cost of living, and more.
The best answer to this question can put defined like this:
Generational wealth is achieved when you have accumulated enough assets and investments that can pay for your family’s expenses and retain that amount for years. In fact, the goal will be to ensure your family wealth will continue to grow as those assets and investments compound for generations.
Naturally, generational wealth can be destroyed quickly if future family members are careless. But with some careful planning and strategic spending, that money can last a lifetime.
How to Build Generational Wealth
Building generational wealth is not exactly easy to do, especially if you have tons of debt and are just starting to create financial stability.
But, the sooner you get started the better your own personal finances will be and you can begin to build legacy wealth.
Your main goal will be to ensure you have plenty in your retirement to last you for your remaining years. Once you have that plan in place, you can begin focusing on acquiring assets and money beyond what you may need in retirement.
If creating generational wealth is interesting to you, then here are some tips to help you get started.
1. Build a plan
Although building and passing on generational wealth is a simple concept, in practice, it does require some planning and thinking in advance. If you want to pass on generational wealth, the best place to start with is a plan and some goals:
- How much do you want to pass on to the next generation?
- What financial mistakes do you wish you hadn’t made?
- What do you wish your parents had helped you with when you first started managing money?
- What assets will you invest in or create to build wealth?
As you keep in mind these specific goals, you’ll want to take a look at your current finances.
Although you may not need to go all out with a budget, having an idea of how much you’re spending and your various assets and liabilities will help you build a better plan.
2. Pay off debt
If you are currently paying off high-interest debt, you may want to prioritize getting rid of ALL your debt before building appreciating assets.
Add up all the debt you owe and calculate the best way to pay it off. If it’s a lot of debt, you may want to have a monthly budget so you can easily allocate more money to paying off your liabilities.
There are several ways to pay off your debt. You can opt for the Avalanche method, where you pay the highest interest first, or the Snowball method, where you pay the smallest balance off first.
3. Invest in the stock market
Once you’ve paid off high-interest debt, you can focus on building assets to pass on to the next generation. The stock market is a good place to start since compound interest means the return on investment increases exponentially the longer you invest.
If you’re new to investing or it all sounds a bit overwhelming, you can try opening an account with Acorns or Stash. These platforms walk you through the entire process and educate you on the basics of investing.
Most platforms and popular investing experts will recommend starting with low-cost index funds. These funds are diversified and offer low fees: the perfect place to set and forget your money.
With compound interest, investing $5,000 every year can turn into millions if left for over 30 years — that’s enough for a comfortable retirement and a nice chunk of money for your children.
4. Invest in real estate
Investing in real estate is another great way to build wealth that lasts for generations. If you put in the initial effort and pay off the mortgage, real estate will offer steady and reliable cash flow for generations to come.
If you’ve already bought your house, you’ve had a taste of real estate! If you enjoy inspecting properties and managing tenants, consider your options and see how you could get started with real estate investing.
You can also start with real estate crowdfunding platforms like Fundrise, Groundfloor, or Diversyfund. However, these options to invest in real estate are newer and should be more of a compliment to investing in actual properties.
5. Invest in education
Going to college is a major investment in the U.S., and it can help pave the way to your children’s future. Putting away some money regularly in a 529 plan is a good way to start saving for your child’s education and protect it from taxes.
Once your children are ready for college, that fund will help them create an education that no one can ever take from them.
However, college is not the only option as your children may want to learn a trade, go to an online school, or start a business.
But being prepared ahead of time can lower the burden of any debt and help your children have a head start financially when they start their careers.
6. Consider life insurance
Life insurance helps protect your family if something tragic happens to you and you’re unable to provide for them.
By taking out life insurance, you can rest assured your children and spouse won’t have to deal with difficult circumstances and they’ll have some money for the future.
Make sure to do your research and compare different options so you take out life insurance that works best for you and your family.
One of the top options out there is Bestow, which is very affordable and can provide you with the best coverage you need. Get a quick free quote from Bestow here.
7. Consult an expert
Consulting an expert will help you make sure you are making a plan with the correct financial instruments and are passing on wealth in the most efficient way.
If you’re passing on a large number of assets with complex terms and conditions, an expert will help you make sure everything is set and in place for when the next generation receives your wealth.
An expert will also make sure you’re optimizing on taxes, are on the right track to reach your goals and that the next generation knows what to expect.
Experts would include: CPA, Financial Advisor, Lawyer, etc.
8. Prioritize financial education
Teaching your kids how to manage money and how to invest in assets helps set them up for life. Plus, it saves them time from having to learn on their own and make mistakes.
While having some minor financial mishaps can be great learning experiences, it can set them back financially for a few years. But by being educated and becoming financially literate early on, they have a much better chance of starting off strong with their money and choices.
And not only will they know how to manage the wealth you pass on to them, but they’ll be able to build their own wealth and pass it onto the next generations to come.
Don’t you wish your parents had educated you on personal finance more?
Passing down knowledge means your children will understand the ins and outs of money and won’t make some of the mistakes that aren’t worth making.
It’s also a great way to bond as a family: encourage them to take part in the family budget, teach them how to use pocket money wisely, and even set them up with their own investment account early on (let compound interest do its magic!).
9. Build a Business
One of the best ways to pass down generational wealth is creating a business, which if successful, can be passed down and create financial stability.
Many well-known businesses today have been continued to be run by families, think Walmart or Chick-Fil-A.
Naturally, your children will have their own interests and may not want to work for the family business. That’s perfectly okay and it happens. But by having a business, you can start your family off young to see if they like it and show any interest.
And you also don’t need to create a franchise business either. It could be something smaller or even an online business that you can pass down as an asset.
Why Can It Difficult to Keep Generational Wealth?
Building and passing on generational wealth isn’t a piece of cake.
This is because you first need to build the wealth, make sure it can be passed on relatively smoothly, and then educate the next generation on money management and how to protect wealth.
The first generation (that’s likely to be you!) will need to work hard in order to provide for your family and pass on assets to the next generation. You will understand the value of money and the importance of working for it.
However, if you do not educate your children on money management, it’s likely they will go on a spending spree and take your assets for granted.
This means the third generation will be back to square one, and generational wealth will have only lasted one generation — which isn’t sustainable generational wealth.
That’s why financial education and teaching kids the value of money can go a long way — make sure this is a priority when building your generational wealth plan!
How to Pass Down A Money Legacy
In order to pass on generational wealth appropriately, you’ll need to be prepared in a few other ways too. The last thing you want is your family fighting over money and assets, which happens all too often.
The best way to avoid and hopefully not have family issues is by being legally prepared ahead of time. Here are some things to consider.
Your will is basically a set of instructions on what is to be done with your wealth once you pass on. Your will should be very specific so there is no confusion as to who gets what — otherwise, there could be some family fights that are taken to court due to unclear wills.
Your estate plan is the accumulation of all your assets, where they are stored, and how to access them. If you have a large and complex estate, consulting an expert on how best to manage and pass on your wealth will make the entire process smoother.
A trust is a financial instrument that is specially designed to pass on wealth in a specific way. You can add cash, real estate, and other stocks into your trust and set instructions as to how they should be used.
For example, you can create a trust of stock market investments and instruct it to be only used for education.
On your trust, you’ll need to add beneficiaries: the people who will be managing and using your wealth. Once you pass away, the trust is simply passed onto the beneficiaries without allowing room for confusion.
Custodial accounts are investment accounts that you manage for your child which they will fully own once they reach a specific age (usually 18 or 21).
This allows you to pass on wealth before you pass away, and can be a good way to teach your children about the ins and outs of wealth management.
The money is commonly used for a college education, a new home or any financial goals your children may have.
Passing down good money values
Not only do you want to pass on generational wealth, but you also want to make sure to pass on good money values.
By educating and training your children with the right money values, the next generation will be able to make the most of your wealth without spending it all.
Hopefully they’ll be able to create their own wealth too and pass it onto the next generation.
Teaching your kids the money lessons that you learned will encourage them to respect and value the wealth they receive and set them up for a future of financial success.