When we hear the phrase “generational wealth,” we often think of royal families, descendants of oil tycoons, and spoiled brats. While those are certainly understandable associations, building generational wealth is actually possible for us ordinary folk, too.
In this article, I’ll discuss how you can start building a lasting financial legacy today, no matter how far-fetched the idea seems.
What is generational wealth?
Generational wealth simply consists of assets handed down within families. This can include cash, stocks, ownership of companies, and pretty much anything else that transfers value to one’s descendants.
It doesn’t always amount to millions of dollars, either. According to a report from Capital One, roughly 20% of American households receive an inheritance, the median size of which is $55,000. That’s generational wealth.
Of course, it’s a drop in the bucket compared to the millions of dollars the stereotypical trust fund baby receives. However, it’s still a substantial amount of money that leaves recipients better off than those who inherit nothing.
Why generational wealth matters
Generational wealth helps offset the factors that make it difficult to get ahead financially in the modern world. Even modest sums amount to a running start in the rat race, helping recipients live more comfortably and perhaps even avoid taking on debt for things like schooling and housing.
The benefits don’t necessarily stop there, either. By limiting financial pressure, generational wealth gives beneficiaries the ability to do things like invest. This can amount to hundreds of thousands of dollars in financial gain over the course of one’s life.
Conversely, people who don’t benefit from generational wealth miss out on those opportunities. Additionally, their need to take on more debt can cost them substantial amounts of money in interest over the course of their lives.
Perhaps you experienced this personally and want something different for your descendants, whether they be your children, grandchildren, nieces, or nephews. Whatever the case may be, keep reading as I’ll now share 12 tips for building generational wealth.
12 tips for building generational wealth
As always, please remember that nothing I write constitutes financial advice. Rather, view these tips as starting points to get you thinking about what it takes to build generational wealth. Speak with an advisor one-on-one before actually taking action.
1. Eliminate debt and establish an emergency fund
Eliminating high-interest debt and establishing an emergency fund are two very important steps to take before thinking too far into the future.
Famous financial talk show host Dave Ramsey goes as far as saying you shouldn’t even bother investing until you’ve done these two things.
There are very valid reasons for this line of thinking.
For one, high-interest debt can leave you spending hundreds of dollars each month on interest alone. Anything that moves you towards escaping that situation is an investment in and of itself.
As for your emergency fund, it will save you from having to crack into your nest egg to cover unexpected costs. Think of it as an insurance policy!
Building generational wealth requires a long-term view of money and its value. It’s why the wealthy typically keep money meant for future generations in investments rather than bank accounts.
You see, what many people don’t realize is that cash loses most of its value over the course of just a single human lifespan.
The reason? Inflation.
It’s a silent wealth killer, destroying roughly 1.4% of your money’s purchasing power every year. At this rate, $100,000 saved today will have the purchasing power of $57,343.18 in just 40 years.
What do you think the numbers would look like, though, if you invested that $100,000 in, say, stocks?
Well, given that the U.S. stock market returns an average of roughly 10% per year (source: Investopedia), that $100,000 would grow to a staggering $2,613,302 40 years from now.
Even when you adjust for inflation, your descendants in this scenario end up with $1,498,550.56 of purchasing power at the dollar’s expected value in 40 years.
Talk about generational wealth.
Of course, investing is very nuanced and requires a measured approach. You’re not limited to stocks, either. If you’re new to the concept of investing, I recommend reading my article about the basics. Once you have a foundational understanding, speak with an advisor about the next steps.
You don’t need $100,000 to get started with investing. I simply chose that number to demonstrate how powerful investing can be. Check out this post for a breakdown of 18 ways to begin investing with little money today.
3. Create multiple streams of income
Unless you earn a substantial salary, chances are the bulk of your income goes towards covering expenses.
While you can certainly invest with little money, you may find it fulfilling to add a few income streams and invest whatever you don’t need to cover living costs.
In this article, I discuss a few great strategies for unlocking extra cash quickly. While the piece is geared towards doing so in the event of an emergency, many of them (i.e. selling items online and freelancing) are great to do on an everyday basis.
Whenever you start earning more money (either through a raise or a new income stream), avoid the temptation to inflate your lifestyle. Any income beyond what’s required to maintain a certain level of stability should go towards long-term goals, such as creating generational wealth.
4. Instill good financial habits in your children
One challenge associated with building generational wealth is that fortunes don’t last nearly as long as one might think.
According to Time Magazine, a whopping 70% of wealthy families blow through their money by the second generation. By the third generation, that number jumps to 90%.
The financial planners quoted in that Time article say this happens because those who inherit great sums typically have no concrete understanding of money’s value or what to do with it.
Based on my observations, I wholeheartedly agree with this diagnosis and the proposed cure – instilling good financial habits in subsequent generations while you’re still here.
One very simple way to do this involves having transparent conversations that encourage rich attitudes about money. Additionally, many financial institutions offer educational resources for those who will be inheriting their clients’ money.
Whatever approach you take, don’t fall into the trap of assuming that the money you plan on leaving behind isn’t enough to justify educating future generations about personal finance.
Even a few thousand dollars can change lives and lead to even greater generational wealth further down the line when the right attitudes are in place.
5. Organize your finances
Of course, you can’t teach anybody good financial habits if you don’t exercise them yourself.
If you know you could use some brushing up, start by reading my post on organizing your finances. In it, I discuss everything from budgeting to strategizing bill payments and doing your taxes.
By improving your financial organization, you’ll maximize your ability to save, invest, and build a legacy. You’ll also set a good example for the next generation.
6. Passing down a business? Start planning early
If you plan on building generational wealth through a family business, you’ll need to teach your descendants more than great financial etiquette.
You’ll also need to educate them on how to run your business so they don’t obliterate the wealth you’ve left behind for them within a few short years. You’d be wise to start doing this years in advance, slowly integrating the family members you plan on having integral leadership roles.
Of course, it’s very possible your descendants will have no interest in operating your business. In such a scenario, you may be better off selling the business and giving family members cash or other assets to use as they see fit.
However, if your descendants do have an interest in taking over the business, they’ll benefit by inheriting both something of value and a source of income.
7. Take advantage of custodial accounts
Custodial accounts allow you to begin saving money for subsequent generations while those beneficiaries are still minors. By doing so, you’ll typically take advantage of tax-deferred investment growth much as you would in a retirement account for yourself.
You’ll also be able to pass money on to subsequent generations while you’re still alive, which can be very fulfilling.
Custodial accounts can greatly simplify the wealth transfer process while also reducing the amount of tax your beneficiary pays when they receive the money (typically at age 18 or 21).
That said, it’s very important that you speak with a financial advisor before choosing a particular custodial account. The ideal choice will depend on several factors, such as whether you’re saving for the beneficiary’s education or some other purpose.
As educational costs skyrocket, students forced to take on debt often end up owing astronomical sums for even the most basic degrees. By paying for a descendant’s education through a custodial account meant for that purpose, you can put them in the very enviable position of entering adulthood without this burden.
8. Consider life insurance
A life insurance policy protects your family in the event that you die prematurely. The payout they’d receive in such a scenario can help them cover your death-related expenses while keeping any cash you set aside for them to use as they see fit.
This can be a huge help considering that the average cost families incur after a member’s death exceeds $18,000, according to Yahoo Finance. That can take a serious chunk out of the seeds of generational wealth.
9. Budget money for yourself, too
Many people make the mistake of significantly underestimating the amount of money they’ll need in retirement. Falling into this trap can be devastating to your goal of building generational wealth.
For example, while many people assume their expenses will drop by around 30% in retirement, this is often not the case. Rather, research shows that roughly half of households spend more in the first two years of retirement.
By depleting their accounts so early, these retirees jeopardize future investment growth, which ultimately limits how much money they have to cover expenses for the rest of their lives.
There’s also the unfortunate reality of health expenses, which really start to pile up as one gets older.
The bottom line? When building generational wealth (especially outside of custodial accounts), it often helps to be more aggressive than you might think is necessary.
10. Get input from financial professionals
Building a financial legacy is a serious undertaking. A professional can help you start off on the right foot and avoid mistakes that might otherwise derail your ambitions.
For example, they’ll help you select the right accounts and assets – two things that can make or break your nest egg.
While standalone investment firms will often only consult with you if you have a certain net worth, advisors at banks are much more accessible. Of course, they’ll nudge you towards their products but this isn’t necessarily the worst thing if you’re completely new to investing.
11. Make a will
It’s never too soon to make a will – especially if you’re in the process of actively building generational wealth. If you die before making a will, your assets may not be transferred the way you intended.
For example, stocks might be liquidated and transferred in the form of cash, making the beneficiaries more likely to spend it recklessly.
Without clear guidelines, your descendants may be left squabbling over who gets what, associating your legacy with animosity rather than prosperity.
All of this can be avoided simply by making a will.
As an added bonus, you’ll enjoy peace of mind knowing your generational wealth will be transferred exactly the way you intend.
It’s a good idea to name beneficiaries on your financial accounts in addition to creating a will. It’s another step towards ensuring your generational wealth is distributed as intended.
12. Maintain good relationships with your descendants
Generational wealth is not a substitute for good familial relations. If you want your descendants to truly honor and respect the effort you’ve put into building a legacy, take the time to maintain healthy relationships.
These relationships may even end up being a more meaningful legacy than the cash you leave behind.
Building generational wealth requires extensive planning and a long-term view of money. However, the fulfillment that comes from knowing your descendants will be taken care of is unmatched.
I hope the 12 tips I’ve shared in this article will help you along this path! Remember to speak with a financial advisor to ensure you get started on the right foot.
For more personal finance tips, check out my other articles here.