4 Ways to Build Generational Wealth
- Generational wealth is about passing down financial assets, resources, and the understanding of how to make money work for you.
- In addition to generational wealth, building wealth through your business is also about legacy.
- Create the vehicle (will or trust) to pass on your wealth on your preferred terms and guidelines.
You'll often hear people throw around the term generational wealth in the financial space. More recently, it has become a trendy word amongst everyday people, in part credited to today's social media world and in a time when the topic of investing and wealth has taken center stage.
While it usually takes one risk-taker, building generational wealth is not about one individual. Instead, building generational wealth with and for your family is the ultimate goal. Doing so opens up options for you, your children, your grandchildren, and multiple generations that will come after as long as they can upkeep the wealth by doing things that they have learned from your risks, your understanding of money, and the examples you set.
What is Generational Wealth?
Generational wealth is the ability to pass down financial assets, resources, and literacy to the next generation. Financial assets are anything tangible that can be transferred with the swish of your pen or the click of a button, such as stocks or real estate. Although financial literacy is equally as important as assets, it is harder to pass down because parts of obtaining financial literacy is about mindset and the want to learn and know.
Why Build Generational Wealth?
Building generational wealth is a goal that many people share, but why does it matter?
Contrary to what some may think, the main objective is not about living in luxury or flying around in private jets. Instead, it is about bringing yourself to a higher financial level and then putting your children on so they can live their best lives. Moreso, having generational wealth allows the multiple generations in your family to start contributing their passions to society earlier in life.
The impact of more people working on their passions can be infinite.
Ways to Build Generational Wealth
Teach children about finances early
Financial literacy is best when taught at a young age. The reason is that children can absorb information and internalize it better than adults. Therefore, it is vital to teach them financial literacy as early as possible.
Recommended Read: How To Educate Your Children About Finances
Don't be afraid to invest in your child's education. That doesn't necessarily mean paying for college because college isn't right for everyone. Instead, it could be investing in a child's financial learning needed to help them build and run a small business. On the other hand, if you have younger children, it could be paying them for extra chores done around the house and then holding them accountable for their money.
Taking the steps necessary to teach your children financial literacy early will assist in keeping up the building of generational wealth perpetually.
Invest for the long term with stocks and real estate
Education is a good foundation, but you need to invest when building real wealth. Common money advice is to save your money. However, just saving money will get you nowhere on the path of wealth building. Saving money is good, especially for an emergency fund or savings goals, but growing your money is the mission.
Consider this example when differentiating savings money versus growing money. A median income employee will make about $50,000 a year. If they can save 10% of their paycheck for 30 years, that's $150,000 they'll have in the bank. (The total is not accounting for the taxes that have to be paid.) On the other hand, if they were to invest that money and get an annual 8% return on average, they would have $565,509.79 in the bank. As you can see, the $400,000 plus difference shows you the power of investing and the difference between saving money and growing money.
Recommended Read: How to Start Investing | Investing for Beginners
Investing, especially in the stock market, is a risk. What you invest in and how much you invest will come down to your risk tolerance. But the saying "scared money don't make money" has some truth. So what should you invest in to build generational wealth? While everyone's situation is different, stocks and real estate are the easiest assets to accumulate and pass down.
Building generational wealth with stocks is as simple as buying shares in a publicly-traded company on the stock market and just letting them grow. As long as you don't pull out more than the growth every year, you'll have generational wealth in perpetuity.
Building generational wealth through real estate is about buying cash flow assets and keeping your expenses underneath your monthly cash flow. As long as the asset is properly managed and the cash flow stays above monthly costs, just as with stocks, you'll have generational wealth in perpetuity.
If you want to pass on generational wealth, you must invest in assets.
Build a business that can operate without you
Many business owners are solopreneurs, and therefore, everything depends on one person. For example, a plumber owns a small business that includes him or herself, the work truck, and some tools. Meaning they are their only employee. When they take time off, business stops. Moreso, unless the plumber has a child or another family member who is interested in being in the plumbing business that they also trust, the plumber can't pass their business down to family.
Compared to buying stocks and real estate, building a business to build generational wealth is more challenging. However, passing down a company is bigger than just money. It is also about legacy. For example, many of the business brand names you know are last names. For example, Ferrari, Colgate, and Johnson & Johnson are the last names of the person or families who started the business. These were businesses that were created and then passed down to the next generation.
If building a business appeals to you, it is one of the fastest ways to grow wealth and pass it down to the next generation, but only if you can make the business run without you.
Use an estate plan
The saying, "If you fail to plan, you plan to fail," definitely holds true in building generational wealth. Choosing not to plan by neglecting to have a will or create a trust is not just denying your mortality, but it is robbing your children or family.
Without a plan in place for when you pass away, decision-making doesn't fall on your loved ones. Instead, it falls on the government, and the government has no incentive to follow your wishes or avoid overpaying taxes. Only you will care enough about your family's future to make the best plan for them.
Now is the best time to create an estate plan. Don't wait until you've finally amassed your fortune or you're about to retire. Creating a plan now means you can rest assured that your wishes will be carried out accordingly, and your wealth will be passed on to the next generation per your guidelines.
The Money Wrap-Up
There are three parts to building generational wealth: growing your money, passing on your money, and generations keeping that money. The problem is that many people follow the order mentioned but worry about part three, which is hoping their children keep generational wealth going for generations.
To increase the chances of wealth continuing for generations, the first step must be to intentionally prepare your children to keep the money. Next, set up the systems for passing down that money with an estate plan. Once that is done, you can focus all of your efforts on growing your money, knowing that the generational wealth you're building with your family will last.