How to Build Generational Wealth

SHORT ANSWER: Start building generational wealth today by following these 10 tips and staying on track with your finances throughout your lifetime.

Many people long to pass wealth to their children to help them enjoy life with little luxuries. Never having to worry about school loans or being forced to rent a home instead of buying one are just a few reasons older generations long to share their assets with their children. If that sounds like you, learn how to build generational wealth by following these long-term financial strategies. First, read about what generational wealth is to get a complete definition and understanding, then learn how to provide for your loved ones in this way.

How Can You Create Generational Wealth?

There’s no fast way to create generational wealth. You’ll need to make strategic financial decisions for decades to start building your family money that you can pass along. This is a long-term goal you’ll need to be comfortable taking on. Here’s a look at how to start building generational wealth now.

1. Start a Savings Account

Each month, save a percentage of your income. You’ll need funds you can invest in financial strategies to get started building your wealth. How much money you make is not as important as how much you’re able to save from your salary. Living within your means and making smart money moves will set you up for success.

Instead of just saving what’s left over from your spending, set specific goals each month and stick to them. You should only pull money away from your saving goal if you encounter a surprise expense, such as something big going wrong in your home or a major car repair.

Careful budgeting will help ensure you put away savings each month to begin building your wealth. Once you have a nest egg, place the money in a conservative place, such as a high-yield savings account to earn interest on your funds or at least keep pace with inflation. You should work to earn interest on funds that you need to keep liquid as your emergency fund. So while you might not want it tied up in stocks or real estate, you do want to ensure every dollar you have is working for you.

2. Talk to Your Children About Smart Money Moves

For wealth to become generational, the next generation needs to know how to invest money and manage it well. That starts from a young age. You need to engage your children in conversations about financial basics.

When children are young, this can start with playing games like Monopoly or providing them a modest weekly allowance so they begin learning about how to make financial decisions. Take every opportunity you get to talk about finances, such as in the case of a surprise expense where you then have to spend less entertainment money to pay for a new refrigerator or replace your home’s roof. That way, your kids will understand the sacrifices and shifts that the average household has to make to balance expenses.

3. Ensure Children Are Well Educated

Another important step in preparing the next generation to take on your wealth and grow it for their children is to invest in their education. Ensuring they get on a good career track and become strategic thinkers will help protect your generational wealth. That way, you can be more confident that they won’t squander that money or leave it sitting in an account with minimal or no interest.

The Social Security Administration found that a man with a bachelor’s degree will earn $900,000 more than a man with only a high school diploma over their lifetime. Likewise, a woman with a bachelor’s degree will earn $630,000 more over their lifetime. Those numbers increase further to $1.5 million for men with graduate degrees and $1.1 million for women. Earning more will help future generations better manage the funds you share with them.

4. Invest Your Funds

Once you have a comfortable emergency fund, you should start investing additional savings to build compound interest. The sooner you get started with investing, the better for your finances. Investing in the stock market has some risk but you can diversify your investments for best results.

Consider dividing your investments across stocks, bonds and other assets. Balance growth potential with how much risk you can assume. If you’re young, you can generally take on more risk.

View your investments as long-term strategies. That way, you don’t get too uncomfortable during downturns or feel the need to pull your funds prematurely. The stock market generally bounces back.

5. Purchase Real Estate

Real estate appreciates at incredible rates and is a pretty sure bet for investing your additional funds. For decades, real estate has been a great strategy for passing assets along to your kin. 

Much like investing in the stock market, you should consider diversifying your investments. This includes getting involved in residential and commercial real estate where you can.

The easiest way to get started with real estate is to invest in a real estate investment trust (REIT). That way, you don’t need hundreds of thousands of dollars to acquire land. 

6. Start a Family Business

A family business is another great way to build generational wealth. Not only will you have an asset you can pass on to your family members, but you also can provide your loved ones with meaningful employment and pass along valuable skills and know-how.

This isn’t right for everyone depending on the type of work you're in. For some, this is a retirement goal so they can work part-time while training family members to run the company. Others have no interest in managing a business and would rather reach great heights in their profession working for others while investing their salary wisely. Evaluate whether this is a good strategic move for you before getting started.

7. Avoid Debt

The fastest way to wipe out savings or turn healthy finances into struggling ones is to take on too much debt. You should live within your means whenever you can. There might be years where you dip into your savings and don’t add to your wealth because of a job loss or other financial woe that you can’t predict or prepare for. But avoiding high-interest debt, such as credit card debt, can keep you on a good track to pass along your wealth to the next generation.

8. Purchase a Life Insurance Policy

Depending on your age and health, taking out a life insurance policy can be a smart move for passing on funds to your loved ones. You can get several hundred thousand dollars in coverage at an affordable monthly premium if you are young and generally healthy. This can help preserve your hopes of generational wealth even if you die unexpectedly. 

Life insurance can help pay off your mortgage, put your children through school and care for your family even without your income. Calculate how much your family would need to replace your income in case of your untimely death and purchase a policy. While you can generally get life insurance through your employer at lower group rates, know that only some of these plans convert to a private plan if you leave the employer.

9. Create an Estate Plan

As you grow your assets, your estate planning will become more complex. Working with a financial advisor is a good idea to ensure your assets transfer with ease. Plus, this will make it easier for your loved ones to know where your money is and how to access it with the greatest ease.

This is more involved than writing a will or setting up a trust. It outlines every detail of how your assets transfer and when.

10. Take Advantage of All Tax Benefits

Some savings options are tax-free or tax-deferred, which can help you grow your wealth faster. Make sure you’re maxing out these tax benefits.

• Retirement savings: Max out your tax-deferred retirement savings. That way, you can put more of your salary in your retirement account to create a nice life for yourself and your family and pay fewer taxes on those funds. Balance the need for tax breaks now with the need for them during retirement by placing money in both tax-deferred accounts and tax-exempt accounts.
• Health savings account: A health savings account helps you set aside funds for medical expenses tax-free with tax-free growth of the funds. You can only use those funds on eligible medical expenses, but your need for these funds will likely increase as you age and require more care.

How Much Money Do You Need to Establish Generational Wealth?

Generational wealth does not rely on a specific value. To create generational wealth, you simply must pass funds on to the next generation. Wealth is relative based on the family, the area they live in and their lifestyle. Set goals for how much money to save each month and be disciplined in smart investments to build a level of generational wealth that is realistic for you. You must also train the next generation on how to make smart money moves to ensure that wealth grows and is passed on to the next generation.

How Do Old-Money Families Stay Rich?

Old-money families stay rich by only using their family money when they need to, such as to bridge income interruptions. Their goal is to ultimately add to the money that was passed to them so that they can pass it to the next generation. Or, they might only use money from the interest on their assets to ensure those assets remain for their children while still enjoying the comfort that interest from the assets can provide.

Other families that have old money through a family business stay rich by passing on skills and know-how to keep running the business and operating it at peak performance. 

How Many Generations Does it Take to Build Wealth?

There is no set number of generations that funds must pass through for it to be considered generational wealth. Once money moves from one generation to the next, it is now generational wealth. For the wealth to remain, each generation will need to know how to invest the funds and keep them growing without pulling too much money from the assets.

Leave a Legacy for Generations to Come

Saving a little bit each month is the best strategy for building generational wealth. Get started building your financial legacy a little at a time. Then teach your children wise money decisions to help ensure your legacy lives on for future generations.