What is generational wealth, and how do you build it?
Leaving a financial legacy to your kids can give them a significant leg up in life. Data from the Congressional Budget Office shows that 28% of families in the top third of the income distribution received an inheritance, compared to only 17% of those in the bottom third.
Building generational wealth may sound like something reserved for the ultra-rich. But the truth is, generational wealth may be more accessible than you think. Whether you want to help your kids pay for college, give them money for their first house, or leave them the family business when you retire, generational wealth can help your children get off on the right financial foot.
Passing down generational wealth may not require an enormous net worth, but it does involve strategic planning. Read on to learn more about generational wealth and how to build it.
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Generational wealth includes assets, such as cash, property, investments, and businesses, that are passed down from one generation to the next.
You can leave generational wealth in the form of an inheritance — for example, investments or property — transferring the wealth when you die. But you can also build and pass on generational wealth during your life. For example, parents may build generational wealth by paying for their children's higher education, helping them purchase a home, or giving them a financial gift when they get married.
Generational wealth is important because it gives younger generations a financial head start. In extreme circumstances, it can make the difference between living debt-free, owning a home, or simply having a financial safety net — or not.
Read more: What happens to a bank account when somebody dies?
If building generational wealth is one of your financial goals, you'll need to establish your own financial foundation first. This can mean paying off high-interest debt, creating an emergency fund, and saving for retirement. You may also want to save for goals of your own, such as traveling, buying a home, or starting a business.
Once you've got these basics covered, you can shift your focus to the next generation. The following strategies can help you build generational wealth over the decades.
Investing is a key wealth-building strategy for reaching any long-term goal, including building generational wealth. Investing allows you to buy assets, such as stocks, bonds, mutual funds, and real estate, that will generate income or grow in value over time. Investing typically allows you to build meaningful wealth much faster than you would by saving money in a bank account.
A financial advisor can help you create an investment strategy tailored to your goals and circumstances, but a few tips can help almost anyone:
Start investing as early as possible to maximize the power of compound interest.
When possible, invest in tax-advantaged accounts.
Minimize investment fees, which cut into your returns.
Diversify your investment portfolio to lower your risk of major financial losses.
According to the Urban Institute, homeownership is the primary wealth-building tool in the U.S., especially for Black families. This makes it a common goal for those who want to pass on generational wealth.
Real estate typically appreciates over time, which can make it an especially valuable asset to pass down to your children. Whether you want to buy a primary residence, invest in rental properties, or both, owning real estate can be a useful tool in building generational wealth.
Starting a business is one way to grow your own income exponentially, but it's also a valuable generational wealth-building tool.
According to the U.S. Small Business Administration (SBA), business equity was the second-largest share of nonfinancial assets in 2019 (after homeownership). Data from the SBA also shows that, on average, self-employed people are wealthier than non-self-employed people.
Starting a business has the potential to help you improve your cash flow and build a wealth-building entity to pass down to your kids, creating a major financial advantage for your family. Not only that, but the sale of a business can generate significant income for future generations.
Like generational wealth, you may associate estate planning with high-net-worth individuals. But it's a key financial step for anyone who wants to control what happens to their assets after they pass away.
Estate planning helps you transfer your wealth according to your wishes after you die. When done well, it helps your heirs minimize unnecessary taxes, other financial losses, and time spent in probate court.
To create an estate plan, start by taking inventory of your assets and choosing beneficiaries for each. You'll then need to create a will, which makes up the core of your estate plan. While you can do this yourself, it may be worth meeting with a financial advisor or estate planning attorney to make sure your plan is legally sound.
After creating an estate plan, review it every year to make any necessary updates to your assets, beneficiaries, or wishes.
Read more: What is wealth management, and is it right for you?
If your goal is to make your wealth last for generations to come, financial education should be a focus within your family.
Teaching your kids the basic skills of money management, budgeting, and saving money can help them build a foundation of financial responsibility. And going a step further by teaching them how to invest, start a business, or pass down their money can help them continue to build and share their wealth as they age.
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