The simplest way to explain generational wealth is that it is wealth that gets passed down from generation to generation. Leaving behind a sizable inheritance to your descendants is considered generational wealth, but how does one obtain generational wealth for their family?
“Wealth” can consist of many things. It can include assets like businesses, real estate, stock market investments, and anything that is of monetary value.
Read on to discover how to build generational wealth for your family.
How Does Generational Wealth Work?
Generational wealth, also commonly called family or legacy wealth, is something that you leave behind for your children and/or grandchildren to continue the legacy of wealth in your family. The concept behind generational wealth for many is to ensure that your family has financial support upon your passing.
Worrying about your family is second nature. That is why many find generational wealth to be so important.
Thinking about the legacy you will provide future descendants is the concept of generational wealth. With the right planning of investment and business portfolios, you can set your family up for financial success for generations to come.
Why Is Generational Wealth Important?
Generational wealth is important for many families because it provides heirs with financial advantages that others do not have. For example, your children/grandchildren will not have to struggle to pay student loans because their college fund could already be paid for.
If you do not come from a family that has built generational wealth you are likely starting from scratch. Your personal finance journey was likely not always easy.
Many look at their own financial struggles to build wealth and want to secure a stronger financial future for their family, so their children will not be burdened with the same struggles. Instead they are set with security and financial vehicles to help ensure they are well established.
The wealth you build over the course of your life will provide a solid foundation for the financial success of generations to come.
How Much Money Is Enough to Be Generational Wealth?
There is no exact net worth or “magic number” to determine what is considered generational wealth. It is relative to your particular family situation, so try not to focus too much on the number.
After all, each person is different. If one person inherited $10 million and invested it properly while they lived off of only $50,000 per year, the money could last them forever.
However, another person might blow through $1 million (or more) per year, making the money last not nearly as long.
How Many Generations Does Wealth Usually Last?
There is a Chinese proverb “rags to rags in three generations.” The proverb says that generational wealth does not last for more than three generations.
- The first generation makes money
- The second generation spends money
- The third generation sees no wealth
Shockingly, this ancient proverb is not the only one to note the problem. The data backs up this euphemism and others like “wealth may pay, but it may not stay”.
A recent 20-year study by The Williams Group, a wealth consultancy, found that 7 out of 10 families lose their fortune by the second generation; and 9 out of 10 lose it by the third generation. In order to beat the odds, wealth can continue to be passed down if it is properly managed.
Consider working with a financial planner to help with your succession planning and work to implement it carefully.
Can Anyone Build Generational Wealth?
While building generational wealth likely seems intimidating, with a strong financial strategy anyone can build generational wealth.
How To Build Generational Wealth
Now comes the exciting part — how to build generational wealth. While the appeal of leaving financial security for your family behind is enticing, it takes work to acquire.
Consider using the following wealth building vehicles below. With all of these examples, it is recommended that you work with your trusted financial advisor to help put you on the right path to build wealth.
You might not be an expert, but they are, and are there to help guide you!
Investing in the Stock Market
This is a great way to pass wealth on beyond your lifetime as the assets can be transferred to your family.
Making an estate plan is an important part to your generational strategy. Estate planning requires you to put together the legal documents that are necessary to pass your assets on to the next generation of your family.
It keeps all your pertinent financial documents in one location. When you work with a financial planner, they will be able to work out the framework of an estate plan that not only helps second generation heirs, but also further into your legacy.
Real Estate Investing
Real estate investing is a tangible way to produce income for future generations. If your family inherits an investment property that has already been paid for, they can receive the cash flow of the rental income while only worrying about ongoing maintenance and operating costs.
Adding multiple properties to a real estate portfolio will only continue to add value over time.
Start a Business
In the United States, approximately 90% of businesses are controlled and owned by families, many with the intent to be passed down to future generations. While not all of these businesses make it to the second or third generations, it’s important to start a business that involves the interest of your family.
Get your children involved in the early/planning stages. Help them learn about the company and how it operates. That way, there is a higher chance of success for the business in the future when you pass it down.
Invest in Education
In the second quarter of 2021 there is an outstanding $1.59 trillion in student loan debt. Currently more than 42 million Americans have federal student loans.
Investing in your child(ren)’s future education through college funds or other investment options, helps to put them on the road to success. They will be able to obtain a college degree without the struggle of financing.
Not fully understanding personal finance is one of the ways that heirs squalor their inheritance. By helping your children learn about personal finance, you teach them ways to properly protect their wealth.
This way, they will be equipped to continue passing down your hard earned assets. Remember the above example?
The first person who inherited $10 million was able to invest the money and live a comfortable life. The other did not do the same and lost the generational wealth.
Understanding personal finance plays a big part in protecting assets.
Custodial accounts, including 529 college savings plans, allow you to invest money on your child(ren)’s behalf. You are working in the best interest of your child.
Upon your child turning 18-25 (depending upon the type of account you open) they will be able to utilize the funds or continue to invest them. Savings plans work differently, so be sure to help your child understand what the funds can and cannot be utilized for in regard to this account.
What Is the Fastest Way to Build Generational Wealth?
The first thing you should consider to build wealth is getting out of debt. Having high-interest debt hanging over your head can work against you.
The second thing you should do is work with a financial advisor. All of the above suggestions to build wealth can help guide you, but your financial advisor knows your personal financial situation better than anyone else.
They can create strategies that will make your money work the best for your unique financial needs.
Build Wealth to Last Generations
Building wealth is complex and to have it last generations requires financial education and strategy. The good news is you do not have to go about this journey alone.
Your financial advisor can help create a plan, whether it be investing in stocks, real estate, business, or other personal finance options, to help set you and your family up for success. With the right generational wealth planning, your family can hopefully overcome the 3rd generation rule and continue to see the benefits of your hard work.