If you’ve ever wondered what is generational wealth or how to build generational wealth- you’ve come to the right place. If you want to create wealth to pass on to the next generation in your family, you should plan and implement the steps necessary to ensure your wealth is transferred to the future generation.
According to GoBankingRates, 70% of wealthy families lose their wealth by the next generation, and 90% lose it by the second generation.
What is Generational Wealth?
Generational wealth is when one generation passes down its assets to the next. Assets might include cash, investment funds, stocks and bonds, real estate, and businesses. Generational wealth can also include providing financial literacy to children.
Why Build Generational Wealth?
There are various reasons to build generational wealth, with most wanting to help the coming generations even after they’re gone. Some of the most common reasons families may want to build generational wealth are:
- Stop families from facing financial difficulties
- Have the option to choose a career based on interests rather than salary
- Donate to charities
- Make it possible for every family member to attend higher education
- Pay for healthcare when faced with disabilities or illness
Building generational wealth can also mean that the next generation can have economical advantages compared to those who don’t. Individuals who receive financial support for college education or for buying their first home can have a head-start on their path to building wealth earlier in life. This means money that would’ve been spent on student loans can be used towards investments or starting a business.
Building wealth means the future generation will have more freedom and live life on their terms instead of worrying about paying bills or working at a job that isn’t fulfilling for them.
Generational Wealth and the Racial Wealth Gap
Building generational wealth may be more challenging for minority ethnic groups. The Federal Reserve has reported that, as of 2019, “White families are both more likely to have received an inheritance and are also more likely to expect to receive an inheritance.” While 17% of White families expected an inheritance, only 6% of Black families, 4% of Hispanic families, and 15% of other families expected to be left with an inheritance.
Ways To Transfer Generational Wealth
There are two ways to transfer generational wealth. You can transfer your wealth when you’re still alive or once you pass away. When you’re alive, you can:
- Gift your Family
In 2022, you can gift up to $16,000 per person or $32,000 per couple in money or property free of federal gift taxes. In 2023, this is set to rise to $17,000. - Cover Educational Expenses
Another form of wealth transfer is by investing in the next generation’s education. Tuition paid directly to the institution will be exempt from gift taxes in America.
How To Build Generational Wealth
Building generational wealth can feel intimidating and confusing at first. But when you plan and take one step at a time, you can have a clearer idea of how to achieve your goal of building generational wealth.
Here are some ways to build generational wealth:
- Invest In Your Child’s Education
Apart from covering educational expenses, you can raise financially independent children to build long-lasting wealth. You can simply have open conversations about money at home and spark curiosity in your children to ask questions. - Start Investing in the Stock Market
Start your investment journey as soon as possible to build wealth for the long term. Investing your money not only builds your wealth passively but also protects it from inflation. It’s recommended to diversify your portfolio and to have a long-term goal in mind when investing. - Invest in Real Estate
Investing in real estate is a great way to build wealth. Most real estate increase in value and can be a tool to provide cash flow. It might seem intimidating to be a real estate investor, but you can begin by renting out one property at first. - Build Your Own Business
When you start your own business, it can be a way to build generational wealth since you can pass it down to your children. - Buy Life Insurance
Life insurance can be a great way to create generational wealth. If you were to die suddenly, life insurance can offer a safety net for your family. If you compare the death benefit that your beneficiaries receive, the monthly life insurance premiums can be affordable. - Build Multiple Streams of Income
Wealthy people often have many sources of income. When you create multiple sources of income, you are less likely to be affected by economic instability. There are various ways to set up multiple income streams, like investing in dividend-paying stocks, rental properties, or owning your own business. Such assets can be transferred from one generation to the next. - Seek Knowledgeable Advisors
When you begin your journey to creating generational wealth, it’s important to seek expert advice to gain guidance and clarity. Advisors can maximize your benefits and lower your taxes. Investing in their expertise can be worthwhile since it provides ways to save money and offers continuity for your plan once you have passed away. - Have an Estate Plan
Setting up your estate is vital to transfer your wealth to the next generation. When planned correctly, you can minimize estate taxes and have control over how the money is used by your family. This means you can stop one generation from using up all of your money before it can be passed down to the next generation.
You can take the following steps to set up an estate:
- Write a will: A will can document your last wishes and includes specific instructions about what will happen to your assets. Without a will, you leave the decision up to the state.
- Set up a Trust: A trust fund is a legal entity to store and transfers assets to your beneficiaries.
- Name Account Beneficiaries: Name your beneficiaries to ensure your assets pass down to the beneficiaries of your choice.
Summary
Creating generational wealth might be an intimidating thought at first. When you begin to plan and take appropriate steps, you will get closer to your goal of creating generational wealth for your family. It’s important to remember that creating generational wealth is a long-term process and requires patience and persistence. Setting specific financial goals and creating a plan to achieve them can help you stay on track. Additionally, seeking the advice of financial professionals, such as financial advisors or accountants, can be beneficial in identifying potential investment opportunities and managing your finances effectively. It’s also important to educate yourself on financial literacy and make informed decisions about your money. Building a strong foundation and making smart financial choices can help ensure that your wealth lasts for generations to come.
Asma is a freelance writer specialising in finance and business niche topics. Her experiences include working at one of the world’s oldest and largest asset management firms.
Apart from writing, Asma also enjoys reading about finance, business, and entrepreneurship.
