Building generational wealth is not about being lucky or outperforming the stock market. Here are five ideas for increasing your net worth and ensuring that you leave assets for future generations.
Individuals and families are increasingly considering the concept of generational wealth. The greatest wealth transfer in history is currently underway, with Baby Boomers passing on an estimated $30 trillion to their children. Furthermore, the tech and cryptocurrency explosion has encouraged many people in their 30s and 40s to learn more about the notion.
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What is Generational Wealth?
Most people associate generational wealth with the transfer of assets such as stocks and real estate from one generation to the next.
While this is undoubtedly a significant component of generational wealth, there is another much more complex aspect to consider: ensuring that your heirs use their money wisely and live a fulfilling life, as well as ensuring that future generations can continue to benefit from the wealth you are creating today.
Why does Generational Wealth Matter?
Wealth provides you more choices in life.
Generational wealth is significant because it gives you more freedom to think and live the life you want when you don’t have to worry about paying expenses or whether you can afford to leave a job that doesn’t satisfy you.
But why should you care about passing on money to the next generation? Many people have felt compelled to accomplish tasks or work a job because they needed money.
Of course, generating generational wealth does not imply that your children will never face adversity. However, many parents want to give their children more alternatives in life.
How is Generational Wealth Created From Scratch?
Over 88% of today’s millionaires are first-generation. In our essay on how to grow rich, we examined the most feasible strategies to accumulate significant money in your lifetime, with a focus on the fundamental concept of widening the difference between your income and your expenses.
In short, you want to maximize the difference between your income and spending while investing everything within it in a way that will grow long-term wealth.
Ideally, you can benefit from compound interest for as long as feasible. After instance, while Warren Buffet has a remarkable track record of identifying assets, his overall success is mostly due to his consistent investing over a 70-year period.
While real estate — including homeownership and real estate entrepreneurship — is marketed as the best way to acquire wealth, data reveals that the bulk of today’s billionaires made their fortunes through investment appreciation, employee compensation, and stock options/profit sharing.
These activities, in my opinion, have one thing in common: they all need a long-term commitment.
A million-dollar portfolio requires decades of market experience. Highly compensated individuals are able to add the most value to an organization by taking the time to develop high-value talents. The most attractive stock market and profit sharing arrangements go to the longest-tenured personnel at the highest levels.
As much as I enjoy entrepreneurship, creating a company that will survive decades and allow you to maintain a huge gap between your income and expenses for decades is difficult. And, because leverage is employed in real estate, it only takes one market meltdown in your lifetime to wipe you out.
As a result, generating generational wealth necessitates a very long time horizon, rather than simply being lucky. In a remarkable piece titled “Meet the Money Whisperer to the Super-Rich NBA Elite,” one financial consultant even used a 100-year timetable for his customers.
It is difficult to become and remain wealthy throughout one’s life. However, maintaining wealth over a century is more difficult and necessitates a distinct set of techniques.
Challenges of Building Generational Wealth
Unfortunately, the default for parents is to work hard and pass on assets. However, that scenario is unlikely to work in most cases. That is why an estimated 70% of generational wealth is lost by the second generation, and 90% by the third.
Most parents who came from low beginnings do not want their children to go through the same challenges they endured. But finding the correct balance is difficult. Building wealth that lasts more than one generation necessitates more than financial assets.
How to Create Generational Wealth From Scratch
If you want to create generational wealth, whether you already have the assets or want to get started, here are five secrets to consider.
1. Invest in your child’s education
Raising financially independent adults is essential if you want to build long-term wealth.
Teaching your children about personal money can help them build a road to self-sufficiency. Giving your children a financial education is one of the most critical things you can do to begin accumulating generational wealth. It all starts with open conversations about money at home, so your children understand they can ask questions.
We have age-appropriate money conversations with our children aged seven and under on a daily basis. The topics range from need vs want to earning money to the value of saving and giving back.
Our 7-year-old has begun taking weekly financial literacy tests and learning about investing. As our children grow older, we plan to introduce them to more advanced personal finance ideas. As we learn more and discover new tools, we incorporate what we know into our children’s education.
Our goal is for them to be financially responsible individuals by the time they leave home as young adults.
It can be intimidating to embark on that duty, especially if you’re trying to figure out your money, but most people learn from their mistakes rather than their accomplishments. The same goes for money. Children can gain from our financial successes, as well as from our financial mistakes. As parents, we may be hesitant to discuss our failures and mistakes, but by discussing our losses and what we learned from them, we can assist our children avoid some of the same mistakes we did.
2. Invest in the stock market
You can invest in a variety of assets. Signing up for Empower’s free financial tools may help you better understand your net worth, which is your assets minus your liabilities. Millions of households in the United States utilize this technology to view all of their financial accounts and analyze their investments for free.
Investing in the stock market allows you to develop wealth passively while protecting your money from inflation. Most people who invest in the stock market with long-term goals and diversify their portfolios see their assets grow over time.
Since 1926, the S&P 500, an index that measures the stocks of 500 of the top corporations in the United States, has returned 10% on average before inflation2. Investing in the stock market might be frightening at first, but as a novice, an easy way to get started is with low-cost index funds, which offer long-term growth prospects at minimal costs.
3. Invest in real estate
Real estate can be an excellent way to build wealth. Real estate often appreciates with time. Real estate can also generate cash flow for investors.
It may be difficult to envision yourself as a real estate investor. However, there are less scary methods to get started, such as moving out of your house, renting it out, or buying another property. Many investors have adopted this technique to develop their real estate portfolios one house at a time.
4. Start a business to pass down
More over 30% of family-owned businesses are thought to have reached the second generation. Building a business to pass on to your offspring is another approach to create generational wealth. Anyone who wants to pass on their business to their children should start working in it at a young age. It can assist motivate them to take over the company. However, if your offspring are not interested in running the family business, there is still a way to generate income by selling it.
5. Make use of life insurance
Life insurance is an excellent way to pass along wealth. It provides a safety net for your family in case you die unexpectedly. If you have children or dependents who rely on your salary, your eventual death will have a detrimental influence on their financial condition.
Term life insurance can be an economical way to ensure that your loved ones are financially secure if you are no longer there to provide for them. Losing a loved one is stressful enough; reducing the stress by ensuring their financial security through a life insurance policy will allow them to focus on grieving.
How to pass on generational wealth.
Creating an estate plan is an important step in establishing generational wealth because it ensures that in the event of death or incapacitation, your assets are split according to your intentions.
There are various procedures that can be taken to ensure that money is passed down through generations. Here’s a few.
1. Write a will.
A will should provide clear instructions on your final wishes and assets. Understanding the laws in your state is critical to ensuring that your will is valid. A will can also assist you communicate your wishes for your young children’s care. You can also disclose your financial holdings to help your family members find them. When you do not have a will, the state decides what happens to your children, property, and possessions.
2. Set up a trust.
A trust, sometimes known as a trust fund, is a legal structure that you can employ to hold and transfer assets to your beneficiaries. It is another option to explore for parents with minor children. Trusts can be costly, but they can have other advantages, such as avoiding or decreasing estate and gift taxes based on the size of your estate.
3. Name account beneficiaries.
Naming specified beneficiaries for each account can often be enough to ensure that your assets pass down to the beneficiaries of your choice. Naming beneficiaries can save your loved ones time and energy after your death, especially if they are adults.
Proper estate planning is a critical component of passing on family wealth. As a result, consulting with an estate attorney is critical to ensuring that you have a comprehensive estate plan in place.
Final thoughts on building generational wealth
Paying for your children’s and grandchildren’s education, ensuring that no one in your family incurs medical debt, and even assisting future generations in purchasing a home are all empowering experiences.
No matter where you are now, the process must begin with taking charge of your personal financial circumstances. Create a vision for your own future based on the basic values and concepts you desire to follow. Organize your own finances and investments. Finding a career that you enjoy (that will maximize your income).
So, whether you’re in debt or have seven figures in the bank, there are things you can do now to assist future generations live better lives.
That is extremely powerful.