Generational Wealth: Definition & How to Build One For Your Family

How To Build Generational Wealth

Perhaps you’ve heard the term ‘generational wealth’ and thought to yourself, ‘Wow, that sounds impressive.’ However, you may have pushed it to the back of your mind due to more pressing concerns.

For instance, you may be concentrating your efforts on paying off debt, saving money, or pursuing other financial goals. It’s possible that building generational wealth isn’t a top concern right now as you focus on your present financial situation. Having said that, you can still build it into your long-term financial plans.

Not sure what generational wealth transition means? You don’t have  to worry! I’ll clearly explain what it is and how to build one for your family.

Generational Wealth

Generational wealth, by definition, refers to assets passed down from one generation to the next. If you are able to leave a significant inheritance to your offspring, this is referred to as generational wealth. These assets can take the form of real estate, stock market investments, a business, or anything else with monetary value.

Individuals who inherit wealth from their parents enjoy a huge financial benefit over those who do not. They are likely to be able to avoid student loans and other sorts of high-interest debt. Rather than that, their inheritance may be used to fund income-generating investments, appreciating assets, or even the purchase of their first home.

However, sustaining generational wealth across generations is not easy. Indeed, data indicates that around 70% of families lose capital in the second generation and 90% in the third. Not the best odds for building wealth over many generations. So, building wealth is one thing, and the other thing is for your generation to maintain such wealth .

Now, the question is, how do you build a generational wealth for your family? First, let’s dig deeper on this topic to understand more. I will be showing you thereafter, how you can start building a generational wealth for your family if you are yet to start the journey. Keep reading!

What Is Generational Wealth?

Generational wealth is any asset that a family passes on to their children or grandchildren, whether it is cash, investment funds, stocks and bonds, real estate, or even an entire business.

Real estate is one of the most popular ways for people to inherit and pass on generational wealth.

“You enter the middle class by becoming a homeowner, correct? That is the quantum jump. You are aware that you are building equity as well.

And equity matters: When you sell or refinance your home, you can access your equity and leverage it to increase your wealth or enhance other aspects of your life. This may involve upgrading your home, making home modifications, saving for retirement, paying for your child’s college tuition, or investing in a business endeavor that has the potential to boost your income. This enables a level of social mobility and risk-taking that poor people just cannot afford.

Halstead, who purchased and rehabbed four properties between the ages of 30 and 35, feels that generational wealth can also come in the form of education. Her parents instilled in her a sense of fiscal responsibility and an understanding of borrowing and credit, which gave her confidence as she went out to develop her own wealth through homeownership. She also views her carpentry abilities as a type of wealth to pass on to others, as they may save individual thousands of dollars in renovation fees and significantly raise the value of a house.

Further Explanation On Generational Wealth You Should Know

Essentially, it is money that is carried down from generation to generation. This is often referred to as family money or legacy money. If you are able to leave something to your children or grandkids, you are contributing to your family’s generational wealth growth.

Of course, you may leave many things behind for your family, such as great memories and healthy. However, I’m referring primarily to the financial resources that you can leave behind. This wealth can take many forms, including real estate holdings, stock market investments, or a financial education that will benefit future generations.

Before we move on to how you can build generational wealth and the importance, You need to know the first steps to start building generational wealth. This we explained in detail in the next paragraph below, keep reading!

The First Step You Should Take When Starting Your Journey In Building Generational Wealth

Homeownership is likely the most popular means families can build generational wealth, but there are dozens of small stages to getting there. The Federal Reserve states that the median net worth for homeowners in 2019 was $255,000 compared to $6,300 for renters. That’s more than 40 times larger wealth for homeowners compared to people without property on their own.

However, generational wealth can grow faster when you implement what you understand about budgeting, spending, and saving to other aspects of your financial life. The fact is that you’ll need to keep a good credit score so you can qualify for the most competitive loans with the lowest APR.

And if you’re fortunate enough to have a constant source of income with some extra spare cash, make use of compound interest. Also use simple ideas like “pay yourself first” in whatever little, regular ways you can until you start seeing your savings increase. Check out these 10 tips to making savings easier.

>> Learn More: Money Jar: How to Save And Budget With Money Jar System

All these simple steps prepare you for the greater leaps. The first step to buying a home is saving up for a down payment on your mortgage, and the first step to saving a down payment is saving your first $1,000.

Neptunmag estimated that you can save $1,000 in a year by putting aside $20 per week into high-yield savings. One beautiful thing about these options we explained above is that they don’t have to pay any fees to start. However, they come with no or low minimum balance, so you could begin right now.

Start with what you have right now. After making incremental deposits each of the week, you have to identify areas in which you may need to cut back and save more than $20 every week. Build some courage, and you will be amazed how easier it is for you to save.

Once you have saved for an emergency fund, you can start investing, prepare to have your own home or consider entrepreneurship to set up your own legacy.

How To Start Building Generational Wealth

The idea of generational wealth building is simple. You just need to acquire assets or save money for retirement that you do not intend to waste. Then, when you kick the bucket (pass on), you transfer those assets to your children.

This sounds simple in concept but might be challenging to implement. If you’re having difficulty saving for the future, saving for the next generation may seem overwhelming. Which is quite understandable!

Prior to beginning to save for generational wealth, it is vital to establish your own retirement savings strategy and other financial goals. Once you’ve gotten a hold on your current finances in order to fund your golden years, it’s time to begin saving for the future.

How should you begin saving for future generational wealth? Here are some of the most effective strategies for beginning the process of preparing to leave a legacy of wealth to your children and generation after.

Consider investing in the stock market

The stock market can be an amazing option for building long-term generational wealth. If your goal is to build generational wealth, this is an excellent option because it has the potential to grow for ages. If you’ve never invested in the stock market, this could sound like a harder task to you. However, it is vital for building generational wealth in your lifetime and even beyond.

However, as a beginner to the stock market, the best place to begin is with low-cost index funds. These funds may offer modest management costs and potential for long-term growth. Meanwhile, here are the top 8 best cryptocurrencies you should know and invest in.

>> Very Important: Discover: How To Spot And Protect Yourself From Crypto Pump And Dump Scheme

Invest in residential real estate

Real estate is another significant way to build wealth over time. With the potential for consistent revenue flows and appreciation in value over time, real estate may be a dependable source of wealth.

The prospect of establishing a real estate empire can be daunting. However, this does not have to be the case! You may have already entered the real estate market when you purchased your first house. If you continue to acquire properties one at a time throughout the course of your life, you may be amazed at how fast your real estate portfolio will grow. Consider this as a means of building wealth for your children.

Build a business that you can pass on to your children

Family businesses offer a great deal of potential for success. Over 30% of family-owned businesses pass on to the next generation. Consider the possibility of passing on the biggest perks business to your children.

Although not all family businesses survive into the second generation, yours may. If your interests and skills fit with those of your children, they may desire to take over the business you build.

To ensure a smooth transfer, you should involve your children in the business from an early age. They must understand how the business runs and how to succeed in it.

Don’t hand over the business to them if they show no or low interest in the business you’ve built. If they are incapable or unwilling to take over the business, you may wish to sell it and use the proceeds to build generational wealth in another way.

>> Attention: Money Management: Definition, Importance & Simplified Guideline(+ tips & pdf)

Carefully save money

Wealth is acquired not only from earning money but also from saving it. As you receive distributions from stocks and other assets, rental income from real estate, or money from other sources of income, set aside as much money that is necessary, first, in tax-advantaged accounts. Here are some savings strategies you may need to learn to help you in your savings.

Make use of life insurance

Life insurance enables you to safeguard your family in the case of your early passing. Without your money, your children may find themselves in less-than-optimal financial situations.

If you make the effort to invest in life insurance today, you can potentially save your children from financial difficulties. Furthermore, they will already be overloaded if they lose you.

Make an investment in your child’s education

Oftentimes, education can give a means of self-sufficiency for your children. Many people with a college degree have the option to pursue high-paying careers that can assist them in managing their personal finances.

Any individual who has received an education will always possess that education. While other aspects of life change, nobody can take away your knowledge. If you are able to assist your children in graduating from college debt-free, you are assisting them in establishing a more secure financial future than most of their peers.

>> Read Also: How to Choose a Bank: The Complete Guide

In 2016, the average college graduate owed $37,172 in student loans. It is probable that this figure will continue to rise in the future. Consider the financial strain you will be able to relieve from your children’s shoulders if you are able to pay for their education.

Educate your children on personal finance

Seventy percent of households, it is said, lose their money in the second generation. And 90% of the time, they lose it in the third! With these figures in mind, it may seem pointless to save for a wealthy legacy. However, financial education can prevent the loss of generational wealth. After all, it’s simple to lose generational wealth if your children lack financial literacy.

However, that would be similar to telling your child to maintain a classic antique car after you kicked the bucket (pass on) without passing any mechanical knowledge to them. The car is almost certain to break down at some point. Similarly, if you don’t educate your children about personal finance, the money you left for them is likely to shrink over their lifetime.

Given your interest in passing on family wealth, you probably have a working knowledge of personal finance. Make it a point to impart this knowledge to your children. This understanding will be the most effective means of them still building and protecting generational wealth.

There are various methods to teach the idea of money to your children. You can educate them about money by buying children’s books on money. As well as teaching them through activities, or showing them by allowing them to listen as you discuss financial matters. You can even assist your children in opening their own bank accounts at a young age to have an early understanding of the value of saving for the future.

>> Related: How to Make Money Through Investing: In Stocks, Best Options for 2021

How Can You Pass On Generational Wealth?

After you’ve built the assets, you’ll need to find a plan for passing them to the next generation. There are steps you must take to ensure a smooth handover of your assets to the next generation. Every one of these steps points towards organizing your affairs early.

Organize your affairs early

Do not wait until you have a medical emergency or are already into retirement to prepare to pass on your wealth. Life is truly uncertain. Several things you can do to get organized and ready include the following:

Keep an updated will

Hire a competent estate planning attorney or lawyer

Probably buy life insurance to safeguard your beneficiaries if necessary

Create an estate strategy or plan

Establish custodial accounts

List beneficiary names for your financial accounts

These procedures can help ensure a peaceful wealth transfer and will reduce future difficulties for everyone. Perhaps just as crucial as wealth transfer is the transmission of knowledge about money management.

>> This May Interest You: Why You Need To Hire An Estate Planning Attorney

Approximately half of all inherited money is wasted or lost through poor investment decisions, while the other half is saved. Moreover, Chris Heilmann, chief fiduciary executive of US Trust, notes, “When you look at the figures, 78 percent believe the following generation is not financially competent enough to handle inheritance.” In other words, simply giving someone money is not enough. You must ensure that they are financially literate.

Fortunately, if you lack the capacity to teach them personally, there are numerous ways for individuals to learn about finance. You can encourage your children to take finance courses in high school and college, to watch educational videos online via platforms like YouTube or Khan Academy, or to read well-rated personal financial books. To appeal to the preferred digital learning method of young people, you can also suggest banking apps targeted toward young adults. By building generational wealth, preparing correct documentation, and educating beneficiaries on how to manage money, you can ensure their financial success in the future.

Can Generational Wealth Impact Your Saving Ability?

The answer is always yes!

Acquiring wealth enables you to earn and save more. Property taxes are greater in communities of color. Frequently, that money does not convert into improved services. Meanwhile, according to history, Redlined towns have fewer food stores and key infrastructures such as banks, parks, and community centers. However, simple acts such as ordering lunch or withdrawing cash are subject to a convenience fee.

“How are you going to get to the bank if you don’t have a car?  “Well, you simply go to the cash machine, and then both your bank and the cash machine will charge you. The average cost for using an out-of-network ATM is $4.64 per transaction, which adds up rapidly. However, it’s quite difficult to build wealth from this position.

Is Building Generational Wealth Important?

If you are getting started with your money or whether you’re starting with a large debt burden, you should understand the value of generational wealth.

What if your parents were able to cover the cost of your college education? This single action has the potential to have a significant impact on your financial future. Rather than catching up on your student loan payments, you may be saving for your first house or retirement.

As you continue on your personal finance adventure, you’ve probably realized that recovering from financial errors is not always simple. What if your parents had been able to provide you with sound financial advice while you stumbled through? It could have prevented you from overspending or gotten you started on a budgeting habit much sooner.

The more you consider your personal financial situation, the more you appreciate the important nature of generational wealth. If you have children or plan to have children, you may begin to consider their financial destiny. Consider how different things may be if you took the time to educate them about personal finance and established strategies to safeguard their financial future now.

Conclusion

The early you begin investing in stocks, real estate, and business ventures, the more wealth you can build. The generational wealth of your family can start with you.

Chiemerie Ozurumba (Adorablepen) is a freelance writer & Computer Science degree holder, a personal finance expert, blogger, public speaker, and poet. He is also a relationship & life coach. Currently a writer at BusinessYield.

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