Generational wealth is all about having a vision for the future—a vision in which your hard work, smart financial decisions and strategic investments benefit not only you but also your children, grandchildren, and beyond.
Building wealth that spans multiple generations is not an impossible dream but a deliberate, thoughtful process. Whether you are just beginning to accumulate assets or have been building your fortune for years, it's crucial to understand the key strategies to create and preserve generational wealth.
The fact is, if you don't spend your money, someone else will. This article breaks down the process of building generational wealth, dispels common myths surrounding it and provides actionable tips to ensure your children and future generations can benefit from your savvy money moves.
What Is Generational Wealth?
Generational wealth refers to assets that are passed down from one generation to the next, creating a financial foundation for future family members. These assets may include cash, investments, businesses, real estate and other valuable property. The goal is not just to accumulate wealth, but to create lasting financial security for future generations, ensuring they have the resources to thrive without starting from scratch.
The importance of generational wealth lies in its potential to break cycles of financial struggle, provide opportunities for education and entrepreneurship, and give family members a solid financial foundation on which to build their own wealth.
Consider the following seven strategies to help you create generational wealth.
1. Develop and Encourage Financial Literacy
Research finds that up to 70% of family wealth is lost by the second generation, and up to 90% of family wealth is lost by the third generation. To avoid going from “shirtsleeves to shirtsleeves in three generations," you need to educate your future generations about building and preserving wealth.
A financially literate next generation is far more likely to retain and grow the wealth you leave them.
As parents, it's important to talk openly about finances with your children. Encourage them to learn about money, the basics of investing and the importance of planning for tomorrow. The earlier they grasp these concepts, the better equipped they will be to manage the wealth you pass down.
Incorporate lessons on budgeting, saving and investing into family conversations. You might also consider:
- Setting up savings and investment accounts for children.
- Involving them in the family's financial planning processes.
- Encouraging financial independence by giving them responsibilities as they grow older.
Engage your family in regular financial meetings where you discuss the family's financial goals, strategies for building wealth and the importance of preserving what's been built. This can help foster a sense of ownership and responsibility in the next generation.
2. Diversify Your Investments
Investing is one of the most reliable methods for growing wealth over time. Whether it's through individual stocks, mutual funds or other assets, investing allows your money to grow and compound over the long term. The key to successful investing is diversification, which spreads your investments across different sectors, industries and asset classes, reducing the risk of a major loss if one area underperforms.
Stocks and bonds
A well-diversified portfolio of stocks and bonds can provide consistent returns over time. Stocks tend to outperform other investments over the long term, though they come with higher risk. Since 1900, the U.S. equity market has generated an annualized real return of 6.5%.
Bonds, on the other hand, are safer but typically offer lower returns. A balanced mix of both is ideal for long-term wealth creation.
READ MORE: Personal Finance 201: Stocks and Bonds
Real estate
Real estate is often regarded as one of the best ways to build and preserve generational wealth. Owning and investing in real estate can provide consistent cash flow (passive income through rent), tax advantages and long-term appreciation.
Additionally, real estate can provide a hedge against inflation and can be leveraged (borrowed against) for further investment.
Successful real estate investment involves:
- Making strategic property purchases in high-demand locations or emerging areas.
- Maintaining properties to ensure they generate steady rental income or appreciate in value.
- Diversifying your real estate holdings to include residential, commercial and possibly international properties.
READ MORE: Is Buying a Home Actually a Good Investment?
3. Become an Entrepreneur
One of the most common ways to build lasting wealth is through entrepreneurship. A successful business can provide a consistent stream of income, assets and opportunities for future generations.
However, entrepreneurship requires a strong plan, commitment and adaptability. It's also extremely risky. In the U.S., about 1 in 4 businesses fail within the first year, nearly half of businesses fail within the first five years and more than 65% of businesses fail within the first 10 years. That's not a strong track record.
Succession planning is the key to passing down a business successfully. Working with a financial advisor, involving family members in the business, developing leadership skills in the next generation, and ensuring the business has the infrastructure to survive long-term are essential strategies for creating lasting success.
4. Explore Life Insurance Plans
Life insurance is often overlooked as a tool for wealth transfer, but it can be a powerful way to provide financial security for future generations. Permanent life insurance policies, such as whole life or universal life, can accumulate cash value over time and be used as an inheritance or wealth-building tool.
A well-structured life insurance policy can:
- Provide a tax-free death benefit to heirs.
- Serve as collateral for loans, which can be used to fund education, buy property or grow a family business.
5. Protect Your Wealth Through Estate Planning
One of the most critical aspects of passing down generational wealth is ensuring that your assets are properly distributed when the time comes. This requires careful estate planning. An estate plan typically includes:
- A will: This document outlines how your assets will be distributed upon your death.
- Trusts: A trust allows you to pass on assets to beneficiaries while avoiding probate and minimizing taxes. Trusts can also provide instructions on how the assets should be managed.
- Power of attorney: This grants someone you trust the authority to manage your affairs if you become incapacitated.
Estate planning is not a one-size-fits-all process, so it's important to consult with a financial advisor and an estate planning attorney to tailor your plan to your specific needs.
6. Minimize Your Tax Burden
Another essential element of protecting generational wealth is understanding and minimizing taxes over your lifetime and beyond. Taxes can significantly erode wealth, so it's important to implement strategies to reduce the tax burden on your heirs.
Consider options such as:
- Gifting strategies to pass wealth to heirs before death, utilizing the lifetime gift tax exemption.
- Trusts and foundations that can reduce estate taxes and direct funds to charitable causes.
7. Practice Philanthropy
Wealth is not just about accumulation; it's about impact. Instilling values of philanthropy and social responsibility in the next generation ensures that wealth is used for the greater good, benefiting communities and causes important to your family.
Consider establishing a family foundation, or supporting charitable causes, as part of your legacy plan. This not only helps others, but also teaches your heirs the value of giving back and making a positive impact.
Myths Surrounding Generational Wealth
Now that we've outlined key strategies to building a lasting legacy, let's address a couple of common misconceptions that may hold people back from attempting to build generational wealth.
Myth #1: "Generational wealth is only for the ultrarich."
While it's true that wealthy families may have more resources, anyone—regardless of income level—can start the process of building wealth over time. The key is to focus on long-term strategies, smart saving and disciplined investing. Building wealth isn't about overnight success; it's about creating a sustainable foundation that can grow over generations.
Myth #2: "Building generational wealth happens overnight."
According to Morgan Housel, author of "The Psychology of Money," Warren Buffett made 99% of his famed $132 billion fortune after the age of 65.
“His skill is investing, but his secret is time," said Housel.
Indeed, building wealth is a gradual process. It involves consistently making good financial decisions, saving, investing wisely and planning for the future. The power of compounding interest, for example, only works over time. Patience and persistence are the true drivers of generational wealth.
Final Thoughts: Building Your Legacy
Creating and passing down generational wealth is a powerful way to ensure your family's financial security and create opportunities for future generations. While it requires discipline, education and strategic planning, anyone can begin the journey toward building lasting generational wealth.
Start by educating yourself and your family about financial literacy, making smart investment choices and protecting your wealth through careful planning. Spend within your means so there's something left behind for future generations.
By doing so, you will not only leave a financial legacy, but also pass down the knowledge and values needed to sustain that wealth for generations to come. Start now, and let your wealth continue to grow long after you're gone.
READ MORE: 4 Financial Literacy Games to Make Saving Fun for Your Family
