What Is Generational Wealth?
So firstly, you may be wondering, what is generational wealth?
Generational wealth is essentially where you pass on things to your children and grandchildren.
This is typically looked at as assets e.g. passing on money or a house via inheritance, but it can also be things that you have learned and want to pass on to your kids.
You’ve probably come across people who have received an inheritance from their family, which can help them get ahead in life.
Why Is Generational Wealth Important?
Generational wealth is important because it will provide your loved ones with certain privileges.
If you are from a background where there are typically not a lot of privileges, you can be helping to break any generational poverty curses and help your family start off on the right foot.
It can also mean that you are not having to rely on your children or grandchildren helping you out for money in retirement.
If your children do not have to help you out with money, this means that they have more for themselves to then start building their own wealth with.
You can start them off in life with things in place so that they don’t have to worry as much.
It doesn’t mean that you have to have buckets of cash and a real estate portfolio – anything you are able to help your descendants out with will benefit them massively
Why Is It Hard To Keep Generational Wealth Going?
There are lots of different reasons as to why it can be hard to keep the generational wealth going.
Unfortunately, when presented with a large sum of money, this doesn’t prompt people to then work hard for their money.
It can easily be spent, especially if bad choices have been made financially. This is why it is equally important to pass on values and learnings – not just money.
How Long Does Generational Wealth Last?
When you look at very rich people who come from rich families, it’s easy to assume that generational wealth can continue for a long time and compound. But that’s not the case.
You may be surprised to know that when looking at examples of generational wealth, 70% of rich families lose their wealth by the second generation, and 90% by the following generation. Yikes!
So, how much money is needed to build generational wealth?
How To Build Generational Wealth
So you know that you want to build generational wealth for your family, but what’s the best way of doing that?
Let’s take a look at some ways that you can start:
One of the best ways that you can build wealth is to invest. This is important not just for your family, but for yourself as well!
You can make smart investments for your kids to create wealth for them when they grow up, but you can also create wealth for your own retirement and enjoyment.
The great thing about investing is compound interest. This is where the interest that you earn will be reinvested – meaning that your money will make money over and over.
A good place to start is with your employer retirement accounts. These have tax advantages that you should use in order to build your wealth, and get that company match!
Once you have maxed out your tax-advantaged accounts, you can start to invest in other things such as the stock market and property.
These are all things that you can pass onto the next generation, and it can continue to generate a passive income.
Click here to start investing for your future with Betterment.
2. Have proper insurance(s)
One of the easiest ways that you can start building generational wealth is to make sure that you have proper insurance in place.
The first thing that you should look at is life insurance. Life insurance isn’t very costly, but it can make sure that you are protecting your family if anything could happen to you.
Let’s face it – we don’t like to think about the fact that something bad could happen to us before our time, but I think that we can all agree that if something did happen, we don’t want to leave our family in financial difficulty.
Protect your family with a life insurance policy from Haven Life.
3. Create independent income sources (i.e. start a business)
When it comes to passing on assets, a lot of people don’t think about passing on a business, but this is something that the vast majority of us can do.
It doesn’t need to be a multi-million dollar business (although that would be nice!) – but a business that is doing well and has the potential to grow.
If you start up a business that you can pass on to your children, this is something that they can also make money from and they can also in the future.
You don’t just need to start up a small business – having a job and paying into your retirement accounts will benefit your family as well.
In addition to your job, you may want to think about starting a side hustle (which could end up being your own business), that you use to generate some extra income.
There are so many different side hustles out there, and you can use this money however you’d like. Maybe you’d like it to fund some extra things that you’d like, or you could put that money into investments.
The best part about putting that money into investments is that it will grow with compound interest, and you won’t need to work as hard for that money. You can just leave it in there to grow!
We love this idea because you are putting money aside for your future and future generations, but you don’t have to bust a gut to do so.
4. Teach your kids about money
We have talked mainly about the types of assets that you can pass on to your kids, but don’t panic if you don’t think that you are going to be in the type of situation whereby you will be able to do this.
Sometimes we don’t start to think about generational wealth until we are later on in life, but if you are reading this when you are young then that is perfect timing to get started!
There are other things that you can pass on to your kids that don’t involve exchanging money or assets. We are talking about values and anything that you think they need to learn in regards to finances and life.
We’ve spoken about the fact that 70% of wealth is gone by the second generation, and so this is something that you are going to want to prepare for.
What are some reasons that people would spend all of their money if they are starting out from a financially privileged position?
There are a whole host of reasons, but it could be down to things like poor money management, not understanding finances, gambling, and bad decisions.
Whilst you won’t be able to control how your children run their lives, you can get them started off in the best way possible by modeling how it is best to act with money.
If you are not going to teach or show them about money, how will they know how to manage the money that you are passing down to them?
It’s really important to remember that children learn from watching their parents. The best thing that you can do is show them, in day-to-day life, how money works.
You can also pass down financial literacy and generational wealth education, but they will benefit the most from watching you in action.
5. Avoid debt like the plague
The key part about passing on generational wealth is that you will need to have wealth to pass on.
Therefore, you are going to want to do your best to avoid getting into debt. As we mentioned, you don’t know if something is going to happen to you before your time.
The last thing that you are going to want to happen is that you leave your family having to pay off any debts that you rack up.
The good thing is, that you should be aiming for these things in your own life as well, for your own benefit.
If you are able to stay out of debt, pay off any debt that you have, pay off your house, etc, you are making life easier for yourself as well.
6. Give to charity
We have been talking about generational wealth when it comes to your own family, but why should it stop there?
If you want to help others to build generational wealth then you could think about giving some money to charitable causes, that will help people out with this.
This is also something that is nice to consider if you do not have a family to pass the money on down to.
7. Continue to learn
As much as we all like to think that we know it all, there are so many new things that you can continue to learn, no matter what your age.
If you are committed to continual learning, you can find out things that can have a huge impact on your life and can then pass them on to your children.
Think of it like this – you can make the mistakes and do all of the research so that they don’t have to.
That’s not to say that you don’t want them to try things out for themselves, but more so that you can save them a lot of time, and potential pain.
Not only that but even if you didn’t get a good financial education, that doesn’t mean that you can’t go and look for one.
There are so many financial resources out there (like our website!) – there are Youtube channels, blogs, social media pages, books, TV programs, and more – all dedicated to helping you get better with your money.
Click here to learn some high income skills you can pass down to your kids.
8. Be smart with your money
We aren’t saying that you need to spend no money at all ever, but rather to be sensible with your money.
When you really think about it, you don’t want to waste your hard-earned money, do you?
A lot of us make some questionable financial decisions which we come to regret later down the line, but you can avoid these if you search out a good financial education.
There are some things that you can do when you are just starting out:
- Save an emergency fund. A lot of the time, the thing that trips people up the most with their finances is not having a backup plan. You can be doing well with your finances, but an emergency can really put you in a bad place. Make sure that you have an emergency fund saved, even if you can only start with a small amount
- Try and avoid debt. Companies want you to spend money with them, so they will offer you ways to pay that involve going into debt. As tempting as it may be to spread your payments out or get a car loan, consider saving up instead
- Budget your money. This sounds like an obvious one, but it’s still one that a lot of people skip. Budgeting your money can ensure that you have everything covered
- Only buying things that you really need. Try not to get caught up in what your friends or peers are buying. Ignore the fancy cars and houses, and focus on what’s important to you
How To Pass Generational Wealth To Your Kids
We’ve looked at some ways that you can create generational wealth, but what are the best ways to pass it on to your kids?
Let’s take a look:
1. Create estate plans
A lot of people think that an estate plan and a will are one and the same, but an estate plan is more thorough, to make sure that your assets are secured after your passing.
An estate plan should be done with a lawyer and is important to get right as it covers so many different things, including power of attorney arrangements.
2. Create & keep your will up to date
Even if you are very young when you are reading this, it’s important to have a will, especially if you have dependents.
We assume that things will get sorted out easily if we don’t have a will, but that’s just not the case.
The easiest thing for your loved ones after you pass is to have a will set up in place so that things can run smoothly for them.
3. Ensure beneficiaries are named
Did you know that any time you open any kind of financial account, you are able to name a beneficiary?
A beneficiary is a person who will receive the funds upon your passing. Doing this makes sure that things are much easier for your loved ones.
4. Create custodial or trust accounts
Although we have talked mainly about the things that you can put into place after you’ve gone, there are things that you can do right now.
You could set up a custodial account or even a trust account. This is where you set aside (and invest) money for your child until they reach a certain age e.g. 18 years old.
This is a great way of helping your children out when it comes to paying for things whilst you’re still around, such as paying for college or buying their first home.
Final Thoughts On Generational Wealth
When we are working on our finances, it’s important to not just think about the here and now, but the legacy that we want to pass on to our loved ones.
If you don’t think you will be able to pass on many assets, you will still be able to pass on knowledge and generational wealth management skills which will greatly benefit your children and grandchildren.
As it has been shown that a lot of generational wealth is gone by the second generation, it’s never been more important to instill good money skills into your children.
There is not much point in passing on wealth if you are not going to give them the tools for how to use that money.
If you can pass on the skills that your children will need for the wealth that you are going to pass down, then they can in turn pass it on to their children.