Have you ever thought about how life would have felt much easier if you had graduated from school without any debt, or wished you had inherited a large sum of money? Alternatively, are you someone who was able to get ahead early in life because your family supports you financially?
Regardless of your situation, you may already understand the value of generational wealth without knowing it. It’s a method of boosting our financial wellness, so much so that we can ensure the financial wellness of our children and perhaps their children, and so on. Perhaps you’re focused on your personal finances, but if you’re thinking about starting or growing your family any time soon, now is a great time to learn how to build generational wealth.
What is Generational Wealth?
General wealth is passed down within a family, from one generation to the next. The first generation accumulates property during their lifetime, which they then pass down to their children. With successful and proper planning, those children can then pass down wealth to their own children, and so on.
Let’s use an example to help illustrate the generational wealth meaning. Paul and Jayne Smith are a married couple who come from humble beginnings. Their own parents survived through the Great Depression and struggled to make ends meet. They decided that they never want their children to go through the same experience, so they live a comfortable yet frugal life to build up a sizable savings account. Through their estate plan, they bequeath their life savings to their only child, Simon. Years later, Simon decides to use his inheritance to buy a rental property. After several years, he uses his profit to buy additional income properties. By the time he retires, he passes on a robust rental property business to his daughter Sandra.
The example above demonstrates how family wealth can be created and passed on. In this case, Paul and Jayne’s son Simon made the wise decision to use his inheritance to invest in real estate. He then created even more wealth and passed it on to Sandra, who will likely be able to pass on the family business to her own children. Building family wealth is no easy task, but when it goes well, it can be compounded with each passing generation.
Investing in real estate is just one of many ways to build generational wealth, which can take many shapes. Here are some examples:
Life insurance policies
Antiques and heirlooms
Why is Generational Wealth Important?
Have you ever heard the idiom, “it takes money to make money?” Although anyone can create their own wealth, those who have access to family wealth have the advantage.
The high cost of education, coupled with low wages and high costs of living, can make it difficult to get ahead. If you don’t come from family money, you may very well be familiar with the burden of debt. Creating wealth might not be an option until later in life, as it can take years to pay off school loans and credit card debt.
Individuals who have access to family wealth arguably have a leg up relative to those who don’t. Those whose families paid for their college education, or even helped them buy their first house, are economically advantaged over others. They have a financial head-start that allows them to begin building wealth much earlier in life. Freed up money that would have otherwise been spent on expenses and paying off debt can be used for investments or building a business.
If you plan to grow your family, you probably realize how important generational wealth can be. Personal financial wellness is often a priority for those who are single or don’t yet have their own family. However, once you plan to have a family, those priorities quickly change. Providing financial comfort for your future generations becomes a top priority, even if it’s in the long-term.
How to Build Generational Wealth - 3 Strategies for Building Family Wealth
It’s hard to argue against the importance of building generational wealth, especially for those who have children, or plan to start a family. If you feel ready to get started, you’re probably wondering what you should do next. Here are some actionable steps you can take to begin building family wealth.
1. Set up a trust
One of the most practical steps you can take to protect your generational wealth is to set up a trust fund. Trust funds can sometimes get a bad rap, but in reality, they are a powerful estate planning tool that allow you to have more control over how your wealth is passed on.
First and foremost, assets placed within a trust will allow you to avoid probate and certain taxes. This means that your children’s inheritance will be better sheltered from legal fees and certain taxes that can affect your inheritance.
Second, you get to decide on what terms your children will be receiving their inheritances. For example, you could designate that each of your children will receive their inheritances in increments, and only once they meet a certain milestone.
Know that you can set up a trust fund no matter how humble your beginnings might be. You can always add to the trust fund as time goes on, and the trust itself can be used to grow your wealth through investment portfolios. To help you get started, here’s our guide that will walk you through how to set up a trust fund.
2. Invest your money
Time and appreciation make up a powerful combination for growing your wealth without having to put in any extra work. Yes, you’ve guessed it: investments.
Diligently tucking your money away into a savings account is certainly laudable, but unfortunately won’t stand the test of time. Due to inflation, the value of your dollar today will only be worth a fraction of a dollar for your children’s generation. Instead of passing on a devalued lump sum, you can make a greater impact by investing your money in a way that it’ll be worth much more by the time your children receive their inheritance.
Here are some great investment options to consider:
Mutual and exchange-traded funds
Retirement investment accounts
Certificates of Deposit (CD)
3. Start a business to pass down
If you have an entrepreneurial disposition, consider starting your own business. Family businesses account for the majority of the world’s wealth, and contributed to 57 percent of the U.S. gross domestic product (GDP).
The majority of startups fail, so starting a business has many risks to consider. However, if you’re successful, you’ll have a legacy that you can pass onto future generations. Alternatively, your children can choose to sell off your business and re-invest the proceeds in other ways.
Start Building Generational Wealth for Your Family Today
The best way to build generational wealth for your family is to get started as soon as you can. Wealth compounds over time, so the earlier you can get started, the more time will be to your advantage.
While you consider ways to build family wealth, you should also be thinking about how to protect that wealth and pass it on. Although there are many ways to structure an estate plan, setting up a Trust is a great place to start. That way, you’ll have peace of mind knowing that whatever wealth you do build will pass seamlessly on to future generations.
Want to take a look to see what creating a trust might look like? Visit our online Trust services page.
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