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:
Real Estate
Savings
Cash
Life insurance policies
Investments
Family businesses
Antiques and heirlooms
Collectible items
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.
Millennial Financial & Economic Hurdles
Millennial Americans are in an economic pickle, so to speak. This generation has endured a historic number of financial disasters in one lifetime thus far:
The Dot-Com Implosion
The 2008 Financial Crisis
The COVD-19 Pandemic
What this means is that Millennials in particular have faced the largest number of blocks with regards to building wealth relative to any other American generation in history. Examples of economic and financial hurdles for Millennials as a whole include:
Student loan debt
Lower savings
Tighter credit
Inflation and increased cost of living
Stunted career growth
Millennials have been hit hard by a series of economic setbacks. First and foremost, student loan debt has been a major burden for many in this generation. Higher education costs have skyrocketed, leaving graduates with substantial debt that can take decades to pay off.
The savings crisis is another significant issue. With salaries barely keeping up with the rising cost of living, saving for the future often feels like an insurmountable task.
Credit has also become a constraint. Tighter lending standards following the 2008 financial crisis have made it tougher for millennials to secure credit for significant purchases like homes and cars.
Furthermore, inflation and the increased cost of living have eaten away at the real value of their earnings. The cost of essentials, such as housing, healthcare, and education, have increased at a rate far outpacing wage growth.
Last but not least, numerous financial crises have led to stunted career growth. Many millennials graduated at the peak of the Great Recession with very limited career opportunities. Recent graduates with degrees found themselves working part-time and odd jobs. Most recently, the economic slow-down during COVID-19 have resulted in massive layoffs by some of the largest employers in the country. Career growth is not going as planned for the largest workforce in the nation, to say the least.
Wealth Inequality
We cannot have a discussion regarding wealth without addressing wealth inequality. Historical and systemic discrimination have caused a significant wealth divide between racial and ethnic groups.
According to the Federal Reserve, the median net worth of a White household is about 10 times greater than that of a Black household, for example. This wealth gap reflects centuries of policies that have restricted opportunities for people of color, including redlining, job discrimination, and unequal access to quality education. Even when controlling for factors like education and income, the racial wealth gap persists due to these structural inequities. Addressing this wealth gap is crucial, not just for achieving financial equality, but for ensuring that generational wealth can be a reality for all communities, regardless of race or ethnicity.
These hurdles have made wealth-building a challenging task for millennials, emphasizing the importance of strategic financial planning and management.
Overcoming Economic Crisis with Wealth-building
If we've learned anything, it should be that the economy is ever-changing. Long gone are the days in which we could follow an easy path of "go to school, get a job, obtain financial stability." Even when we do our very best, external factors can easily throw us for a loop.
Because the economy is so volatile, it is increasingly evident that relying on a steady paycheck is no longer viable. This may have worked for previous generations that enjoyed a relatively stable growth economy, but millennials have yet to enjoy this. (At least, not for long.)
Wealth-building is a proactive step towards controlling one's financial circumstances. It provides a safety net, enabling us to weather economic downturns, and can also create generational wealth that benefits our descendants. Moreover, wealth-building allows for financial independence, and the freedom to make life choices without being heavily dictated by financial constraints. As such, despite the hurdles, millennials must seize the reins of their financial futures through consistent saving, investing, and strategic estate planning.
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:
Stocks
Bonds
Mutual and exchange-traded funds
Retirement investment accounts
Annuities
Cryptocurrencies
Commodities
Certificates of Deposit (CD)
Real estate
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.
How to Make Wealth Last Generations
So what makes wealth generational?
So far, we've introduced our best tips on how to build wealth for yourself, starting from ground zero. Next, let's address how we can make sure that wealth can be handed down to the next generation, and the next, and the next.
This is much easier said than done. In fact, many cultures believe there's a generational wealth curse. The Chinese have the idiom, "wealth does not last beyond three generations."
Luckily, we can make sure history does not repeat itself by learning from other people's tragedies. It provides an important clue that you need a strategy to make sure wealth actually lasts.
The answer? An estate plan.
An estate plan is a process of anticipating and arranging for the disposal of your assets after you pass away. It involves creating a legal document that outlines how your assets will be distributed, who will manage your finances, and who will make decisions on your behalf when you are no longer able to do so. Estate planning can also involve minimizing taxes and protecting your assets from creditors.
Here is how you can use an estate plan to create generational wealth:
Asset Distribution: Outline how you would like your assets to be distributed after your death. If your goal is to create generational wealth, you might choose to distribute your assets to your children, grandchildren, or other heirs.
Financial Management: Designate someone you trust to manage your finances after your death. This person will be responsible for ensuring that your wealth is maintained and continues to grow.
Tax Minimization: Work with a financial advisor or estate planning attorney to design an estate plan that minimizes the tax burden on your heirs. This can help to preserve more of your wealth for future generations.
Protection from Creditors: A well-designed estate plan can help to protect your wealth from creditors. This is especially important if you own a business or have other significant liabilities.
Creation of Trusts: Establishing trusts can be an effective way to manage and protect your wealth. Trusts can also provide a means for providing for future generations.
Implementing these strategies through an estate plan can be a powerful way to create and maintain generational wealth. Remember, wealth that lasts doesn't happen by accident. It's intentional, carefully planned, and thoughtfully executed.
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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