Have you heard the term “generational wealth” before? Maybe you’ve heard it called other things – family wealth or legacy wealth. While I know you are focused on the pressing financial items for your family right now – like getting out of debt or starting a cash envelope system – building wealth for your family is still important.
While I know it’s never exactly fun to think about your own death, this is an important thing to plan for. You work hard for your money and you want this money to be passed on to your kids and their kids. This is a much better alternative than leaving them with bills, debt, and worry.
What Is Generational Wealth?
To explain what generational wealth is, I went right to the source – Wall Street. According to NASDAQ, generational wealth is, “an aspect of financial planning that is geared toward passing down stable, significant financial resources to future generations.”
In other words, generational wealth is keeping your hard work in the family, and passing on what you’ve earned to those you love. It’s building wealth that lasts way past yourself!
To do this, you need more than a ton of money in a bank account. In fact, you may be surprised to know that’s the worst way to pass along wealth to your family. In this guide, I’ll show you how to build generational wealth and some tips that will help this wealth outlast generations. You’ll discover how to create a family legacy – sounds exciting right? It is!
Why It’s Important
When you have young kids and your mind is focused on current concerns like how to catch up on bills or how to create an emergency budget, what you leave behind someday is the last thing on your mind.
The struggle you are feeling is exactly why you want to provide this for your kids. Imagine leaving behind enough wealth that they wouldn’t have to struggle with college debt or how to find enough money to buy a house!
Generational wealth gives your children and their children a life free from the stress of trying to pinch pennies. It’s so comforting!
How To Build Generational Wealth That Lasts
How do you build the kind of wealth that can outlast generations? That’s the tough question, and even wealthy families struggle with it.
More than 70% of wealthy families actually lose their wealth by the second generation. Yikes!
Thankfully, there are a number of things you can do right now to make sure that you are building generational wealth that won’t disappear.
1. Diversify Your Income
Have you heard the saying, “don’t put all your eggs in one basket?” It’s so true. Diversifying your investments and your income is vital if you want your wealth to last.
That means don’t just rely on your business or your jobs. Own stock, invest in real estate, and establish multiple income streams.
This way, if one aspect doesn’t do so well, your family still has the other investments to rely on.
If you are going to invest in real estate, apartment buildings are a really smart option. Forbes states that the “demand for multifamily properties is strong and growing.” The best thing about investing in real estate is that you are passing along not only passive income but financial assets that will increase your family’s net worth as well.
2. Plan Ahead
Whether it’s with budgeting or saving money, planning ahead with your money is as important as breathing. I seriously can’t think of any way to pass on your wealth without planning ahead.
One easy way to start this is to begin using a Budget Life Planner to get your finances in order and see what you are currently spending money on.
Next, you might need to sit down with a financial coach or wealth planner to look at your current assets and make a plan together.
I’m all about hiring people when it’s out of my wheelhouse. An expert will help you create smart investment strategies that will build your wealth from even the smallest amount.
3. Build A Business
Another way to build wealth that you can pass on is to create a flourishing business. Your kids can inherit the business and cause it to grow even more. Plus, you are giving them the gift of job security – something that can be tough to come by.
Even if your kids don’t want to own or run the family business, you can still set it up so they earn a portion of the income in other ways. They could sell the business and use that income in other investments as well.
Lots of other families agree this is the way to go. Actually, more than 30% of family businesses successfully transition to the 2nd generation.
4. Educate Your Kids
Eventually, you will need to sit down and have a family meeting about inheritance and how it is all set up.
Believe me, the worst thing you can do is just leave your family in the dark and then bam! Here’s all this money and investments!
When you have this meeting (or set of meetings) is entirely up to you. Obviously, they should be old enough to understand and mature enough to actually want to pay attention to it.
5. Teach Financial Responsibility
The family wealth will have a greater chance of actually lasting beyond one generation if you teach your children financial responsibility. When they know about investments, how to save money, and how to set and stick to a budget, they will be more likely to pass your wealth on to another generation.
This part starts when they are really young. Teach them the value of money and how to save. You can teach children as young as elementary age how to save up for big purchases and how to set a budget.
6. Use Life Insurance
After doing all of this, it’s still important to make sure you have enough life insurance to cover end-of-life expenses. That way they won’t have to withdraw from family income accounts to pay for all of that stuff.
If you invest in a large life insurance plan early, you can snag a really low rate. Do your research and take this burden off your family’s plate.
You might also want to set up life insurance for your children too. Anything that you can set up so that you don’t have to use your income or savings accounts for those end of life expenses is a smart choice.
7. Start A College Fund
Investing in your children’s future is a smart way to alleviate their financial burden and keep the wealth in the family. College loans are crippling people. If you can prevent your kids from having to deal with loans, you are setting them up for success.
While not everyone needs a college degree to earn a nice living, it can really help for some professions (like law and medical). Plus, college is where you network and snag positions in coveted companies.
8. Set Up A Family Fund
In addition to all of these income streams, you still need to have savings account for your family too. People call this all sorts of different things – an emergency fund, a savings account, a rainy day fund, etc…
You’ll use this money for everything from emergencies to funding new investment opportunities.
Even with all types of insurance, an emergency fund will provide emotional relief from the worries of your wealth vanishing. It’s there as a back up just in case something happens.
9. Start With Small Family Lending
A fantastic way to teach financial responsibility to your family members is by lending money, not just giving it to them. Teach them good habits through real-life examples and experience.
Plus, when you are lending it to them it keeps the money in the family. You aren’t making an outside bank richer through exterior loans.
When you lend the money, you can teach them financial habits such as paying on time and taking out loans for things that will have a positive ROI. These are essential lessons that will help your family long term.
It’s important to consider this carefully before you lend the money out. You’ll need to set up and agree to payment amounts and discuss what happens if the money is not repaid in a timely manner.
10. Invest In Leadership Experiences
When your kids become leaders they will handle the wealth better. You can start this as early as elementary school. Sign them up for camps and educational experiences with a focus on leadership.
How To Pass Down Family Wealth
So, you accrued all this wealth and you know you have your family set for life. How do you make sure they receive it? You’ll need to set up more than just a will (although that’s a very important part of it).
Set Up A Will
Sadly, even the closest families experience fights over assets and things when there isn’t a will to explain things. It happens even with a will!
Work closely with a lawyer to draft a specific will. Spell out who gets what, when, and how.
You even need a will if you have a trust. The will explains things that are not included in the trust. Save your family a lot of heartache and headache – don’t skip this step!
Establish A Family Trust
If you have family wealth, you need an estate plan. A family trust will establish the rules for who gets how much money and when they get it. You can even set up a family trust to send out automatic payments to your family members.
You will definitely need to consult with an attorney to set this up. Trusts can be pretty complicated, especially if you have a diversified income.
Create Custodial Accounts
Finally, set up custodial accounts for your kids. These are ways to manage money for minors until they are adults. In some states, the custodial accounts aren’t available until kids reach at least 21 years old.
These are investment accounts that will pay money to your kids at an amount you set. It’s another way you can control how much money they get so that you can teach them financial skills slowly.
Generational Wealth for BIPOC
If you want to hear more stories or articles about building generational wealth for BIPOC, check out these amazing articles:
- Generational Wealth Gap & People of Color
- Black first-generation wealth builders need to put on their own financial ‘oxygen masks’ first
- As a financial adviser, this is what I want Black women to know about building generational wealth — and taking control of your money
Generational Wealth: Final Thoughts
There you have it! Building generational wealth is taking care of your family’s financial future. It means that all the hard work you do to provide for your family will stay in the family. Your financial legacy could last multiple generations if you do it right. It all starts with smart money habits. Then, it builds with education from professionals like a financial planner. It’s possible, it just takes lots of planning!