One of the greatest things parents do for their children is provide security. That security comes in many forms: a home, food to eat, a shoulder to cry on, a voice of encouragement, and, in many cases, a financial safety net. I can’t tell you what a boon it was to be able to ask my parents for help as I was figuring out how to budget and trying to stay on top of my newfound adult finances. However, meaningful financial security goes beyond just the here and now and looks to the future. One of the most lasting ways to provide financial security for your children is to build generational wealth.
Building generational wealth goes a long way toward providing financial security for you as well as the generations that follow you. In this article, we’ll talk about what generational wealth is and list some ways you can start building it for your family. Focusing on building generational wealth will allow your money to extend far beyond your own lifetime and be a welcome resource for your posterity.
What is Generational Wealth?
I’m sure you have some preconceived notions about generational wealth, but first, let’s define it. Here’s how Investopedia defines the term:
The term “generational wealth” refers to assets passed by one generation of a family to another. Those assets can include stocks, bonds, and other investments, as well as real estate and family businesses.
If you’re like me, when you think of generational wealth, your mind conjures up an image of some swiss banker on the east coast passing his investment banking fortune from one vineyard vines polo-wearing generation to the next. While, historically, generational wealth has been more exclusive to the white upper-class, that is due for a change. Recent polls show that Black and Hispanic wealth grew at a faster pace than White wealth between 2016 and 2019, increasing 32% for non-Hispanic Black families, 60% for Hispanic families of any race, and 4% for non-Hispanic White families. While COVID may have slowed that momentum, there has never been a better time than now for everyone, regardless of race or income bracket, to think about how they can use their wealth to secure their family’s financial future. This includes you!
How to Grow Generational Wealth
Building generational wealth for your family takes time, often many years, but you can begin growing it right now. Here are some strategies to consider:
1. Buy a Home
Buying a house is a big investment with a variety of financial benefits. As long as you keep your home in good shape and pay down your mortgage monthly, your home’s value will most likely increase over the years as you build equity. This equity can help you build a foundation for the assets you wish to leave to loved ones. Your home can even be put in a trust for your children to help them avoid estate taxes after you pass away.
2. Save for Retirement
It may seem counterintuitive that investing in your own retirement would help create generational wealth for your posterity. However, in a very real way, every time you put money toward your retirement, you are putting money in the pockets of your children who might otherwise have to support you when you reach retirement age and can no longer work. By prioritizing your retirement, you are also modeling healthy financial habits that the rest of your family can follow with confidence.
Retirement accounts like HSAs, IRAs, or 401(k)s also offer tax advantages that can help you build your wealth faster than a traditional savings account. If you have an employer-sponsored retirement plan, take advantage of it, especially if they have a contributions matching program. If possible, always opt for the maximum employer match.
3. Find Investment Opportunities
One obvious investment opportunity is the stock market. Over the last decade or so, investing in stock has become more and more accessible. With many online banks or investment services offering fractional shares and automated investment accounts, the barrier to entry has never been lower. Some services we recommend include Betterment, SoFi and Robinhood. With these accounts, you can invest in stocks you believe in or create a balanced portfolio. You can choose what level of risk you are comfortable with, fund your account, then track the performance of your investments.
Another good investment is real estate, especially rental property. If you manage them well, real estate investments provide income that not only helps you grow your wealth over a long period of time, but also provides another asset you can pass on to your children.
Whatever you may decide, prioritize investments that are low or moderate risk. While high-risk investments like cryptocurrency can yield high returns, the risk is such that it may not be worth it when it comes to the long-term financial health of your family.
4. Start a Family Business
A family business is another great asset you can pass onto your kids. This could be as big as a law firm, or as small as a food cart. Keep in mind, however, that if you want any of your children to become a part of the family business or even run it someday, you should involve them early on. This gives them the opportunity to learn about the business as they grow up and see the way you do things. Naturally, they will bring some of their own ideas to the table. Then, when the time comes, the transition to a position of leadership will be more natural and the business will have a greater likelihood of lasting.
5. Invest in Your Children’s Education
One of the most significant financial burdens for younger generations is student loan debt. The average student loan debt per borrower is $37,113. Investing in your children’s education can ease the burden of student debt and set them up for a better post-grad life. Even if they don’t graduate completely debt free, the less debt they have at the beginning of their career, the better their prospects will be and the earlier they can begin building wealth of their own.
6. Teach Your Children About Personal Finances
As an individual member of your family, you may feel you have limited control over your family’s long-term generational wealth. Maybe you don’t have the financial bandwidth to consider some of the options above and won’t for some time. To you, I say that you don’t need to limit your idea of generational wealth to just monetary assets. Consider building generational wealth of knowledge. After you’re gone, it will be up to your children and your grandchildren to build wealth for themselves, even if they’ve inherited something from you. This is why it’s important, apart from any material assets that you may leave them with, to teach your children about how to manage their finances and help them develop good money habits. Some important skills to help them develop include budgeting, financial planning, managing debt, and saving money.
7. Get Life Insurance
Life insurance helps to ensure that your family will be taken care of financially in the event that you pass away. Essentially, you pay a monthly premium and, in exchange, the insurance company agrees to pay a sum of money to your named beneficiaries in the event of your death. This comes in especially handy if you share finances with someone else. Instead of your spouse or partner or children having to scramble to find a way to pay off your remaining debts, you can ensure they will be able to continue their current lifestyle, or even have a little extra to ease the burden of your death.
8. Make a Will
Creating a will according to state law guarantees your assets are handled exactly how you’d like them to be when you pass away. In many states, a will is your only opportunity to let the courts know who you want to act as legal guardian for your children if you pass away.
Having a will ensures your children are raised by someone who understands the importance of good financial habits so when your children come of age and can collect your assets, they know exactly what to do with them to build generational wealth.
9. Learn How Taxes Work
The final piece to consider when trying to grow generational wealth is tax law. While the majority of us know how to pay income taxes, most people don’t know the details of estate taxes until it’s too late.
Essentially, if your children accumulate their own wealth, and then inherit wealth from you on top of that, that could place them in a higher tax bracket. This could mean that much of the wealth you leave them will be lost to taxes. There are many solutions to this, including the solution mentioned above of putting assets in a trust, but it’s best to work with a financial advisor, so that you can hear all the options and decide what is best for you and your family.
I hope that at the end of this article, you come away with some ideas for how you can build generational wealth for you and your family. To sum up, keep an open mind about how you can help your posterity build wealth and do all you can now to build your own wealth. Building generational wealth can be intimidating, especially if you are the first in your family to try it, and it does take time, but the reward of knowing that your family’s future is secure is priceless.