My husband and I often talk about the lessons we want to teach our children and how we can assist them in life while also raising them to be financially responsible adults. One thing that comes up quite often is our desire to build generational wealth.
Why is generational wealth important?
Wealth gives you more options in life.
Generational wealth is important because you have more freedom to think and live the life you want when you don’t have to worry about paying your bills or whether you can afford to quit a job that doesn’t fulfill you.
But why should you care about passing down wealth to the next generation? Many people have experienced feeling forced to do things or work a job because they need the money.
Of course, building generational wealth does not mean you stop your kids from ever experiencing hardships in life. But many parents want to give children more options in life.
Challenges of building generational wealth
Unfortunately, the default for parents is to work hard and pass down assets. But that scenario is unlikely to work in most cases. That’s why an estimated 70% of generational wealth doesn’t make it past the second generation, and 90% disappears by the third.1
Most parents who started from humble beginnings don’t want their children to experience the same struggles as they did growing up. But finding the right balance is a challenge. Building wealth that survives more than one generation requires more than financial assets.
Here are a few ways to build generational wealth.
How to build generational wealth
1. Invest in your child’s education
Raising financially independent adults is important if you want to build lasting wealth.
You can help your kids create a path to support themselves by teaching them about personal finance. Giving your kids a financial education is one of the most important things you can do to start building generational wealth. It starts with having open conversations about money at home so your kids know they can ask questions.
In our household, we have age-appropriate everyday conversations about money with our children aged seven and under. Topics vary from need vs. want to earning money to the importance of saving and giving back.
Our 7-year-old started taking weekly financial literacy quizzes and learning about investing. As our kids get older, we plan to introduce them to more advanced personal finance concepts. As we learn more and discover new tools, we also incorporate what we learn into our children’s education.
Our goal is that they are equipped to be financially responsible adults by the time they leave the house as young adults.
It can be intimidating to take on that task, especially if you’re figuring out your finances, but most people learn more from their failures than their successes. The same applies to money. Children can benefit from our financial wins, but they can also benefit from our financial mistakes. As parents, we can shy away from talking about our failures and what we did wrong, but by sharing our losses and what we learned from them, we can help our children avoid some of the mistakes we made.
2. Invest in the stock market
You can invest in many assets. To better understand your net worth — that is, your assets minus your liabilities — you may consider signing up for Empower’s free financial tools. Millions of U.S. households use this technology to see all of their financial accounts in one place and analyze their investments, all for free.
Investing in the stock market provides an opportunity to build wealth passively and protect your money from inflation. Most people who invest in the stock market with a long-term plan and diversify their portfolios generally increase their assets over time.
The S&P 500, which is an index that tracks the stock of 500 of the largest U.S. companies, has returned 10% on average before inflation2, since 1926. Investing in the stock market can be intimidating at first; that’s why as a beginner, a simple way to get started is through low-cost index funds, which provide long-term growth opportunities at relatively low fees.
3. Invest in real estate
Real estate can be a great tool to build wealth. Real estate generally appreciates with time. In addition, real estate can provide cash flow opportunities for investors.
It may be hard to see yourself as a real estate investor. But there are less intimidating ways to get started, such as moving out of your home, renting it out, and purchasing another property. That’s a strategy many investors have used to build a real estate portfolio one house at a time.
4. Create a business to pass down
More than 30% of family-owned businesses are estimated to have made it to the second generation.3 So, building a business to pass down to your children is another way to build generational wealth. For anyone interested in passing down their business to their children, it’s a good idea for them to start working in the business at a young age. It can help encourage them to take over the business. However, if your children are not interested in running the family business, there’s still the option to create wealth by selling the business.
5. Take advantage of life insurance
Life insurance is a great tool to pass down wealth. It provides a safety net for your family if you were to die unexpectedly. If you have children or dependents who rely on your income, their financial situation would be negatively impacted by an eventual passing.
Term life insurance can be an affordable option to ensure that your loved ones would be financially cared for if you were no longer here to provide for them. Losing a loved one is difficult in itself; alleviating the stress by making sure that they are financially secure through a life insurance policy will help them focus on grieving. Here’s a resource to help you determine how much life insurance is appropriate.
How to pass down generational wealth
A critical step in building generational wealth is to create an estate plan which will ensure that in the event of death or incapacitation, your assets would be divided according to your wishes.
There are several steps that one can take to pass down generational wealth. Here are a few.
1. Write a will
A will should provide specific instructions on your last wishes and assets. Understanding the requirements in your state is very important to ensure that your will is enforceable. Also, when you have young children, a will helps communicate your wishes regarding their care. You can also list your financial assets to make it easier for your family members to locate them. When you don’t have a will, you leave the decision up to the state when it comes to your children, property, and assets.
2. Set up a trust
A trust, commonly referred to as a trust fund, is a legal entity you can use to hold and transfer assets to your beneficiaries. It is another option to consider for parents of minor children. Trusts can be expensive, but they also provide other benefits such as avoiding or reducing estate and gift taxes depending on the size of your estate.
3. Name account beneficiaries
To ensure that your assets pass down to the beneficiaries of your choice, it is sometimes as easy as naming specific beneficiaries for each account. Naming beneficiaries can save your loved ones a lot of time and energy in the event of your death, especially if they are adults.
Proper estate planning is an essential part of passing down generational wealth. Therefore, it’s important to consult with an estate attorney to ensure that you have a solid estate plan.
Building generational wealth is not an easy task.
Beyond the process of building wealth — which is challenging in itself — education and proper estate planning are two key factors that we as parents should focus on equally if we want the wealth to last.