Building Generational Wealth Isn’t Easy. Here’s How to Start

Generational wealth refers to assets passed down from one generation to the next. Building generational wealth can provide long-term financial security and opportunities for your children, grandchildren, and beyond.

Generational wealth is about more than just financial resources, according to Taylor Kovar, certified financial planner (CFP) and CEO of 11 Financial in Lufkin, Texas. “Its value extends beyond the monetary aspect—it’s also about imparting enduring family values and wisdom, creating a legacy that benefits and shapes the lives of future generations,” he said.

Learn more about why generational wealth is important, how to lay the foundations to build wealth for your family, and how to ensure that your legacy is passed on in the most efficient way.

Key Takeaways

• Generational wealth refers to passing down assets from one generation to the next.
• Before you can build generational wealth, you must create a strong financial foundation by prioritizing savings, growing an emergency fund, and thinking through future plans.
• Generational wealth can provide long-term financial security and open opportunities for your children and beyond.
• Strategies for building generational wealth include investing in education, financial markets, and real estate, and creating and preserving assets.
• Maximizing tax benefits and avoiding debt are crucial for building generational wealth.

The Importance of Building Generational Wealth

Achieving financial success takes a lot of hard work, sacrifice, and planning. Not only can it help you enjoy things in your lifetime, but it can also help your heirs reap the benefits of your legacy and enjoy a financially secure lifestyle after you’re gone.

Think of it as a wealth snowball. For example, generational wealth paves the way for enhanced educational opportunities and, consequently, greater earning potential for your kids, according to Kovar. And then they can continue building upon that foundation for their kids (your grandkids).

The Challenges of Building Generational Wealth 

Building generational wealth is not an easy undertaking, but it’s especially challenging if you grow up in poverty or face systemic barriers. Unfortunately, that has been the experience of many marginalized groups in this country.

For instance, in 2019, the median wealth of White families was 6.5 times that of Black families, 5.5 times that of Hispanic families, and 2.7 times that of Asian and other families, according to the Congressional Budget Office.

As of the fourth quarter of 2023, data from the St. Louis Fed showed that Black families owned about 23 cents for every $1 of White family wealth, on average. Hispanic families owned about 19 cents for every $1 of White family wealth. 

Contributing to this racial wealth gap is the fact that Black Americans are less likely to own a home, which is one of the major ways that people pass on wealth. The underlying reason for this is, in part, systemic discriminatory practices in home selling, home lending, and appraisals that have been well-documented in recent decades.

Black Americans and other marginalized groups have also historically had less access to banking and financial services and lower credit scores, which has locked them out of various investment opportunities.

If building generational wealth is a goal of yours, there are a few financial moves you can make that can help you achieve this.

Build a Strong Financial Foundation

Building generational wealth is as much about setting a strong example as it is about making the right financial decisions. You can model the building blocks of healthy personal finances to your family, which includes the following best practices.

Prioritize Savings

“It’s not how much you make, but how much you keep. That’s the key to accumulating savings and wealth,” says J.B. Beckett, founder of Beckett Financial Group in West Columbia, South Carolina.

Many people fall into the trap of saying they’ll save what’s left over at the end of the month but never end up getting around to it, or they spend beyond their means. A better approach is to create a budget to control your spending so that you have guaranteed funds available to save and set up an automatic payment to yourself each month.

Here’s how to get started:

1. Pick a percentage or dollar amount that you are able to allocate toward savings goals after your expenses are covered.
2. If you have more than one savings goal, create separate accounts for each one.
3. Consider a high-yield savings account that earns interest on top of your contributions.
4. Set up automatic payments to each savings account and watch them grow.

For longer-term savings goals, you might consider putting money in certificate of deposit (CD) accounts for a guaranteed return.

Build an Emergency Fund

One of the most important tools for building generational wealth is making sure that you have financial security in case of an emergency or loss of income. That’s where an emergency fund comes in.

Oftentimes, not having an emergency fund is what leads people into debt or causes them to cash out retirement accounts, which not only incurs penalties but also comes with a big opportunity cost.

Ultimately, you want to end up with enough money saved to cover a few months’ worth of expenses, but that will take some time to build up. In the interim, focus on making regular, automated contributions, and save more aggressively if you find ways to trim expenses or develop new income streams. Most important is that you avoid the temptation to withdraw money from the account—it must be reserved for true emergencies.

Involve Kids in Money Conversations

One often-overlooked aspect of building a strong financial foundation is involving your family, and children specifically, in the conversation. This way, they can understand financial basics from a young age, alongside you.

Kevin M. Curley II, certified financial planner and financial advisor at Global Wealth Advisors in Dallas, Texas, recommends including children in the family finances from a young age through fun and games.

“Play Monopoly and teach them poker at the kitchen table,” Curley says. “Consider giving them an allowance and discuss how they plan to spend it. Later, let them invest a small amount in their favorite video game designer or cosmetics manufacturer and track wins and losses together.”

Invest in Education

Once you’ve made some progress on your emergency fund, you can allocate some of your discretionary income toward other big financial goals. A popular one is to save for your children’s education. If you’re aiming to build generational wealth, you can think of college savings for your kids as an investment in their future earning power.

That’s because degree attainment is directly correlated with an increase in lifetime earnings—in the millions, as a study by the Georgetown University Center on Education and the Workforce found. According to the study, someone with a high school diploma can expect to earn $1.3 million over a lifetime; a bachelor’s degree holder will earn $2.3 million; a master’s degree can lead to $2.7 million in lifetime earnings; and a professional degree holder can earn $3.6 million.

Note

Of course, the costs of education are continuing to rise, and it may not be the best option for everyone. It’s best to take a comprehensive look at your financial situation and life goals before deciding to invest in education.

Consider opening a 529 plan, which is a tax-advantaged account that is tax-free when used for eligible educational expenses. 

Invest in Financial Markets

To build wealth in a meaningful way, the sooner you get started, the better. “Starting early and consistently saving, even in smaller amounts, can lead to significant growth over time, thanks to the power of compound interest,” Kovar says.

While investing in the stock market comes with some risk, if you diversify your investments across stocks, bonds, and other assets, you can balance risk with growth potential. One popular strategy for beginners is to invest in index funds, which is a collection of many stocks designed to mimic the performance of major market indexes like the S&P 500.

The key to investing in the stock market is to think of it in the long term by riding out the downturns since, historically, it usually bounces back.

Invest in Real Estate

Another popular investment avenue to explore is real estate, thanks to its potential rental income and appreciation in property value. Plus, it’s a strong investment to pass on to your next of kin.

“Exploring various property types, from residential to commercial, can diversify your real estate portfolio,” Kovar says.

If you’re not ready for that level of investment or don’t want the commitment of running a property, Beckett suggests looking into real estate investment trusts (REITs).

Create and Preserve Assets

Building wealth is just step one in creating generational wealth. The next part is making sure that your assets are protected so that they remain available to pass on to future generations. You also want your heirs to be able to retain as much of their inheritance (if relevant) as possible, which is why tax implications come into play.

To ensure your children are protected and set up in the best possible way financially, consider the following actions.

Build an Estate Plan

As your assets grow and become more complex, working with financial professionals and attorneys on estate planning is the smart move. Some considerations include:

• Creating a business that you can pass down 
• Considering life insurance. “Life insurance is one of the most tax-efficient vehicles to pass on wealth,” Beckett says.
• Making sure other insurance needs are met. Make sure you’re covered in case of a catastrophic event involving your home, car, or a medical event. If not, one incident or lawsuit could wipe out your savings.

Maximize Tax Benefits

A number of tax-efficient investing strategies and vehicles can help you retain a greater share of your returns. Some strategies include:

• Tax-deferred accounts: Traditional individual retirement accounts (IRAs) and 401(k) plans are tax-deferred, offering you an upfront tax break as you invest. You pay taxes when you withdraw your money in retirement.
• Tax-exempt accounts: Roth IRAs and Roth 401(k)s are tax-exempt when you withdraw, since contributions are made with after-tax dollars.
• Health savings accounts (HSAs): You contribute tax-free and enjoy tax-free growth. Then, if used for eligible medical expenses, money comes out tax-free, too.

Work with a tax accountant or financial advisor to learn what strategies are best for you, and ultimately shield the most money from taxes as possible.

Avoid Debt and Financial Pitfalls

Living within your means and having a healthy emergency fund are the two best ways to avoid unnecessary, high-interest debt like high credit card balances. Those types of borrowing costs can prevent you from making progress on your savings and wealth-building goals.

If you do have some debt to contend with, prioritize paying your highest-interest accounts, while still maintaining your contributions to your emergency fund and retirement accounts (though it’s OK to scale back temporarily). Try to use any windfalls of money such as tax returns or monetary gifts to pay off large chunks when those opportunities become available. 

How to Pass Down Generational Wealth

The last aspect of generational wealth is making sure it goes where you want it to go. This involves getting your wishes documented legally. At a very basic level, you can start with a will. But as finances get more complex, you’ll want to go beyond that, according to Curley.

Beckett recommends setting up a trust. “A trust can be efficient for bypassing probate if it’s set up properly,” he says. “And it’s private. If it’s in a trust, it’s not public record.”

Once you have your affairs in order, keep the lines of communication open with your family, letting them know your plans and how to access your documents. This is beneficial on the off chance that a sudden emergency happens and your family needs to take over the financial plans.

How Can I Start Building Generational Wealth If I Have Limited Financial Resources?

Take it one small step at a time. Create a budget that allows you to allocate money toward savings each month. Make lifestyle choices that help fuel your financial goals. And invest in your retirement as early as possible to give it time to grow.

What Are Some Tax-Efficient Strategies for Maximizing Generational Wealth?

There are many tax-efficient strategies that you may consider adopting, such as investing in tax-deferred accounts or Health Savings Accounts. The route you choose to go will depend on your own personal financial situation, so you may want to work with a tax professional or financial advisor. Plus, these individuals can help you stay current with any new tax rules as they are established.

How Can I Protect My Assets and Ensure They Are Passed Down to Future Generations?

Making sure you’re properly insured (through home, auto, and life insurance) and working with an estate planner are the two best ways to protect your assets. In addition, be sure you at least have a will, and consider establishing a trust.

The Bottom Line

If you’re a first-generation wealth builder, committing to taking those first steps of saving money, building an emergency fund, and starting to invest for the long term and following through with consistency will eventually pay off.

Though it might take some sacrifice upfront, building generational wealth has both short- and long-term benefits that make it worth the effort. In your lifetime, you’ll get to enjoy the peace of mind of knowing that your loved ones will be well taken care of financially. You can also share your knowledge and insights with your children and grandchildren to help instill strong financial habits that can help them keep the family legacy strong for the next generation.

Read the original article on Investopedia.