What Is Generational Wealth and How Do You Build It?

what is generational wealth

This thought has probably slipped most people’s minds at some point in their lives — how much easier their life would be if they graduated from college without debt or had some inheritance. Some people can get ahead early because their families can support them financially.

Having generational wealth is a means of boosting someone’s financial wellness, which may come from parents and is passed on to the next generation and the ones after that. So for those planning to have a family soon, now is the time to start building generational wealth. 

In this blog post, we answer many questions, such as what generational wealth is, why it’s important, how to build it, and how to pass it on to future generations.

 

What is Generational Wealth?

Generational wealth refers to assets and money that have been passed down from generation to generation and may come in various forms, such as: 

  • Family businesses 
  • Real estate
  • Investments 
  • Other holdings

Generational wealth will also include intangible riches, such as community impact, family reputation, relationships, values, and education. Data from the Federal Reserve revealed that the baby boomer generation owns a total amount of $23 trillion in retirement funds and investments, $16 trillion in real estate, and $15 trillion in their pension, where most will probably go to their loved ones. 

These vast numbers only confirm that many Americans will be able to leave their families with a legacy to help in the years to come. However, many wonder how they can do the same for their families — through thoughtful planning, communication, and saving, building generational wealth is within reach. 

 

Why is Generational Wealth Important? 

Parents will always want to provide the best for their children — many will think about how they can give their kids a chance to chase their dreams, knowing they’re financially secure. This is precisely what generational wealth can do, where the new generation can start living as adults without worrying about not having any savings or debt to hold them back. 

Because of this, they can pursue a master’s degree, start their business, and save up for their early retirement. In other words, generational wealth can unlock many options, allowing them to make a difference in the world and uphold the family’s values.

 

How to Start Building Generational Wealth

Starting early is the key to building generational wealth — people don’t have to retire before planting seeds for their families. But, while starting may be easy, it can be hard to stay on track with goals if there are too many distractions. 

To combat this, you will need to ask yourself the following questions: 

  • What are the opportunities you wish your children could enjoy?
  • How do you plan on giving back to the community? 
  • Why are you compelled to share your wealth with others?

These are just a few questions that need to be answered while reflecting on what generational wealth means to you and your family. Having a goal or a more profound sense of purpose will help you look past the money and help to further your commitment to your plans. 

Below are just a few ways how people can start building generational wealth.

 

1. Create a Diverse Investment Portfolio

Getting a head start in diversifying your investment portfolio is the best way to grow it through the years. You will be able to reap your compound interest and see it overcome fluctuations in the market. 

Here are a few ways you can diversify your new or existing investment portfolio. 

  • 401(k): Because some employers will offer 401(k)s as part of their benefits package, this is where most people will start, and most will grab the opportunity if their employer sponsors it. In general, the contributions will come straight from an employee’s paycheck and be made before taking out income taxes, which means they may come with tax benefits.

If an employer can match a percentage of these contributions, employees should leverage the maximum amount they can offer, often translating to getting free money.

  • IRA: However, 401(k)s aren’t the only option for those who wish to invest. They may also open an individual retirement account (IRA) and other investment accounts where their contributions can be withdrawn automatically from a chosen bank account. 
  • Stock Market: Making suitable investments in the stock market is a great way to build wealth passively through the years while providing an opportunity to protect your wealth from inflation. While familiarizing the stock market may seem intimidating initially, beginners can start by investing in low-cost index funds with relatively low fees that provide opportunities for long-term growth. 
  • Real Estate: Investing in real estate is a common way to build generational wealth because the value of houses only continues to rise. Once the mortgage is paid, a house can become an asset with an attached value which can then be passed down to beneficiaries or sold if needed. 

Real estate investors will often start with a multi-family home, where they will live in one area and rent out the others to pay the mortgage.

 

2. Instill Financial Literacy in the Family

Getting an understanding of how finances work is an excellent advantage for anyone. By teaching your family the value of financial literacy, you can build a solid foundation to build your generational wealth in the future. 

But much like everything else, getting a hold over finances can take a while; for many, it can be intimidating. Luckily, there are plenty of resources to help you get started, such as:

Those who have children should teach financial literacy to their kids at an early age because chances are that they won’t learn it at school. For example, parents can use an allowance system to teach kids the basics of spending, saving, and donating money. 

Older kids will also need to learn about creating and following a budget before going to college and should know the importance of saving and how to build credit. Finally, as they enter adulthood, it’s best to talk to children about generational wealth and see how they can uphold the family’s wealth for generations.

 

3. Think Big, Dream Big

Most people will have a dream, whether it’s to change careers, start a business, or pursue an advanced degree. However, generational wealth is sometimes made out of bold decisions that can have a compounding impact over time.

 

Intangible wealth can also play a role in achieving such goals, while the values and relationships of a family can get stronger through the intentional expression of these values.

 

For instance, someone might be able to create generational wealth by writing a book about their experiences or by renovating the family’s vacation home. 

While not all bold ideas will work, starting early means investors will have time on their side while keeping risks low by taking small steps in the right direction. For example, a person looking to build their wealth can open a savings account for that dream while steadily gathering the knowledge they need to become successful.

 

4. Invest in Life Insurance

People should invest in life insurance for many reasons, but the main reason is to protect their loved ones should the unexpected happen. With it, your family can use death benefits to pay off the mortgage, eliminate debts, or even replace them with income. 

Some people may think that the life insurance benefits from their employers will be enough, but they might not cover their family’s needs. Moreover, they might not be able to transfer it to a new job, leaving them wide open in case of disaster. 

Younger people may want additional life insurance, not just for protection but also to help build generational wealth since they tend to be more affordable for those who start early. People who fail to secure life insurance may find that their loved ones will struggle with their daily needs and be unable to build wealth for future generations.

 

5. Start an Estate Plan

Once people have started building generational wealth, they will likely consider the next step: passing it to their loved ones. This is where an estate plan comes in — the estate planning process can be done with the help of an attorney to ensure that the transfer of assets, wealth and other materials is made smoothly after the benefactor passes. 

The attorney will work with the benefactor to ensure that the proper documents and arrangements are made for their estate plan. Once everything is settled, it’s best to review them daily and update them whenever a significant life event happens.

 

6. Create a College Fund

One of the best gifts that a parent can give to their children is the gift of education, and a college fund will allow their children to go to any college or university of their choice, along with their preferred course. But unfortunately, because the cost of education has only risen yearly, more Americans find themselves paying off their loans in exchange for years of their lives. 

However, those fortunate enough to have relatives to pay off their education needs can happily start their lives with little debt or none. Likewise, parents who start building their children’s college funds can help to protect them from massive amounts of debt further down the line. 

A great option to look into is 529 plans; these are college savings plans with tax benefits. A parent can also use the money from 529 plans to pay for eligible expenses apart from tuition fees, such as computer equipment and textbooks.

 

How Parents Can Pass Wealth to Their Family

Gathering wealth is essential for anyone who wishes to leave their family with a legacy. Making preparations ahead of time can help to save future generations plenty of time and money should the worst happen. 

Below is a recap of how parents can pass their wealth on to the next generation. 

  • Create a Diverse Investment Portfolio
  • Instill Financial Literacy in the Family
  • Think Big, Dream Big
  • Invest in Life Insurance
  • Start an Estate Plan
  • Create a College Fund

Many will help you create an estate plan, a complex process that should be revisited many times with the guidance of an attorney. However, that step can be highly beneficial and ensure that a benefactor’s wishes are respected and carried out, even after they pass. 

When problems arise or a family member asks for a more significant part of their wealth, an attorney can provide professional advice regarding estate planning, making them indisposable throughout the process.

 

Conclusion 

Generational wealth is one of the most unique gifts a parent can pass on to their child. It not only keeps them financially secure but can also provide a better quality of life and education they deserve. 

Because of this, providing generational wealth for their families should be something everyone strives for. Whether it comes from an estate plan or life insurance, building wealth for their children and the children after them should be the ultimate goal for parents. 

If you’re ready to start building your financial wealth, visit 121 Financial Credit Union, Jacksonville’s leading credit union, or call us at 904-723-6300 today. 

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