Providing for your family is important, it creates stability and provides opportunity for your children and possibly grandchildren. It makes you feel good to see them benefit from the fruits of your labor. And you want that to last — even after you’re gone. During the next two decades, it’s projected that American seniors will pass down $84 trillion to their children and heirs.1
What is generational wealth?
Generational wealth are assets that are passed down from one generation to the next. Wealth can take many different forms including cash, investment funds, stocks and bonds, real estate property, and businesses — all great assets to pass on to the next generation.
Perhaps the easiest way to start building generational wealth is through homeownership. Housing is where America’s wealth is stored, the U.S. housing market is worth $47.5 trillion, an increase of $2.4 trillion over the last year, according to real estate brokerage Redfin data.2 A home is likely the single biggest investment most people ever make and passing that asset on to the next generation is a generous gift. Home equity can increase over time as property values generally rise over time and your mortgage is paid down.
However, wealth has an endpoint if it’s not properly cared for — proper planning and communication is extremely important as you prepare your heirs for the future.
In addition to passing down financial wealth, you must also pass down intangible wealth, such as financial education and literacy, values, and spending habits. That might mean your family creates a habit of packing lunches (instead of eating out) or regularly having healthy conversations around the dinner table about money.
Showing future generations how to budget, save and differentiate needs from wants will help prepare them for future financial responsibilities. Here are some tips to get you started on the road to generational wealth.
4 ways to build and protect generational wealth
1. Financial education
Understanding your finances is key to growing generational wealth. Opportunities have improved for young people in the U.S. to gain knowledge on personal finances. Now, more than two-thirds of all states require personal finance classes for high school graduation, up from less than half the states in 2022.3
It’s never too late to learn about financial matters. Podcasts, community education courses, books, and blogs are all good resources for the late bloomer. And ratcheting up an understanding of how to build and maintain wealth will help you now and well into the future. And if you’re a parent with young children, it’s never too early to start their financial education. That’s because many of our financial habits are formed at an early age, as a result of our feelings being formed by how people around us talked about money. Here are some tips on How to teach young children about finances.
2. Budgeting
Having a family budget is important — and sticking to it — can make a big impact. That means that even if your income increases and you are seemingly in good financial shape, you are more likely to avoid “lifestyle creep,” the temptation to spend more on your lifestyle just because you can.
Gen Xers (those born between 1965 and 1980) have an average net worth of $541,200. For most households the biggest contributor to net worth is home equity, the average net worth for Gen Xers without home equity is $381,100.4 However, Gen Xers are the least confident about retirement, only 16% of Gen X workers are “very” confident that they will have a comfortable lifestyle in their retirement years, thanks to rising inflation and the cost of living. This generation is also the one to carry the most amount of debt.5
A couple ways to pay off debt include the snowball and avalanche methods. With the former, you pay off the smallest debts first. With the latter, you pay off the higher interest rate debts first.6 Here are some additional Tips on changing your spending habits and being more intentional about money.
It doesn’t matter how big — or how small — your bank account is, your money can grow over time. The tried-and-true way to build wealth is through consistent saving and investing. It takes time for your money to grow, be patient and avoid the get rich quick schemes.
Investing a few bucks a month in the stock market is a relatively easy way to grow money over time. And be sure you are making the most of contributing to your 401(k) plan.
3. Life Insurance
Life insurance is more than a large sum of money that’s delivered to a loved one after your death. It can be a good tool to help build generational wealth.
First, if you provide for a spouse or children, the death benefit from life insurance enables you to keep providing for them, helping them to keep their current lifestyle as they build for their future.
Life insurance can help do so much more. Here are a few examples: pay estate taxes from inherited assets; finance a college education; pay off debt. All these things can help build wealth and have a trickle-down effect for future generations. Here are five reasons to consider buying life insurance.9
4. Estate planning
Surprisingly, just 33% of Americans have a living will or trust.7 It is likely for many of the 66% who don’t have a plan in place to distribute their money and possessions is because they think they don’t have enough assets for it to make sense.
But any assets you do have will help the next generation create a financial foundation to build upon. So, get a team in place — one that includes an estate planning attorney, tax adviser, and financial professional — to help you put a plan in place for distributing and investing your wealth, and creating a long-term legacy.
Be sure your estate plan passes the multigenerational test, which encompasses adding any new family members, such as children, grandchildren, and great-grandchildren. Learn more about why estate planning is one of the most important steps you can take to preserve your legacy and protect your loved ones.
Incremental approach to building generational wealth
Remember that you don’t need lottery-sized earnings to build generational wealth. Instead, let your wealth build up over time. That’s what legendary investor Warren Buffett did. He saw investing as a long game, much like a marathon versus a 100-meter dash.
Consider investing your funds over a period of time, an investment strategy referred to as dollar-cost averaging. The strategy has you investing your money in equal portions at regular intervals regardless of the market fluctuations. Dollar-cost averaging may help boost your returns without taking on extra risk, while providing an opportunity for building a financial legacy.8
