Tips & advice on getting your finances back on track.
Generational wealth refers to any kind of asset families pass down to their children or grandchildren whether in the form of cash, investment funds, stocks and bonds, properties, or even entire companies. Generational wealth is also improving your financial knowledge and building your own personal assets so you can, in turn, build financial knowledge and assets for your children. Both tangible and intangible items are equally an important part of building successful generational wealth. Wealth can increase your options in life, so the more that you pass on to your children the better their long-term wealth. With proper generational wealth planning and management, wealth can be passed down for several generations.
Importance of Generational Wealth
Many people don’t grow up with adequate financial literacy. This lack of financial knowledge can make it difficult to succeed financially. Families and individuals are put at a significant financial advantage if they can increase their financial literacy. As this financial education is passed from parents to children, not only does wealth grow, but so do opportunities. For example, adequate financial literacy may mean proper planning for children’s college education and the ability to avoid student loans. Subsequently, those children are able to graduate from college debt free and begin their working careers investing in homes and other income-generating investments. This paves the way for a greater level of financial stability for future generations to build their own wealth.
Individuals who have access to family wealth have a financial head-start that allows them to begin building their own wealth earlier in life and take advantage of the magic of compound interest.
Five ways you can build generational wealth:
1. Teach your children financial literacy
It’s estimated that 70% of families lose their wealth in the second generation and 90% lose it in the third. Financial literacy is key to building generational wealth. Giving your kids a financial education is one of the most important things you can do to start building generational wealth. It’s important to equip your children and young adults with the ability to keep building wealth for years to come. Raising financially independent young adults is an important step in building lasting wealth.
Read More: Teaching Kids About Money
2. Invest in your child’s education
People with little to no student debt are more likely to succeed financially than those with the burden of debt. Investing in a 529 Plan and saving for your child’s education can be an effective way to support their financial future. A 529 Savings Plan grows tax deferred and withdrawals are tax-free if they’re used for education expenses. You can learn more about investing in a 529 plan here. By being unencumbered by student loans, your children will be able to start their own investing at an earlier age. They’ll be able to invest in a house or retirement fund thereby growing their own wealth.
3. Prioritize life insurance
If you’re a parent or you have dependents who rely on your income to live, it’s important to have some sort of set-term life insurance. Set-term life insurance is designed to temporarily protect you for a set amount of time, usually 20-40 years. You can also invest in whole life insurance to help build your generational wealth. This pays a benefit upon the death of the insured while also accumulating in cash value, thereby serving as a form of inheritance. Not having some income protection for your family should the worst happen, can derail your plans for generational wealth.
Read More: The Millennial Insurance Almanac
4. Stock market investing
Stock market investments are another way to create generational wealth. Investing in the stock market provides an opportunity to build wealth passively and can protect your money from inflation. When investing, invest with a long-term plan and diversify your portfolio to insure against industry-specific downturns. The stock market can seem complicated, but it doesn’t have to be. A simple way to get started is through low-cost index funds, which provide long-term opportunities at relatively low fees. Learn how to get started with stock market investing here.
5. Own property and real estate
Owning your home can provide financial stability to future generations. The value of your home may fluctuate, but the housing market has experienced positive annual appreciation since 2012. Your house will be worth more than it was when it was purchased which will help increase your family’s wealth. You can also transfer the house’s title into your children’s names. This will allow them to rent it out to make a passive income or let one of them live in the house with their own family. They won’t have to take out a mortgage for a new house which lets them invest that money in their generational wealth.
Transferring generational wealth
After you’ve determined how you want to build your generational wealth, it’s crucial to create an estate plan to ensure your wealth is transferred. An estate plan will make sure that in the event of death or incapacitation, your assets are divided according to your wishes. Create a Will that provides specific instructions on your last wishes and dispersal of your assets. The more specific you can be about plans for any assets you have accumulated, the better. Things can get tense between surviving family members if you don’t have a Will.
Read More: Personal Finance For Millennials 101
A trust is another way you can dictate how your family receives your assets. A trust is a legal entity you can use to hold and transfer assets to your beneficiaries. You can set up a trustee who carries out your wishes, whether or not you’re still alive. Although trusts can be pricey, they can also provide other benefits such as avoiding or reducing estate and gift taxes depending on the size of your estate. A trust will give your family access to more of your money, making it easier for them to continue building wealth.
It’s not uncommon for generational wealth to crumble by the second generation. Make sure you teach your kids how to be financially independent and how to build on their own money. This will help increase the odds that they’ll be able to contribute to the generational wealth of your grandchildren. Understanding the importance of the financial legacy you’ve created will allow your children to contribute to the ongoing success of the family’s financial future. Take the time to sit down with your children and have age-appropriate conversations about how they can contribute to the future of your generational wealth.
Katherine Fatta is the Social Media Coordinator at Navicore Solutions. She creates fun and informative social media posts that engage the public. She’s also the host of Navicore’s podcast, ‘Millennial Debt Domination.’ You can listen to our podcast here.