How to Build Generational Wealth

Generational wealth is wealth that parents or grandparents pass on to their children and grandchildren. Having generational wealth can provide financial stability and opportunities for children, grandchildren, and even more generations in the future.

But money is not the only valuable element of this type of intergenerational inheritance, says Taylor Kovar, CFP and chief executive officer of 11 Financial in Lufkin, Texas. ‘Financial inheritance isn’t simply about funnelling assets into children’s lives. I think it’s about the knowledge and passions and values that you pass down and you impart that will last. You are gifting the family so much more than money: you’re gifting that forever family DNA that you carry.’

If you’re interested to know why creating generational wealth matters, how to put down roots to create wealth for your family and how to maximise the effectiveness of your legacy, read on.

Key Takeaways

Generational wealth refers to passing down assets from one generation to the next.

You need to establish financial footing before you can claim generational wealth – that means saving, building an emergency fund, and thinking through your future.

Much as generational wealth can provide for your family over the long term and and offer you a chance of life and opportunities for your children and grandchildren.

Their strategies for creating wealth across the generations involve investing in education, financial markets and land (real estate), and building assets and controlling their depletion.

Maximizing tax benefits and avoiding debt are crucial for building generational wealth.

The Importance of Building Generational Wealth

Financial success requires hard work, sacrifice and planning. This can help you reap the rewards for your time on earth, while also seeing that your heirs benefit from your legacy and live comfortably once you are gone.

Imagine a snowball of wealth. Generational wealth, for instance, can lead to better educational opportunity and therefore higher earnings for your children – a snowball that they then build on for their children (your grandchildren).

The Challenges of Building Generational Wealth

Developing generational wealth is no small feat, of course – excepting for those of us who were born into it. And if you’re born poor, as many of us in marginalised communities were, the odds of achieving material generational wealth become much, much steeper.

For example, as of 2019, the median wealth of White families was 6.5 times Black families’ median wealth, 5.5 times Hispanic families’ median wealth, and 2.7 times Asian and Other median wealth, per the Congressional Budget Office.

Data from the Federal Reserve Bank of St Louis in the fourth quarter of 2023 showed that, on average, Black families owned 23 cents of wealth for each $1 of White family wealth. Hispanic families owned 19 cents of wealth for each $1 of White family wealth.

Compounding this racial wealth gap is the fact that Black Americans are much less likely than other Americans to own a home – one of the chief mechanisms of bequeathing wealth – perhaps due in large part to wellic forms of discrimination in home selling, home lending, and home appraisals in recent decades.

Black Americans — but so have many other marginalised groups — have also been poorer (giving them fewer savings and fewer options), been banked less (locking them out of index-fund accounts and other opportunities offered by large brokerage firms), and have lower credit scores that lock them out of different investments.

If you want to build generational wealth, there are a few financial moves to make that can help you.

Build a Strong Financial Foundation

But establishing wealth across the ages is a little more than just financial optimization. It also means setting a good example. So here are some of the best personal finance habits you can model to your family.

Prioritize Savings

‘It’s not what you make, it’s what you keep,’ says J B Beckett of Beckett Financial Group in West Columbia, South Carolina.

They trap themselves into saying they’ll save whatever’s left at the end of the month (which of course they never get round to doing) or they spend more than they earn. A better strategy would be to budget so that your spending can be controlled and put the money you want to save into your bank account already marked, so that you know the money is there and ready every month while setting up an automatic payment to you.

Here’s how to get started:

Pick a percentage of your post-expense income – or a dollar amount – that you can put toward your savings goals.

If you have more than one savings goal, create separate accounts for each one.

Consider a high-yield savings account that earns interest on top of your contributions.

Set up automatic payments to each savings account and watch them grow.

For longer-term savings goals, you could be putting cash into certificates of deposit accounts (CDs) for a guaranteed return.

Build an Emergency Fund

Perhaps the most important accelerator of generational wealth – an emergency or rainy day fund is the most important accelerator of generational wealth – is simply making sure you don’t live paycheck to paycheck. Having a buffer for six months or more if you lose your job or face a health crisis can make all the difference.

It’s usually lack of an emergency fund that gets people into debt in the first place, or cashing out retirement accounts that cost them substantial penalties but also a lot of extra time.

After a while you should have several months’ worth of expenses saved up in case of a real emergency; but that will take some time to accumulate. In the meantime, look for ways to save, even small amounts, through regular automated deposits. If you learn how to cut back your expenses or develop new sources of income, find ways to accelerate your savings. Most important, resist the urge to raid the fund, for this should be a true emergency fund.

Involve Kids in Money Conversations

An important part of building financial intimacy that often isn’t discussed is involving your family, and your children especially, in financial conversations – giving them a chance to learn financial basics from you at a young age.

Kevin M Curley II, a certified financial planner at financial advisor Global Wealth Advisors in Dallas, Texas, recommends including children in your family finances from the very beginning – and making it fun with games.

‘Play Monopoly at the dining table and teach them poker at the kitchen table. Give them an allowance and talk them through how they’re going to spend it. Later, give them a capital amount to invest in their favourite video game designer or cosmetics company, and track their success together.’

Invest in Education

After you get some money squirreled away for an emergency fund, you can begin to use some of your discretionary spending to address other big financial goals, like saving for college. If you want to preserve generational wealth, dollars contributed to your children’s education might be seen as an investment in their future earning power.

That’s because ‘an additional degree is highly correlated with higher lifetime earnings, in the millions’, according to the Georgetown University Center on Education and the Workforce study. ‘A worker with a high-school diploma can expect to earn $1.3 million over the course of a lifetime; a bachelor’s degree will boost that to $2.3 million; an additional master’s degree can bring in $2.7 million throughout an average worker’s lifetime; and after a professional degree, that figure spikes to $3.6 million in lifetime earnings.’

Note

Of course, these costs continue to increase and higher education is not for everyone. It is always best to consider your financial situation and listen to your heart when deciding to invest in your education.

You might consider opening a 529 plan, a tax-advantaged account that allows you to allocate up to $10,000 annually per child, tuition-free for qualified educational expenses.

Invest in Financial Markets

Starting sooner, the better – saving more, the better But for wealthy individuals, starting as early as possible makes the biggest impact. ‘Even for modest managers that used conservative growth assumption rates and returns, they started very early, usually in their 20s,’ Kovar explains. ‘Documenting that as you start early, and save even small amounts, you can see significant growth over time through the compounding effect.’

Stock-market investing does involve risk, but you can mitigate that risk by placing your eggs in different baskets (stocks, bonds, etc). For beginners, investing in so-called index funds is a classic strategy. This is a fund of many stocks that is weighted in order to track a major market index like the S&P 500.

You should think long-term about your investments, by facing up to the blips (expect that a rise will be followed by a fall) because it is true that the market always rises in the long term.

Invest in Real Estate

Another good and profitable investment avenue to look into is investing in property (real estate), because of its rental yield and increased property values, not to mention the fact that it’s a good investment to inherit for your next of kin.

‘Getting involved in different property types, from residential to commercial, is a great way to build a well-rounded real estate portfolio,’ Kovar says.

If you’re not ready for that level of commitment or you don’t want to manage a real estate hold, Beckett suggests checking out real estate investment trusts: also known as REITs.

Create and Preserve Assets

Creating wealth is one thing, preserving it another. This is really our second goal. Protecting your wealth ensures it will be available to pass to future generations. It also means that your heirs will benefit from as much of your assets as possible (if you have them) by having as little of your estate as possible go to the tax office.

Now, how can you make sure that your kids are protected and supported as much as possible? Here are some options.

Build an Estate Plan

The more you have, the more you should connect with financial professionals and attorneys about estate planning. You may want to think about these things:

Creating a business that you can pass down

Considering life insurance. ‘Life insurance is one of the most tax-efficient ways to leave wealth.’

And taking care of other insurance needs. Make sure you have adequate insurance for a catastrophic home, car or medical event. Without it, one event or lawsuit could wipe you out.

Maximize Tax Benefits

A range of effective tax-efficient investment strategies and vehicles can help you keep more of your returns:

Consult with a tax accountant or financial advisor for the optimal way to do so for you, but generally, it’s a good idea to try to find an approach that shelters as much money from taxes as possible.

Avoid Debt and Financial Pitfalls

Meanwhile, living within your means and maintaining a sound rainy-day fund help to free you from the shackles of high-cost, discretionary debt (like high credit card balances), the types of debt that can hinder your ability to get ahead on your savings and wealth-building ambitions.

If you do have some debt, pay off your highest-interest accounts first, even while adding to your emergency fund and your retirement accounts (though you can dial it back a bit temporarily). Pay off lump sums, such as tax refunds or money gifts, when you get them.

How to Pass Down Generational Wealth

The final consideration is to see that your wealth, generational and other, flows where you want it to flow. And that requires that your wishes be legally documented. ‘At the simplest level, it’s just a will,’ Curley says. But her clients tend to have more complex financial pictures, and will, inevitably, need more than a will.

Beckett suggests a trust. ‘A trust is efficient,’ he says. ‘It can avoid probate if you set it up right, and it’s private. If it’s in a trust, it’s not public record.’

When you’ve got all your ducks in a row, and the assets in place, let your family know what you have done and where they can find your records. This can come in handy, both so your family can be on board with the plan and, more importantly, so that a sudden emergency results in financial plans falling into your family’s lap.

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

Just take it slowly, a step at a time. Put some money into a budget each month to build in a contribution toward savings. Make lifestyle decisions that support your financial goals. And start putting money into retirement early.

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

You might or might not want to take advantage of some of these tax-preferential strategies – for example, tax-deferred accounts or Health Savings Accounts – it all depends on your individual financial situation, so talk to a tax specialist or financial advisor, and check in with them periodically to make sure you’re up to date on new tax rules as they are established.

How Can I Protect My Assets and Preserve Them for Future Generations? There are various ways to make sure that your property is not overlooked when determining who receives your assets, such as specifying a do-not-resuscitate order, creating a will, and setting up a trust.

Keep yourself indemnified (home, auto and life insurance), and hire an estate planner, two of the best things you can do to protect your assets, and one for each spouse. Also, don’t forget a will, but perhaps most importantly, a trust.

The Bottom Line

But if you’re a first-generation wealth builder, committing to take those first steps of saving money, building an e-fund, and starting to invest for the long term, and following through with consistency, those dividends will accumulate.

Yes, it may require some sacrifice in the short term, but the advantages of generational wealth over the short and long term make it worthwhile. One of the chief advantages you will experience in your lifetime is the peace of mind of knowing that your loved ones are going to be financially taken care of. Another advantage is the ability to pass along your knowledge and insights to your children and grandchildren, to help them develop financial habits to hopefully continue the legacy you are building for the next generation.