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What is generational wealth & how do you build it for your family?

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7 mins

Thinking about money is an inescapable fact of life. We spend time contemplating how to save for our children's education, how much money we're going to have to live on when we retire, how to reduce our debt, and a myriad of other financial concerns.

But, have you ever considered your plan of action concerning generational wealth? If you're not familiar with the term, generational wealth is wealth that is passed down from one generation to the next. It's sometimes referred to as "family wealth" or “legacy wealth." Leaving wealth that you've accumulated behind for your children or grandchildren is your contribution to generational wealth in your family.

As you'll see, this wealth comes in many forms that can be passed down, such as stock market investments, real estate, or an education that can benefit the next generation.

There are varying types of generational wealth, such as lasting memories and healthy genetics left behind for your family. The generational wealth we'll be looking at concerns the financial resources you're able to leave behind.

How to build generational wealth

Creating generational wealth requires accumulating assets that you don't use so you can pass them along to your children when you pass away. Though it sounds easy, it's not easy to put into practice. If you find yourself currently struggling to build your savings, the thought of saving for the next generation can feel overwhelming.

For starters, take the time to create your own financial plan if you haven't already. This should include investment planning, retirement planning, educational planning, and other financial goals you may have. Once you have your plan in place to meet your own financial needs, you'll then be able to begin thinking about generational wealth.

If you're at that point in your financial development, how do you start accumulating assets to pass along? Here are five ways to start preparing to leave a legacy of wealth behind for generations to come.

1. Invest in the stock market

Though it takes time to understand how the stock market works and how to attain positive returns over time, you can rest assured that investing in the market will prove to be a sound investment if you're in it for the long haul. According to Goldman Sachs data, the average stock market return for 10 years is 9.2%, based on 140 years of tracking. Nobody knows what the next decade will hold as far as stock market returns are concerned. Still, history shows that if you're going to stay invested for a decade or longer, there is a high probability that you'll be profitable as an investor.

An excellent way to participate in the stock market is by contributing to your 401(k) retirement plan at work if you have one available. By investing in mutual funds that are part of your plan, you are investing in companies in the U.S., and abroad if you select an international or emerging markets fund. 401(k) plans offer several advantages, including pre-tax contributions and tax-deferred accumulation.

2. And real estate, too

Another great way to create generational wealth is by investing in real estate. It can be a reliable path to building wealth with its potential for steady cash flow and its increasing values over time.

Homeownership is a firm foundation for accumulating real estate assets. After buying your own home, you can continue to acquire properties throughout your life. You may find it surprising how quickly your real estate portfolio grows.

[ Related read: A simple new homeowner checklist for 2021 ]

3. Start your own business

As opposed to the passive income provided by the stock market and real estate, owning your own business initially requires very active participation on your part. It's a challenge to build a successful business, but it is a viable option to consider.

Research has shown that 30% of all family-owned businesses are passed on to the next generation, and 12% are still viable into the third generation.

To increase the odds that your business can make it through to the next generation, include your children in the business as soon as they're able to contribute. It's essential that they know how the business operates operationally and financially and how they can successfully continue with the business.

Not all children are interested in continuing to operate a family business. Many have their own hopes and dreams. If your business isn't going to make it to the next generation, you can consider selling the business and funding generational wealth in another form.

[ Related read: 5 fortunate industries with the most pandemic-proof businesses ]

4. Protect your income

Building generational wealth is about more than making money. You also have to protect what you earn — or risk losing all the progress you've made.

Take life insurance. It provides the funds to protect your family in the event of your death. Without your income, your children might face less-than-ideal financial circumstances.

The death benefit life insurance provides can keep your children in their home and fund their education. If you own a life insurance policy that accumulates cash value, such as whole life or universal life, the cash buildup is an asset that can be taken out in the form of a loan or withdrawal, which can be used to fund a business or be gifted to the next generation.

The same goes for disability insurance. What would happen if you suddenly lost the ability to earn a living? How long could you live off your savings? And where would your loved ones turn to for support?

With a personalized disability insurance policy, you won't have to worry. It will replace a percentage of your monthly income if injury or illness prevents you from working. That way, you can continue to meet your financial obligations and take care of your family while you recover.

Get a free, personalized disability insurance quote in seconds.

5. Prioritize education

One of the best generational wealth creation strategies is investing in your children's education. College graduates frequently have the opportunity to pursue and obtain higher-paying occupations, which can help them navigate their own finances.

Investing financially in their education also gives your child a head start accumulating their own wealth. According to U.S. News and World Report, the average student loan debt for 2019 college graduates exceeded $30,000, a new record high. With college costs continuing to climb, so will the amount that students will have to borrow to get their degree.

Bottom line

Building generational wealth is no easy feat. If it were, everyone would do it. You first have to get your own financial house in order to implement a wealth-building plan that will work for your family.

You may not want to invest in real estate or build a business, but you can find something that works for your situation. Regardless of the strategy you choose, involve your children and pass along the financial know-how you've developed. It's another smart way to create generational wealth.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published February 10, 2021
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