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Five Steps to Building Generational Wealth

Generational wealth is financial wealth and assets that can be passed down from one generation to the next. Most people plan to pass on their wealth to their children or other designated heirs, giving them the gift of greater financial security. Passing down of wealth through inheritance can have a beneficial multiplier effect, building a “wealth snowball” that grows exponentially over time. Generational wealth can also give your family a financial “head start” which has the potential to change the trajectory of a family by breaking the cycle of poverty and building a foundation for future success. Passing down wealth can also have a positive impact by creating the means for individuals to provide financial support to their local economy, community, or trusted charities, so that future generations can obtain financial stability and opportunities. Examples of generational wealth include:

  • Financial wealth (money, savings, investments)
  • Assets (house, real estate, collectables, precious metals/gems)
  • Business ownership
  • Intellectual property (patents, copyrights, trademarks)
  • Charitable foundation or endowment

If you are new to financial planning, you may be wondering how to start building a wealth portfolio. Understanding your options, setting priorities, and deciding how to move forward can be confusing and intimidating. Follow these five steps to get started on your generational wealth building journey:

Step 1: Pay off Debts

Think of debt as missed opportunity. Why pay interest when you could be using that cashflow for other financial goals. Make paying off consumer debt a priority. This type of debt includes credit cards, personal loans, car loans, and student loans. Lowering debt can bring other benefits, like reducing your overall financial risk, improving your credit score, and relieving stress caused by financial worries. Get started by mapping out your financial situation. Use a budget and set financial goals.

Step 2: Buy a House

An inherited home, or the proceeds from the sale of a family property, is a transfer of wealth. Unless you have been gifted a home; renting, leasing, or paying a mortgage will almost always be your single largest expense/debt regardless of your life stage. The value of your home is likely to increase over time. This builds equity in your wealth portfolio. Owning a home can also serve as a form of forced savings as homeowners tend to be more cautious about spending and saving to protect their property asset. Home equity can also be tapped into through home equity loans (HELOC). If buying your dream home seems impossible right now, consider purchasing a “starter” home that will help you build equity for an upgrade in the future.

Step 3: Start Long-term Investing

Never underestimate the power of compound interest – with a 10% return on investment, you can turn $100,000 to $1.6M in 28 years. Long-term investing also has reduced risk as short-term investing is more susceptible to market volatility and trendy, high-risk options. It also has the potential to lower your taxes as long-term capital gains are often taxed at a lower rate than short-term capital gains. Depending on your financial situation, it is recommended to invest 10-15 percent of your annual income each year.

Step 4: Put an Estate Plan in Place

It’s never a good plan to not to have a plan for managing your financial assets after your death. Without a clear succession plan, your beneficiaries could end up in expensive probate cases lasting years, and they still may never see any of your hard-earned investments. To get started, make a comprehensive list of your assets and determine beneficiaries for each. Be sure to consider the tax implications of wealth inheritance as to not overburden your beneficiaries. Choose an executor that you trust to carry out your wishes. Review and update your estate plan every year, especially after any significant life or financial asset changes.

Step 5: Share Your Financial Wisdom

The greatest legacy you can leave behind is knowledge. Empower your heirs with the knowledge and skills needed to manage and grow wealth responsibly. It’s never too early to talk about money with your kids. For example, you can play games around “money lessons” that combine fun with learning, creating memories that last a lifetime. Lead by example by showing your family responsible financial management and sharing your financial experiences with them. Become a role model by mentoring young people or early career professionals and promoting community financial literacy programs.

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Last updated: Mar 19, 2024 @ 1:56 pm