What do you want to pass along to your children when you’re gone? What about their children? And their children’s children?
Building generational wealth is about leaving a financial legacy for the generations of your family that come after you. And, while it may not be easy to create this level of wealth, it is possible!
In this article, we’ll explain:
- How generational wealth is defined,
- The amount of money you need to constitute generational wealth,
- The seven steps for building generational wealth, and
- Five tips for ensuring that your wealth successfully passes to future generations.
Once you learn how to build generational wealth, you’ll be able to leave a legacy that benefits your family line long after you’re gone.
How Is Generational Wealth Defined?
Generational wealth is when financial assets are passed down from one generation to the next, typically following family lines. You might, for example, leave a family business to your children, who could leave it to their children.
How Much Money Do I Need to Have Generational Wealth?
Generational wealth is more than simply having enough money needed for retirement. It’s even more than having enough money to achieve lifelong financial freedom.
You have generational wealth when you have assets that generate enough passive income to cover your family’s expenses. When you and your family members can live on the income generated by your assets without dipping into the principal capital of those assets, the generations that come after you will be in a position to focus on their passions rather than their day jobs.
The exact amount needed depends on several factors, including:
- Your family’s cost of living,
- The returns being generated by your investments, and
- Your family’s ability to manage their wealth responsibly.
Let’s consider an example.
Taylor and Ellie Johnson have two children and an annual household budget of $125,000 (which they expect to increase by an average of 3% per year due to inflation). Taylor and Ellie have built a real estate portfolio that generates $50,000 per year in rental income. Rental rates are increasing at an average of 5% per year. They also have stock market investments that currently generate dividends of $15,000 per year, as well as a small family marketing business provides a net income of $150,000 per year to the family (increasing by an average of 3% per year). While the family owns the business, the day-to-day work is handled by the business manager and multiple employees.
Taylor and Ellie have generational wealth because of the passive income from their financial assets, which more than covers their family’s budgeted expenses. As long as these assets are managed responsibly, the cash flows should continue to increase, allowing Taylor and Ellie’s children to pass this family wealth along to their children as well.
7 Steps for Building Generational Wealth
Here are seven steps to building generational wealth for your family.
- Start saving and investing early
- Pay off high-interest debt
- Invest in real estate
- Invest in your children’s education
- Generate multiple strings of income (focusing on passive income)
- Utilize life insurance
- Consider starting a family business
1. Start Saving and Investing Early
Time plays a critical role in building generational wealth. When you start investing early, you can leverage compounding interest to earn interest on the interest you made over the previous period. This allows your money to grow exponentially with very little active management.
2. Pay Off High-Interest Debt
You don’t need to be debt-free to create generational wealth. In fact, debt can be a useful tool in building wealth. Low-interest Mortgage debt, for example, makes property ownership more accessible and enables investors to purchase real property assets that are worth more than the investor can afford to pay upfront.
But high-interest debt like credit card debt and personal loans hinder wealth accumulation by causing borrowers to throw away excessive amounts of money on interest expenses.
Paying down any high-interest debts will bring you a step closer to generational wealth.
3. Invest in Real Estate
Not only is it possible to become a millionaire through real estate, but real estate can also play a key role in establishing your generational wealth.
As we saw in our comparison of real estate vs. stock market investments, real estate offers many benefits over stocks and bonds, including
- Greater tax benefits (as the IRS allows for multiple income tax deductions on real estate),
- Potential for financial leverage,
- Lower volatility,
- Greater passive income potential,
- Greater tangibility, and
- Natural scarcity.
Real estate has been a mainstay of wealthy families throughout history. And, with so many real estate investing strategies available, there is an option for everyone, whether you’re a new investor with very little capital or a seasoned investor with greater financial resources.
If you want to build generational wealth, invest in real estate before you invest in the stock market.
4. Invest in Your Children’s Education
One of the most important high-net-worth investing strategies is to invest in your children’s financial education.
Traditional education is also worth the investment as it teaches the basics, like critical thinking and social skills, that can set kids up for success later in life. But teaching financial literacy to your kids at home will help you be sure that they will know how to manage the generational wealth that is passed down to them.
Cover personal finance topics like:
- Building good credit, and
- Filing tax returns.
As well as wealth management topics like:
- Hedging, and
- Estate planning.
Your generational wealth is only as good as the wealth management skills of the people handling the funds. So make sure your children (and their children) know how to handle wealth responsibly.
5. Generate Multiple Streams of Income (Focusing on Passive Income)
For many Americans, working a day job barely generates enough income to cover all expenses and have a bit left over for investing. And what happens if you lose that job? How would you pay the bills then?
By creating multiple streams of income, you can grow your earnings, while also diversifying your income so that you aren’t reliant on a single salary or wage.
As you consider different income streams, focus on passive sources. Passive income is money earned without actively investing time in earning that money. This is critical because you can only work so many hours per day, which limits your income potential unless you can figure out how to make money in your sleep.
Luckily, there are several ways to generate passive income, including:
- Owning rental properties,
- Selling digital products,
- Earning royalties on creative works, and
- Gaining dividends or interest on investments.
Passing down wealth to future generations is all about establishing passive income streams that can outlive you. The revenue from these streams can continue to flow to your children and grandchildren even after you’re gone.
6. Utilize Life Insurance
Life insurance policies are used to prove a payout to your beneficiaries in the event of your death. This is particularly useful if a large share of your earnings is dependent on you (for example, if you have a high-salary job).
Having a life insurance policy to provide funding to your family in this case would offer some financial protection and give them one less thing to worry about during an understandably difficult time.
7. Consider Starting a Family Business
Creating a business to pass along to future generations is a final option for building generational wealth.
The business could be in any field that suits you. If you work as a lawyer, for example, you could consider starting your own law firm. Or, if you are a doctor, you could invest in your own practice. Construction company, restaurant, summer camp…there are hundreds of options to choose from!
Plus, starting your own business allows your children to get some work experience as young adults. And, you even have the option to turn your family business into a passive income stream by hiring people you trust to run the business on your behalf.
How to Pass Generational Wealth to Your Family
After investing so much of your time and energy into creating generational wealth, you’ll want to make sure the wealth is passed along through the proper channels to minimize risks and tax liabilities.
Here are a few tips for passing your wealth along to the next generation.
- Find a lawyer who specializes in estate planning. Your lawyer can be an invaluable resource in making sure the documents you intend to use to pass your wealth to your family are legal and enforceable.
- Establish a trust. A trust is a legal entity that can hold your family assets. Having a properly organized trust can make it easier to transfer your assets from one generation to the next and minimize wealth taxes.
- Set up custodial accounts. Custodial accounts hold investment assets for the children in your family until they come of age. Once they turn 18 (or 21 in some states), they get access to the accounts.
- Keep your will up-to-date. Having a current will is critical for streamlining the probate process and making sure that your assets go to the party you intend for them to go to.
- Name beneficiaries. Many investment accounts and insurance policies allow the account holder to name a beneficiary. Having a beneficiary for each account will simplify the transfer of assets when you pass on.
Build Generational Wealth through Real Estate Syndication Investing
Understanding how to build generational wealth through real estate is about learning how to build a portfolio of properties that you can either hold for long-term rental income or sell for a substantial profit. And real estate syndication covers both options.
Real estate syndication is similar to real estate crowdfunding. Syndication allows you to pool your investment funds with funds from other investors to gain access to high-value deals that might otherwise be out of reach for a private investor. You could, for example, invest in a multi-family development in the hot Los Angeles rental market for as little as $25,000. Even better: syndication provides professional project management for your investment, making your returns completely passive!