Generational wealth may sound like something reserved for the elite 1% of Americans, unattainable for everyday people. However, nothing could be further from the truth. The term “generational wealth” simply refers to any assets passed on from one family member to another. This could include anything from a family business to stocks, savings, or real estate.
By building generational wealth, you can enjoy peace of mind knowing your family will have financial security even if you aren’t there to provide for them personally. Your family can also enjoy the comfort that this brings, especially if they currently rely on you as a primary earner. But just how do you create generational wealth? This personal finance article can help.
What is generational wealth?
Generational wealth refers to assets that are passed down from one generation to the next generation. This could include investment accounts like stocks and bonds, savings accounts, life insurance policies, and even cash. It could also include things like cars, real estate, jewelry, businesses, and heirlooms or collectibles. Anything with monetary value qualifies — it doesn’t have to be cash.
How to create generational wealth
Generational wealth can help families maintain long-term financial stability and spare individual members from undue hardship. It provides a financial cushion to fall back on while also opening up options — for example, it can help future generations avoid student loan debt. The challenge in building such a buffer, though, is setting up wealth to survive multiple generations. This requires more than simple assets like savings.
Why? A savings account can be chipped away at and depleted over time. Plus, the money in it is very likely to lose value due to inflation. The key to building generational wealth is to invest in assets with growth potential. Here’s how you can get started.
Understand your 401(k)
A 401(k) plan is a type of retirement account with distinct tax advantages. You typically contribute pre-tax earnings to the account, reducing your taxable income (although some plans allow you to contribute post-tax earnings, referred to as a Roth). Many employers will also match what you contribute to your 401(k) up to a certain amount. When you reach the minimum required age of 59 and a half, you can then withdraw from the account without any penalties (there are fees if you touch it before).
If you don’t need the money in your 401(k), you can leave it untouched and designate a beneficiary to inherit it upon your passing. The beneficiary can then access the funds in the account or leverage it for other purposes — for example, it’s possible to borrow from a 401(k). To make the most of your 401(k), though, consider automating your contributions, ensuring steady growth over time.
Set up a trust fund
If you want to pass down assets like a 401(k), house, savings — anything, really — you need to do some legal paperwork. Estate planning is the process of determining what happens to your assets when you pass on. Most people write a will to designate who gets what or set up a trust fund. A trust is a legal entity that holds property or assets, which can then be transferred to designated beneficiaries.
Although it’s a bit more tedious to set up and manage, a trust is usually a smarter option because it reduces gift and estate taxes on assets you leave behind. It also avoids administrative fees associated with probate. This is a legal process that a will must go through before an estate’s assets can be distributed. It involves authenticating the document and paying debts and taxes on the estate.
Another benefit of a trust is that you can create it with strictly defined conditions. For example, you might set up a trust for your children in which they only receive their inheritance in set increments, ensuring they don’t blow all the cash at once. You might also specify that they only get access to their trust after reaching key milestones, like completing their college education.
Invest in the market
Investing in the stock market is a great way to start building wealth, especially in an era when interest rates are low. Investing is easier than ever thanks to online tools that let you manage your own accounts, sparing you the higher fees of managed accounts. The S&P 500 (which tracks the 500 largest American companies’ stocks — from Amazon to Apple) provides returns of about 10%, on average.
If you’re new to investing, you may want to play it safe. Opt for a low-cost index fund, for example. You’ll enjoy low fees while benefiting from long-term growth.
Be smart about how you invest in real estate
Buying real estate is a major investment that isn’t always guaranteed to increase in value over time, so you’ll want to do your research before signing on the dotted line. This is especially true if it’s your first home. Figure out how much of a down payment you can afford, how large of a mortgage you’ll need, and what home loan terms and conditions are available. For example, if you rent the property, the monthly rent should ideally cover your monthly mortgage payment.
To maximize your real estate investment, consider setting it up as a rental property. This will allow you to rely on a largely passive income stream and create a steady cash flow that your loved ones can rely on even if you aren’t there.
Purchase life insurance
Life insurance is a great way to give your family a safety net in case you pass away unexpectedly. It can provide much-needed liquidity and financial security in a difficult time of grief. If you have people who depend on you for monetary assistance — from a spouse to kids — life insurance is a smart investment. There are many options available, so do your research to select a fitting policy.
When purchasing life insurance, you’ll need to designate the beneficiary, the person who will receive the payout upon your passing. Making sure your beneficiaries are up to date is also an important component of comprehensive estate planning. For example, if you get divorced and/or remarried, you may need to update your beneficiaries.
Note that we do NOT recommend whole life insurance as an investment vehicle — it’s much less costly over time to use term life insurance.
Start a business
A family business can be a valuable means of income and a great asset to pass down to future generations. There are many types of businesses you can start these days. For maximum success, look into leveraging your existing talents and resources. What skills and passions do you have that could be used to make money? This article can help you discover potential business ideas.
If you don’t have a lot of money to start a business, don’t stress. There are plenty of low-investment business models, especially in an age when so much business is done online. An internet-based business is convenient because it allows you to skip major expenses like commercial rent, cutting overhead costs. Here are some options to start the brainstorming process.
How to build your own rich life
You don’t need to hire a fancy financial advisor to build generational wealth. Increasing your net worth as described above can help you provide for the future. This kind of family wealth can lay the groundwork for a prosperous second generation, providing a monetary buffer to help ensure a brighter financial future.
If you’re the first generation in your family to build this kind of wealth, it’s important to create a financial plan. That doesn’t mean you have to scrimp and save every penny, pushing all your hard-earned cash into the stock market and other growth assets. You want to enjoy your life, too — not just make money for younger generations.
One way to achieve long-term financial success is through conscious spending. Figure out your money dials (what you truly enjoy spending on) and prioritize those by creating a conscious spending plan. Changing your mindset about money can help you eliminate fears about finances and allow you to get a handle on wealth management. Learn about the “I Will Teach You to Be Rich” mindset to get started.
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