You’ve probably heard about generational wealth – but what exactly is it?
Each generation will reap what the former generation has sown. Chinese Proverb
Generational wealth is the idea that you’ve built a financial legacy and portfolio that can be passed down to your children and their children.
The thought is that you’re able to provide for yourself and your family when you are alive and have enough money to help support your family after your death.
Sounds great, right? So, how does one start down this path? Let’s take a look.
Why is Generational Wealth Important?
Passing on generation wealth can help your family get ahead in life.
If you’re able to provide college at no cost to your child, think about where they will be financially after college. Then, think about the inheritance you could provide and how that may impact your life.
Another way to think about the importance of generational wealth is to ask yourself how would having a college degree paid for by a parent put you ahead in life?
Many of us have student loan debt that can take years to pay off. The money that you put toward your loans could have been used towards investing, real estate, or starting your own business.
The compounding effect of generational wealth is that one small action can provide so much financial relief to your family in the future. If you can give your family generational wealth, they can build on that wealth and help pass it down to more generations.
8 Ways to Build Generational Wealth
Creating generational wealth is not difficult, but requires effort and certain steps to be taken.
The younger you start, the easier it will be to build your own wealth that you can pass down to your children. You do not have to be an entrepreneur or have had the generational wealth yourself to build it.
There are multiple ways to build generational wealth, but three key ways:
- Creating multiple income streams
- Teaching your children financial literacy
- Proper life planning
Create Multiple Streams of Income
One of the best ways to build generational wealth is by creating multiple income streams.
This will ensure that you have different ways to earn an income and can invest it to provide passive income.
Investing
Investing is a key way to create an income stream. There are two parts to it – you will grow your money as well as create passive income.
Most investments will either grow, and you can use the growth as passive income, or you will receive dividends and can use them as passive income.
Anyone wanting to pass down generational wealth must start investing in different accounts and diversify their portfolio.
Real Estate
Real estate is another stream of income for many people who create and pass down generational wealth.
It’s another way to invest your money in something that will grow, as well as create passive income.
Real estate usually grows in value, which can be sold for cash if needed, but using real estate for passive income through rentals can be a way to build wealth.
You can then pass down your real estate to your family, who can use it for passive income through rentals.
Build a Business
The more income you can generate, the more of it you can use to invest.
Many people who build wealth build their own businesses because they can earn more money than they would with a traditional job. It will take a lot of work and isn’t easy, but the rewards of building a business can be immense.
Similar to real estate, a business can be passed down to the family, which is key to building generational wealth.
Teach Financial Literacy to Your Children
Passing down generational wealth is one piece of building it.
Another key piece is to keep the wealth for future generations. If you pass down your entire portfolio to your children, you need to ensure they know how to use that money wisely.
Many parents pass down generational wealth, but their children weren’t taught financial literacy, so they spend all the money and end that wealth for future generations.
If you are working on investing and generating multiple streams of income, you should also focus on learning about financial literacy and passing that knowledge on to your children.
Talking about money and teaching them to be financially responsible at a young age will ensure they’ll be responsible for their inheritance in the future.
Life Planning
It’s crucial to make plans around your life insurance and estate to ensure your inheritance will be properly distributed to the people you want to take care of.
Without proper planning, your estate, from real estate to your investment portfolios, may not be handled how you want.
Life Insurance
Many individuals who pass generational wealth utilize life insurance to protect and build wealth.
Depending on the life insurance policy, there can be cash provided to your family to cover funeral costs.
Emergency costs and subsidized loss income or retirement income could also be covered.
Estate Planning
Estate planning creates a will and even a trust to pass your wealth to your family.
Without any actual plan, your estate could be split up in a way that you do not want. To ensure you can pass down generational wealth, create a will with your exact plans when it comes to your:
- investments
- real estate
- business
- anything else financial
Final Thoughts
Being able to provide for your family and pass down this wealth is a great thing to do. If you do not come from generational wealth, you are able to provide this for your family. With proper planning, financial literacy, and financial moves, creating and passing down generational wealth in your life is possible.
Editor’s note: This article was originally published Jan 11, 2023 and has been updated to improve reader experience.
