How To Build Generational Wealth was written by Brian Thor and originally appeared on Wealth of Geeks. It has been republished with permission.
One of the things that parents care about most is making sure that their children are taken care of. That means caring for their children, physically and emotionally.
Part of caring for your loved ones is making sure that they have the financial resources they need. Generational wealth is one way that you can provide that for your children and loved ones.
What Is Generational Wealth?
Generational wealth comes in many forms, but the simplest way to put it is that it includes any financial resources you give to your children, their children, and beyond, offering them a head start in life so they don’t have to start from zero.
The most basic form of generational wealth is money. That can be in the form of simple cash or other valuable assets, such as a car, home, or investments.
Giving your child a car or setting up a trust fund for them is a form of generational wealth. Paying for their college education or helping pay their rent while in school or starting their career is another.
When you pass away, any money you leave to your heirs and things like real estate or life insurance payments also serves as generational wealth that future generations of your family can use.
Even if you don’t have vast amounts of money to pass on to your children, you can help them tremendously by educating them about money.
Teaching your children how to build a budget, use a credit card, or how investing works is all a form of generational wealth. The knowledge you give them can help them improve their financial life.
Support systems are another form of generational wealth that doesn’t strictly require that you have a lot of money to give to your kids. Simply being there and being willing to help can help your children get a leg up in their financial life.
Knowing that you’re there with an extra bedroom to sleep in when times are hard or some extra grocery money when times are tight can help your kids mentally and financially. They’ll be more able to do things like taking a risk on starting their own business or spending more time on a job hunt to find a great career instead of a lower-paying job.
How Can You Build Generational Wealth?
There are lots of things that parents can do to help build generational wealth for their families.
Educate Your Children
The modern financial system is incredibly complex, and most people don’t learn about generational wealth, let alone the intricacies of things like credit scores and investing in school. Many people don’t even understand basic budgeting or credit card use from classes.
Get your children involved in your family’s finances from a young age. Even something as simple as having them sit down with you while you pay the bills and explaining what you’re doing can help them learn about managing their money and family wealth.
As they get older, lessons about saving money, planning for the future, and safely using debit or credit cards can help make sure they have a good foundation for independence, managing their finances, and thinking about their opportunities to create generational wealth for their children.
Be There To Help
Make sure that your kids know that you’re there to help and serve as a support system for them. Even small gestures to make sure they know you care can help them feel more comfortable asking for help, saving them from falling deeper into a financial hole.
The most obvious way of building wealth is to save as much money as you can, as often as you can.
The more money you have, the more assets you’ll have available to give to your children. Set aside a portion of your income for saving and investing, and make sure to take advantage of opportunities like your employers’ retirement plan.
Try to invest your extra money into assets like stocks, bonds, mutual funds, and real estate that can appreciate over the long term. The earlier you start saving and the more you can save, the more you’ll have to pass along to your heirs.
Plan for After You’re Gone
You could have millions of dollars saved, but it won’t do your loved ones much good if you don’t have a plan for what should happen to it after you pass away. One of the points of generational wealth is that the money you earned during your life should continue doing good for your family after you’re gone. Proper estate planning and a will can help make sure that your money does as much good as it can.
At a minimum, you should make sure you have a will that outlines where your money is and how you’d like your money to be allocated after you die. You can use your will to create trusts that make sure your money is used the way you want, such as going toward specific charities or structuring the trusts so that your heirs can’t squander your savings.
You should also consider things like life insurance. A good life insurance policy can help pay for end-of-life expenses and leave money for your heirs.
If you own a family business or real estate, such as a rental property, make sure your heirs know how to keep operations running and that they have a plan for what will happen to it when you’re unable to run the business or manage the property any longer.
How Can a Financial Advisor Help You Build Generational Wealth?
Working with a financial advisor can help you create enduring family wealth in many ways.
One of the many benefits of working with a financial professional is the education that they can provide. A good financial planner won’t only help build your financial plan and manage your finances. They’ll also teach you about important financial concepts like creating a budget and managing investments.
You can use the lessons you learn from your advisor to educate your children. When your kids are old enough, you can have them come with you to meetings with your advisor to learn more about the family’s finances and pick up lessons from your advisor to strengthen their financial literacy.
Saving and Investing
A reputable financial planner will help you both save money and invest your savings to grow for the future. And today, the cost of hiring a financial advisor is often quite reasonable, including options to pay by the hour if best for your circumstances.
The more money you’re able to save, the more financial resources you’ll have to pass on to future generations. That makes a good financial advisor a valuable asset because they can help increase the assets you have to pass on.
Your advisor can also help you evaluate life insurance policies and structure an estate plan to ensure your money is used the way you want it to be after you pass away. And they can be an essential resource for your loved ones after you pass away to help advise them on how they can best use the money you’ve left for them.
What Do Financial Professionals Suggest To Start Building Generational Wealth?
We asked financial advisors to share a recommendation or action they suggest their clients take to begin building generational wealth.
“First, think about how much say you want on how succeeding generations can access those resources,” says Scot Jonhson, principal at Adell, Harriman & Carpenter, Inc. in Houston, Texas. “Coupled with that, have a conversation with your advisor and attorney about how to move those resources to succeeding generations in a tax-efficient manner even if estate tax laws change. Did you know grandparents can pay educational expenses directly, and that’s outside the annual gift allowance? In effect, that’s a tax-free resource transfer.”
Deb Meyer, a Certified Financial Planner and founder of financial planning firm WorthyNest in Punta Gorda, Florida, says, “To build generational wealth, it’s important to start with a family mission statement. This aspirational statement should be short (100 words or less) and incorporate core family values that will serve as guideposts during the wealth creation stage.”
Things To Watch Out For When Building Generational Wealth
Generational wealth is a wonderful thing to build. It can feel good to know that you’re helping to take care of not just your children but your children’s children and future generations.
However, it’s estimated that as many as 70% of families lose their wealth two generations after it’s built. Many cultures have sayings to this effect, such as “the father buys, the son builds, the grandchild begs.” You’ll sometimes hear this referred to as the difference between old money and new money (though the latter also includes self-made millionaires).
The idea is that the first generation works to build wealth, buys assets, and passes them along to their children. Those children, the second generation, having seen how hard their parents worked to build their wealth, work to maintain it. The third generation, not having seen the effort and work that goes into building wealth, squanders their money and winds up with nothing.
This is the reason that it’s important to cultivate multiple forms of generational wealth and not just leave money to your heirs. Take steps to educate your children about money and how to manage their finances. Your children can use the knowledge they learned from you to educate their children, hopefully avoiding the common cycle of a family losing its wealth in three generations.
Working with a financial advisor can also help you avoid this trend to preserve family wealth. Your advisor can work with you to structure your assets to help prevent the next generation from squandering your hard-earned money. They can also serve as advisors that can help educate future generations about preserving and building their wealth even further.
Creating generational wealth is one of the best ways to care for your children and many future generations of your family. However, make sure to focus on the many different kinds of generational wealth. Focusing solely on saving as much as possible may lead to your family squandering the money you earned over time.
Consider hiring a financial professional who can help you learn the best ways to start building generational wealth. They can also serve as a resource from one generation to the next to help them continue to preserve and grow your legacy.
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