Generational wealth is when you take all of the assets you’ve built up in your life and hand them down to the next generation, who will then hand them down to the next generation, and so on. This can include anything from investments and properties to businesses and charitable foundations. By maximizing generational wealth, you can help future generations have more opportunities in life and build a legacy that will live on beyond yourself.
So, how exactly can you start building generational wealth if you’re starting from square one? In this article, we’ll cover some foundational steps to help set up future generations for success.
Why is Building Generational Wealth So Important?
There are many different reasons why families seek to build generational wealth. Many times, it’s because parents want to create financial security for their children and grandchildren.
Eliminating financial worries for future generations can allow them to do things they might not have done otherwise, like start a business. Not only will they have the financial backing to get the business off the ground, but they’ll have something to fall back on if things don’t work out.
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How to Build Generational Wealth
If you want to start building generational wealth for your family, knowing where to start is important. Here are a few things to consider.
Focus On Paying Off Your Debt
Did you know that 77% of American households have some type of debt? From student loans to credit cards, each debt usually carries an interest rate that has to be paid on top of the initial principal amount. This can range from a few dollars to several thousand dollars.
One of the most significant missed opportunities for building wealth is wasting it on interest payments. That extra money could be put into an investment or high-yield interest account, generating extra monthly income.
To pay off your debt, consider creating a budget and working with a financial planner to figure out the best way to consolidate, refinance, or pay off your debt as quickly and efficiently as possible.
Invest In Financial Markets
Investing in the stock market is ideal for building generational wealth. The amount doesn’t matter; even smaller contributions can make a big difference in the long run, thanks to compound interest. This means that when you invest money, you will earn money on both the investment and the interest.
To start investing, you’ll want to build a diversified portfolio of stocks and bonds. Make sure the investments you choose align with your goals and risk tolerance. Ziggma’s free stock screener is a great way to find investments that fit these goals. Once you have your portfolio established, use our wealth tracker to understand how your portfolio is performing and if changes need to be made.
Consider Purchasing Real Estate
Did you know that renting a house can be one of the most significant expenses you’ll pay in life? The average American spends $1,536 per month on rent, or $18,432 per year. Instead of paying that money to a landlord each month, consider purchasing your own home. This way, a portion of your monthly payment will go toward building your own equity.
Once you’ve paid off the house, you’ll be able to transfer that asset to future generations and use the house’s equity to purchase additional real estate to add to your wealth portfolio.
Investing in Real Estate
Speaking of additional real estate, one of the best ways to grow wealth is through real estate investments. Not only does real estate typically appreciate in price, but it can help you establish a consistent source of income from collecting rent payments. Plus, it has a low correlation to the stock market, meaning that even when there is market volatility, real estate can continue making money.
Real estate also offers many attractive tax benefits, including tax deductions for home expenses and depreciation.
Utilize Tax Benefits
Unfortunately, taxes are something we all need to deal with. However, there are ways that you can strategically reduce how much you pay to the IRS over your lifetime.
You might consider investing in tax-exempt accounts such as a Roth 401k or a Roth IRA, which allows you to withdraw your money tax-free, or a health savings account, otherwise known as a HSA, which allows you to contribute tax-free money that won’t be taxed if used for medical expenses.
Understanding how your estate will be taxed once you pass away is also important. However, by setting up an estate plan, you can minimize the taxes your heirs must pay.
Create An Estate Plan
An estate plan is essential to ensure the assets you build are passed down as you envision. Without a clear estate plan, you might find that your assets spend years in probate, and those you want to benefit may not actually be able to utilize your hard-earned investments.
To create an estate plan, you’ll want to list everything you have culminated through your lifetime and determine who should receive things after you pass away. Working with an estate planner can help you understand the tax scenarios and how to best set up beneficiaries so you do not leave your loved ones with a big tax bill.
Teach Your Children About Personal Finance
Finally, you’ll need to take the time to teach your children about finances. By helping them understand how finances work, you can help them create their own wealth and ensure they know how to manage their finances.
You should include topics such as investing, saving, budgeting, and setting financial goals. You can even have them help with some financial decisions so they can learn firsthand how money works. For example, maybe you have them plan a trip with you to see the true finances of a trip and how much you need to budget to travel.
The Bottom Line
Generational wealth is an incredible way to continue a legacy long after you’re gone. By paying off debt, investing in real estate and financial markets, creating an estate plan, and teaching your children about finances, you can set up future generations for success.
While it might take a few years to see the results of your efforts, it will be worth knowing that you have provided a stable foundation for future generations to build upon.
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Frequently Asked Questions
How can I protect my assets and ensure they’re passed down to future generations?
The best way to ensure that you’re able to pass down your wealth is to have an estate plan set up and the proper insurance.
How much money do you need to create generational wealth?
The great thing about beginning to build generational wealth is that it can be done with limited financial resources. This means you can start with small amounts of money and gradually build wealth over many years.
What is the 3 generation rule for wealth?
Many families would love to build generational wealth; unfortunately, maintaining that wealth is something that most struggle with. In fact, 60% of wealth transfers are lost by the second generation, and 90% are lost by the third generation. That means only 10% of wealth snowballs past a third generation.