Generational wealth serves many generations of your family now and long after you're gone. To secure a financial future for your children and their children, now is the best time to learn how to build generational wealth.
According to a report from the University of Michigan, “parental wealth heavily influences children’s development and success, leading to substantial intergenerational transmission of wealth status. The odds of becoming part of the wealthiest 20 percent of Americans
are more than 700 percent greater if your parents were in the top 20 percent instead of the
bottom.” So, any actions you can take to build generational wealth will aid your children now and well into the future.
How to Build Generational Wealth
If you already have children or are considering starting a family, it's hard to discount the benefits of building generational wealth. Here are actionable steps you can take to start building generational wealth.
1. Investing in stocks and crypto
To build net worth, most advisers recommend investing in the stock market, particularly in index funds. The upside of investing in index funds is the rapid diversification and ease of management. You can start buying low and try to sell high to try to make money through capital appreciation.
You might also concentrate on buying and holding dividend-paying stocks. Dividends are the most visible and direct way that corporations can share profits with stockholders. This feature makes dividend payments attractive to high-income investors — especially if the stock is rising, the company is producing a reliable product and investors see long-term potential in the sector, product or management team. Ideal dividend-paying stock investors are often retirees who are looking for a reliable source of income for themselves now or as an investment for their children and grandchildren.
Many people believe that cryptocurrencies are a solid substitute for centralized finance. Investing in digital assets is inherently risky because of their volatility. However, diversifying portfolios can mitigate volatility to help build long-term wealth. With Bitcoin, for instance, you can save and invest for the future. Considering Bitcoin as a hedge against the stock market could possibly work against inflation.
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2. Real estate
Building generational wealth through real estate can allow you to achieve portfolio diversity, competitive tax advantages and flexibility. A long-term investment strategy sees renewed energy during stock market struggles. Nor does it stop being profitable when the stock market does well.
Real estate acts as an inflation-hedged investment when cash loses its purchasing power. Unlike cash, its value is less likely to depreciate down the line. With real estate investing, you can use options like investing in real estate investment trusts (REITs) or flipping homes.
3. Family business
Starting a business is risky, but that risk can yield rewards. Starting and passing down a family business could offer financial security for your family and future generations.
Family businesses have a greater chance of succeeding — over 30% of all family-owned businesses are estimated to have made it into the second generation. It's vital that you consider a business where you'll offer a service or product that people will continue to need.
You want to start a business that will still be pulling in consumers 100 years from now. Also, think about having your kids start working at the business from a young age to encourage a smooth transition of the business and its practices down the line.
4. Life insurance
Life insurance is a way to build wealth by using a life insurance policy as a transfer strategy to your children. A policy can cover things like funerals, mortgages, debts and daily expenses.
Not only does it cover basic needs, but you can also design it to provide future long-term benefits. While there are many types of life insurance that you can choose from, they all fall into three categories:
- Term-life insurance
- Permanent life insurance
- Universal life insurance
A term life insurance is the most affordable.
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5. A will or trust
Building generational wealth through a trust or a will is a customary estate planning method to protect assets. A will is a legal document that states your final wishes on distributing your financial assets or care of your young children. On the other hand, a trust is a legal arrangement where one party, called trustor, gives another party, known as a trustee, the legal authorization of holding and transferring assets on behalf of a third party, the beneficiary.
If you decide to use a trust, be sure to understand the various types of trusts and their implications.
- Testamentary trusts: You can create a testamentary trust in your will and testament, which will be functional once you die. If you want to make changes to your testamentary trust, you can only do so by changing your will.
- Revocable trusts: The terms of this trust can be changed at any time by the grantor or the trustee. Income earned during the lifetime of the revocable trust is distributed to the grantor. It's only after death that the assets or property transfers to the beneficiaries of the trust.
- Irrevocable trusts: Unlike revocable trusts, the grantor in an irrevocable trust can not alter it without the beneficiary's consent. The grantor cedes ownership of the assets stated in the trust, withdrawing all their ownership rights and saving on estate taxes.
When to Start Saving and Investing?
Money doesn't grow on trees, but it can grow when you save and invest wisely. It's never too late to start saving and investing for your future family. Start by considering all your options and making wise choices instead of just assuming something good will happen.
Educate Your Kids
Saving and investing money is a vital life skill, but it doesn't come easy. The best inheritance you can give your children is a good financial education. Teaching your kids can help them understand the value of money, grasp the concept of delayed gratification and guard them against unnecessary spending. Also, they'll better understand the choices you made to get to this point.
If your kids are old enough to ask for certain things, then they're old enough to start learning about money. A savings account is a good way for kids to develop strong financial habits. It allows your children to get the feel of having their own money to deposit.
Consider discussing the importance of budgeting and spending money on things they need versus things they want. Teach them the difference between basics and luxuries. Remember to encourage them to use cash whenever buying goods.
Frequently Asked Questions
What is the fastest way to build wealth?
While there is no one-size-fits-all formula for building wealth, some general rules apply. You can increase the difference between your income and expenses and invest the difference to grow exponentially with time.
How much money do I need for generational wealth?
There’s no magic number that can equal generational wealth. You can only achieve generational wealth after acquiring enough investments to cover your family’s day-to-day expenses without using the principal.