How to create generational wealth
If you receive some kind of inheritance, count yourself lucky. Only about one in five Americans inherits assets from a previous generation of their family.1 And most of those who do receive money from older relatives, receive a relatively modest amount — between $10,000 and $50,000.2
While you may not be an heir to a significant sum, that doesn't mean you can't be the one to start a cycle of generational wealth for your own beneficiaries.
Generational wealth is made of assets — cash, investments, property, or other items of value — passed down from one generation to the next. And it's something you can build for your own children, especially if you start while you're still young — perhaps before you even have children.
Here's how to create generational wealth for your heirs.
Creating wealth means more than saving cash
To be sure, the first step in building generational wealth is setting aside enough cash to pass on to the next generation. This isn't always easy, especially after taking care of your own needs (like saving for retirement or another big financial goal). But generational wealth transfer can't happen if you need to use everything you saved in your own lifetime.
While saving for the next generation is a key habit to establish, saving money isn't enough to build true generational wealth. If you want to grow your money — for yourself, for your heirs, or both— you need to invest that cash into assets that will grow in value over time. That could look mean opening and funding a brokerage account to manage an investment portfolio, purchasing real estate to hold for the long-term, or even starting a business.
Investing in the market
Investing in the stock market as a long-term investor is one way that could help you grow your money. You can use mutual funds and ETFs to create a diversified portfolio, and a strategy like dollar-cost averaging can help you maintain your plan for the long-term.
Buying real estate
Buying real estate is another strategy for creating generational wealth. Purchasing real estate as an investment isn't for everyone. But if you understand how to evaluate property for its rental potential, then this could be an excellent way to create passive income for yourself now. It also gives you a valuable physical asset you can pass along to younger generations later.
Helping your kids buy their own home is another way to help boost their own wealth — without taking on the risks of being a landlord or active real estate investor.
If you want to build generational wealth, saving money may not be enough. You need to invest that cash into assets that grow in value over time.
Starting a business
Most people need a job for the paycheck — and saving a percentage of that paycheck is critical for funding your retirement. But what if you could create an asset that generates income whether or not you're the one doing the work?
That's one wealth-building potential of a business. Of course, nothing is guaranteed. But it's worth considering if you have an entrepreneurial mind. Starting a business — and growing it to a point where it doesn't rely on you to be functional — can be a great way to support your own lifestyle and provide an asset that you can pass along to your children. Alternatively, you could sell a profitable business when you retire and use the proceeds to fund a monetary inheritance.
Time Is your biggest advantage
Building generational wealth is a challenge. Take advantage of a critical factor that will make the process easier — time.
The wealth-building power of an investment comes from the ability to earn compounding returns. This refers to the rate of return you earn on your principle over a period of time.3
For compounding to work, it requires time. See the exponential impact of compound returns.4 In the case of investments, "long-term" means keeping your principle and its earnings invested for at least 10 years, preferably even longer.
In addition, it's not uncommon for investments in the stock market — or other tangible assets, like real estate — to experience short-term volatility. But over the long-term, a good investment's value is expected to rise.5
Other ways to create generational wealth
Creating and passing on generational wealth doesn't just mean leaving your heirs with cash and investments. There are other ways you can help leave a financial legacy.
Pay for college tuition
People with a college education earn, on average, $1.2 million more over the course of their careers compared to those who only have a high school diploma.6
Take out a life insurance policy
Taking out a life insurance policy helps ensure your dependents would be spared financial hardship if something happened to you while you were still working to build wealth for yourself and others.
Create a solid estate plan
It's not enough to simply create wealth. You also need the proper legal documents to help ensure the smooth transition of your wealth once you're gone. This means creating a solid estate plan. An estate plan can include many legal documents, but a will is usually at the heart of the plan. A will explains how you'd like your assets to be distributed among your heirs after you pass.
Another legal document you might look to establish is a trust. While a will helps designate your beneficiaries and what they receive, it can't dictate how those heirs use what they inherit or when. A trust, on the other hand, allows you to set specific instructions on how and when your assets may be used by your beneficiaries. This can be a helpful feature if your heirs are minors or young adults, or if you want to provide an adult heir with additional support in the form of financial guardrails.
Teach financial literacy
You can also provide your kids with the financial literacy they need to make wise money decisions throughout their lives. Teaching them how to manage and build wealth costs nothing. But it can make the difference between them squandering their own money and inheritance or continuing the cycle of generational wealth you're working hard to build.
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