How to Create Generational Wealth

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.