It’s highly likely that you’ve heard about the term “generational wealth,” but do you know its meaning and what it actually takes to create it?
By definition, generational wealth is assets passed down by one generation of a family to another. The assets can be, but not limited to, real estate properties, stocks including mutual funds, bonds, and businesses.
Sometimes, these assets can pass down to your family after you die in the form of inheritance. Other times, the next generation can receive these assets while you are still alive. That means a generation does not have to die off to transfer wealth.
To create generational wealth, however, you need to think of having hard assets. A 7-figure salary alone does not equate wealth. If you stop working , the high paycheck ceases to exist.
That’s not all.
There are people who make a lot of money but spend it all and have nothing left over at the end of the month.
So, in order to build generational wealth that you can pass on, you need invest your money in those vehicles that have the potential to make you very wealthy.
You can start with short term investments to begin with, but the money is in long term investments.
Why building generational wealth is important?
Building generational wealth now can help fund future education for your children and ensure that they have a comfortable life when you’re not around.
Even when you’re living, it can give them an edge. For example, if your child is buying a home, you can transfer wealth as gifts towards a down payment on the house. So, your children can have a good financial advantage and are more likely to accumulate wealth on their own.
So, how to build generational wealth?
Here’s how to do it:
1. Work with a financial advisor
If you’re really serious about building generational wealth, you should consider hiring a financial advisor.
A financial advisor advise their clients on how to save, invest, grow and manage their money. They help them set financial goals and create a plan to achieve them.
However, hiring a financial advisors cost money. But if you’re making more than $50,000 a year, you should be able to afford one. Financial advisor costs vary depending on the advisor and the kind of advice you’re seeking.
But usually, a fixed fee per hour can be anywhere between $100 to $300. While that can be expensive, it will be worth it in the long run.
Click here to find a financial advisor in your area.
2. Start a business
One of the best ways to build long term wealth to pass down to your children is through your business. According to the census bureau, 90% of all businesses in North America are family businesses. And these families tend to pass down their businesses to their children.
Or, if you look at the Forbes list of billionaires in the world, you have to say that a lot of them own their businesses.
3. Invest in Real Estate
Real estate investing is an excellent source of generational wealth. More than half of the people in the Forbes made their money in real estate. Even those who haven’t built their wealth out of property generally invest their money in real estate.
So, if most wealthy people in this country or the world are wealthy because of real estate or invest some of their money, it means that real estate is a great source of generational wealth.
So, how do you get started with real estate investing?
Investing in real estate in order to start your journey in creating generational wealth does not require a lot of money to begin with. In other words, you don’t have to be a millionaire to start.
Contrary to what most people think, an ordinary person can start with very little money. That is because the power of leverage is on your side.
That means that banks or mortgage lenders can lend you up 95% of a home purchase price. So, if you have a steady job and a good credit score, you can afford to purchase investment properties.
Most wealthy real estate investors build their long term wealth through saving money and then gradually buying properties over the years. You can start with single family homes, condos, small apartments including duplexes, triplexes and multi-family residential properties.
If you really want to create generational wealth, you should seriously think about investing in real estate.
4. Invest in the stock market.
Investing in the stock market is one of the best ways for families to build generational wealth. Just like real estate, investing in the stock market should be a long-term strategy.
The idea of picking individual stocks on your own to invest can be very intimidating, especially if you’re a beginner. If you’re just starting out and don’t feel confident in your investing knowledge, then you should learn how the market works.
Or you can start with mutual funds or index funds. A mutual fund is an investment vehicle in which investors, like you and me, pool their money together. They use the money to invest in securities such as stocks and bonds. An index fund or exchange traded fund is a type of mutual fund which is designed to match the components of a market index.
There are many benefits to invest in these funds, because they are cost efficient. They offer diversification to your portfolio. They also have low minimum investment requirements.
Mutual funds, such as the Vanguard mutual funds, are managed by an investment company. You just choose your favorite mutual fund and the managers will take care of the rest. You make money from stocks or mutual funds through capital appreciation (i.e., the share increases in value) and dividends.
In terms of generational wealth, you need to reinvests those dividends and focus on those stocks that have the potential to increase in value.
Over the long term, you should be able to make a yearly return of at least 8 to 10 percent investing in mutual or index funds.
How do generational wealth get passed down?
Now that you have an idea of how to build generational wealth, then the next question is how to transfer it to your children. Families can transfer generational wealth after death and during life.
After death
When you transfer generational wealth after death, it takes the form of inheritance. Inheritance is basically assets you receive from your family after they die. They can be cash, stocks, bonds, mutual funds, real estate, gold, automobiles, etc. Those who receive the inheritance are called beneficiaries or heirs, and the inheritance may be subject to tax depending on your states.
The assets to be divided among beneficiaries are written in a will. So, if you’re serious about creating generational wealth and want to pass money to your next generation, you must have a will. Consult an estate lawyer to draft one.
If there’s no will, the probate court will assign an administrator of the estate to divide the assets according to the laws of your state.
During life
Generational wealth does not have to be transferred after you die. Families can transfer their wealth to their heirs while they are alive in three ways:
1) educational expenses. A good example is when a family pays for the next generation college’s education.
2) gifts. Families can transfer wealth by contributing to their children’s a down payment on a house.
3) medical expenses. Families can transfer wealth by paying medical expenses for their children as well.
In summary
Generational wealth is important because it can give your inheritance or heirs an edge to accumulate wealth on their own. The best place to start in your journey to create generational wealth is to work with a financial advisor and then set goals to start working toward. Many wealth families create wealth by starting a business. But most, even if they have their own businesses, invest in the stock market or real estate. The reason why is because these investments are proven wealth building vehicles. But remember, to create wealth to pass on to the next generation of family, you have to have a long term perspective.
Speak with the Right Financial Advisor
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning to retire at 50, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.