The Secret to Building Generational Wealth

The word luxury evokes images of fast cars, plush bathrobes, and endless spoonfuls of caviar, but luxuries aren’t just tangible items you’d find in a Hollywood mansion. A broader concept like generational wealth, for instance, is one of the greatest luxuries imaginable. Think of generational wealth as a snowball that grows larger as it rolls from generation to generation. Those who are lucky enough to inherit someone’s assets often experience a greater sense of financial stability than others, though not everyone has the good fortune to reap these benefits. The good news is that there are steps you can take today to help build this wealth and provide for future generations that are yet to come.

What Is Generational Wealth?

Generational wealth involves passing on assets over the course of several generations, which can be utilized decades down the line. Most often, these assets come from a recently deceased individual, though in some instances, they emanate from someone who chose to pass on their assets while still living. These assets include anything with a modicum of financial value — cash, stocks, property, and investments, to name a few — all of which go toward providing your children and grandchildren with greater financial security.

Create an Estate Plan

Estate planning goes a long way toward creating generational wealth, but a shockingly low percentage of Americans — roughly 32% as of 2024 — have an estate plan in place. That leaves 68% of the overall population without a strategy for what will happen to their money.

Having a will is extremely important, even if you don’t have many assets to your name. If you don’t plan, you’re letting the government decide how to handle your assets. Thankfully, there are plenty of easy and affordable ways to write a will without relying on expensive legal consultation; companies like LegalZoom charge just $69 to create a basic will. By putting an estate plan like this in place, you’re ensuring that your assets will end up in the right hands going forward.

Become a Homeowner

Owning a home is easier said than done, and not everyone has the financial means to do so. But those who can afford to become homeowners are setting up future generations for major financial success. When you pass on your home to the next generation, one of two things may happen. Maybe your descendants flip the house for a substantial amount of money. Another option is that they move into it themselves, which frees up assets to be spent elsewhere. Either way, your descendants are looking at a windfall of hundreds of thousands of dollars, which can alleviate tremendous financial stress.

Invest Long-Term

Compound interest is a wonderful tool that helps you grow your wealth without much risk. The more money you invest and the longer you wait, the greater the benefits will be in the end. If possible, you should consider investing between 10 and 15 percent of your salary into these long-term investments and letting that interest grow for as long as you can possibly allow. When you finally withdraw the investments, you can use them to pay for expenses later in life or pass them on to the next generation.

Some of the best long-term, low-risk investments include certificates of deposit, which mature over the course of three months to five years on average and offer higher interest rates than most savings accounts. Treasury bonds are another excellent option, which mature over the course of several decades and are backed by the U.S. government, so you needn’t worry about losing that initial investment. Market-wide ETFs are another strategy to consider. In this case, you’re not buying stock in one company; you’re investing in many, reducing risk in the process.

Be Open About Discussing Money

Many consider talking about money taboo, but this reluctance is causing more harm than good. It’s best to maintain an open dialogue about financial matters for a number of reasons. First, if your descendants know what they can expect to inherit, then that allows them to plan ahead and better allocate their own money. These discussions may also allow you to impart financial wisdom to future generations that only comes with experience and age. If you keep money matters too close to the vest, then your kids may end up suffering from the same mistakes you made all those years ago.

Purchase Life Insurance

Life insurance offers future generations tax-free benefits that take effect after you pass on. This can be used to pay for end-of-life expenses and provide for your family if you were the major breadwinner. Various types of life insurance plans include term life insurance that offers protection for a certain period, whole life coverage that lasts indefinitely, and universal life policies that allow you to manage the amount of money you contribute each year.

Set Up a Trust Fund

Trust funds are an excellent tool for protecting your money from being immediately squandered after your passing. Unfortunately, some financially irresponsible relatives may waste their entire inheritance in the blink of an eye. But if you set up a trust fund, you can make sure that those descendants only receive a certain amount of money each month, or that they only gain access to the account after reaching a certain age. These trust funds promote financial responsibility, increasing the odds of there being enough leftover assets in 10 or 20 years to pass down to future generations.

Issues With Generational Wealth Transfer

Generational wealth is only beneficial if the funds are managed properly. Unfortunately, an estimated 70% of families lose this wealth by the second generation, and 90% by the third generation. This loss of funds is attributable to a number of factors. Maybe it’s due to a lack of financial education, which is why it may be beneficial to bring in a financial advisor to speak with your descendants. Another issue is with the present generation, as many people feel that their kids should work for their money and don’t deserve charity. But don’t look at generational wealth as a charity case, but rather a means of supporting your loved ones financially so that they can pursue their passions without stress.