Building wealth that can last generations is an ongoing process. Depending on where you are in your financial journey, your short term priorities may be focused on saving for an emergency fund or paying off debt.
It helps, however, to have a long term financial goal of creating generational wealth in mind. This helps you frame all your short and mid- term goals into something that goes beyond yourself–creating a legacy that is lasting, self-perpetuating and continual.
Generational wealth refers to the financial wealth you leave behind to your children or successors. It’s often called family wealth or legacy wealth as well. If you’ve made generational wealth a part of your long term financial goals, there’s a few ways to get started
The first and by far the most important thing is investing. This can take many forms:
Investing in the stock market can be a great option for those looking to start building generational wealth. You can get started with any amount of capital you want (after building up cash and emergency savings) and invest on an ongoing basis.
There’s no shortage of ‘tips and tricks’ for beating the market on the internet, but the truth is a simple, consistent investment strategy is best. Low cost ETFs (exchange traded funds) can be a great place to start. These funds ‘follow the market,’ emulating overall market returns while charging very low fees. This can be a good strategy for multiple reasons. Historically, the stock market has had positive returns over the long term. Additionally, this strategy allows for some diversification, as index funds are usually invested in different companies and industries.
You can also tailor your investment in ETFs to your own goals. There are ETFs focused on an industry sector, such as energy and consumables, and by strategy, such as high dividend yield and high growth.
When you find good investment vehicles that work for you, remember dollar cost averaging. This basically involves investing a fixed amount of money at regular intervals (say monthly, or every paycheck), for an extended period of time. This strategy prevents beginners from ‘timing the market’ and hurting their portfolios.
Whichever strategy you pick, odds are that you’ll see positive returns over a long period of time in the market. The compounding gains of investing in the stock market are considerable after 10+ years in the market. This chart shows the growth in the S&P 500 (a market index consisting of 500 diversified stocks) over 30 years:
We’ve all heard that past performance of the market does not guarantee future performance, but keeping money in a standard savings account can mean you’re actually losing money. According to the FDIC, the national average interest rate on savings accounts currently stands at 0.09% APY. The average inflation rate in the US is 3.22%, which means that every year the cash in your savings account is worth less than before. While it is a good idea to have liquid cash on hand for 6-12 months of expenses, investing capital beyond that point means that your money grows with the market. Keep in mind that in the short term, your investments may lose value and you might see some unrealized losses.
The security of home ownership has many societal and psychological benefits even beyond the financial positives. Besides owning your home, investing in real estate is a popular way of building generational wealth.
Some people are intimidated by the thought of investing in real estate. However, it is not difficult to get started. If you’ve started on the journey to own your own home, you are already familiar with the process of real estate investment. Additionally, there are now online platforms such as DiversyFund that allow you to invest in other types of real estate than a personal residence.
Real estate provides the advantages of diversification, a steady cash flow, and long term inflation-adjusted growth. It is a historically proven method of building wealth in something ’real’ that benefits future generations.
It is an unfortunate fact that wages and salaries have not kept up with the rising costs of living in the United States. If your primary source of income is your only source of income, chances are you may need to do more to set yourself up for financial success.
Having multiple streams of income is one way of building generational wealth. Taking some time to reflect on your skills and talents, and whether they are transferable to a business opportunity or a passive income stream. For example, if you learned graphic design skills in your marketing job, you can look for small businesses who need help building their websites or you could partner with a website to create a small course on marketing.
The additional funds you make can help you build wealth such that the impact will be monumental for future generations.
A good education is the foundation on which generational wealth is built. It can never be taken away from you and gives you confidence to pursue your goals and ambitions while always having a baseline to land on.
Thinking about your future generation’s education is also important. There are many investment vehicles, such as a 529 plan and custodial investment accounts, that help plan for costs of college and beyond. The average college student graduates with $26,600 in debt, regrettably starting their careers with a high monthly loan payment that narrows down career prospects and hightens mental stress. Giving your children a chance at a debt-free education will provide them with an advantage over their peers.
It is not enough to simply build a big enough savings nest. One study found that one third of people who received an inheritance had negative savings within two years of the event. Therefore it is vitally important that you teach your family about personal finance and introduce them to good financial habits at a young age.
To start with, consider teaching them about debt, compounding interest, retirement accounts, investments, and banking.
Estate management is about preserving the assets you’ve spent a lifetime building. Even if you don’t have a large net worth yet, having a will and an estate management plan makes it easier to have your assets distributed according to your wishes should anything happen to you. Additionally, an estate management plan helps minimize the amount of unnecessary fees and taxes, while ensuring your loved ones are taken care of.
For a lot of reasons, building generational wealth will not always be smooth sailing. Being able to anticipate changes and pivot accordingly plays a huge factor in successful wealth creation.
Having the financial means to deal with emergencies or the changing world will mean that you can stay the course during life changing events such as being laid off, ill health, and even pandemics and recessions.
Taking the time to build an enduring, flexible strategy with the practicalities all laid out correctly will set you and your family for success for generations to come.