What Is Generational Wealth and How Can You Build It, Too?

It’s the elephant in the room, the dirty word that comes up when we talk about how the super-wealthy became just that — super wealthy. 

I’m talking about generational wealth. 

More often than not, those with an unimaginable bank account and a lavish lifestyle had a leg up in getting there, thanks to their family line. Wealth is handed down from grandparent to parent to child — and the rest of us are left wondering how we can ever compete.

But generational wealth doesn’t have to be reserved for the already rich. In fact, it’s something you can start building for your own family today, even with seemingly small steps. 

…

What Is Generational Wealth?

Generational wealth is made up of assets that are passed down from one generation to the next. 

Those assets can include things like savings accounts, retirement funds, investment portfolios, real estate properties, businesses, and even alternative investments like fine art.

If you’ve heard about the “Great Wealth Transfer” from Baby Boomers, this is an example of what generational wealth looks like.

The goal of generational wealth is to provide a strong financial foundation for your family.

Why Generational Wealth Is Important

Building wealth allows you to not only establish financial freedom for yourself but for your family, too. When you pass it down to a new generation, it helps them pursue things that might otherwise be out of reach, like higher education or owning a home.

The goal is to make life better for those who come after you.

That said, it’s important to not just pass along wealth — you also want to pass on best practices for how to manage wealth. 

According to a study by The Williams Group, 70% of wealth is lost by the second generation, and 90% is lost by the third. Passing on good financial habits and discipline is just as important as passing on actual wealth-building assets.

@erikakullberg What the rich don't do 🤯🤫 #lawyer #money #erikataughtme ib: @johnefinance ♬ original sound – Money Lawyer Erika

How To Build Generational Wealth

You may think that you can’t build generational wealth since you don’t have a high income or don’t already come from money.

But you might be surprised by how much you can build if you start investing now — even if it’s only a few dollars.

Whether it’s through your employer-sponsored 401(k) or a separate brokerage account, investing involves buying assets like stocks, bonds, mutual funds, and even real estate properties.

If you have your own business, even that can be a way to pass down wealth. Family businesses generate revenue, provide equity, and in many cases, employment opportunities for adult children. 

While a business isn’t the same as a cash transfer or inheritance, it provides security just like other assets do.

READ MORE: How To Start a Business with No Money

Here are some ways to ensure your wealth — whatever amount that may be — is passed down correctly.

Create an estate plan

To transfer wealth between generations, you’ll want to have an estate plan in place. This outlines how you’d like your assets divvied up after you die. 

Without an estate plan, your assets will be doled out according to the laws of the state you live in. 

Through an estate plan, you determine who inherits what. This is typically communicated with a will. While you may think wills are only for the rich or elderly, it’s important to have one in place no matter your age. 

Should you become incapacitated or terminally ill, your will provides instructions for how your family should be cared for and ensures your assets will be passed on according to your wishes.

Set up a trust

Another way to transfer wealth between generations is to set up a trust. Similar to creating a business, a trust is a legal entity that can hold assets and pass them down to members of your family. 

There are certain tax benefits to using a trust to pass down assets. If you expect to have a significant amount of wealth to pass on, it might be worth talking with a professional estate planner who can advise you on how your estate will be taxed and whether setting up a trust is right for you.

READ MORE: Why Asset Allocation Is Essential for Investing

Add beneficiaries to your accounts

One of the easiest things you can do right now is to ensure all your accounts and insurance policies have named beneficiaries on them. When you pass, the named beneficiary will receive a payout from your account. 

This isn’t the same thing as writing a will but it is an immediate step you can take to make sure the right people access your accounts after you pass.

Give gifts

You can also pass down wealth as a gift. This is something you can do when you pass away or while you’re still alive. Gifts can take the form of cash payments, as well as the transfer of certain assets like stocks and bonds. 

Gifts can be a one-time thing or a recurring transfer, especially around important events like holidays or birthdays.

Teach financial literacy

Finally, you can build generational wealth even by not building wealth at all. Financial literacy is the foundation of building wealth. 

Even if you don’t have anything to pass on now, helping your kids understand the importance of investing will make it possible for them to pass something down to their kids later on.

FAQs

What is the difference between inheritance and generational wealth?

Generational wealth and an inheritance are related but they aren’t necessarily the same thing. An inheritance is typically a one-time gift, usually after a loved one passes away. This can happen when someone is named in a will. 

Generational wealth is something that exists and can provide ongoing value, regardless of whether or not someone has passed away.

What net worth is considered wealthy?

To be considered wealthy, most Americans believe they need to have a net worth of at least $2.2 million, according to Charles Schwab’s Modern Wealth Survey. 

But wealth is also subjective. For some people, having less than that is all they need to consider themselves wealthy.

TL;DR

Saving money is great, but keeping a bunch of money in your bank account doesn’t necessarily make you wealthy. That comes from acquiring assets that either appreciate in value or generate income.

When you pass away, you’ll leave your wealth behind. Passing it down from one generation to the next is a way you can provide financial stability for your family and create a legacy for yourself.

For more on investing and building wealth no matter your income, listen to these episodes of the Erika Taught Me podcast:

• Why The Rich Get Richer
• Financial Psychologist Reveals: The Secret To Building Wealth
• Asking a Self-Made Billionaire Investor How To Build Wealth

. . .