Introduction: Leaving a financial legacy to your children can give them a significant leg up in life. According to data from the Congressional Budget Office, 28% of families in the top third of the income distribution received an inheritance, compared to only 17% of those in the bottom third. Building generational wealth may sound like something reserved for the ultra-rich, but the truth is, it may be more accessible than you think. Whether you want to help your children pay for college, give them money for their first home, or leave them the family business when you retire, generational wealth can help your children get off on the right financial foot.
What is Generational Wealth? Generational wealth includes assets, such as cash, property, investments, and businesses, that are passed down from one generation to the next. You can leave generational wealth in the form of an inheritance, transferring the wealth when you die. But you can also build and pass on generational wealth during your life. For example, parents may build generational wealth by paying for their children’s higher education, helping them purchase a home, or giving them a financial gift when they get married.
Why is Generational Wealth Important? Generational wealth is important because it gives younger generations a financial head start. In extreme circumstances, it can make the difference between living debt-free, owning a home, or simply having a financial safety net – or not. It also helps ensure that your children have the resources they need to pursue their own goals and dreams.
5 Effective Ways to Build Generational Wealth
- Invest Wisely: Investing is a key wealth-building strategy for reaching any long-term goal, including building generational wealth. Investing allows you to buy assets that will generate income or grow in value over time. A few tips to help almost anyone include starting as early as possible to maximize the power of compound interest, investing in tax-advantaged accounts, minimizing investment fees, and diversifying your investment portfolio to lower your risk of major financial losses.
- Buy Real Estate: According to the Urban Institute, homeownership is the primary wealth-building tool in the U.S., especially for Black families. This makes it a common goal for those who want to pass on generational wealth. Real estate typically appreciates over time, which can make it an especially valuable asset to pass down to your children. Whether you want to buy a primary residence, invest in rental properties, or both, owning real estate can be a useful tool in building generational wealth.
- Start a Business: Starting a business is one way to grow your own income exponentially but also a valuable generational wealth-building tool. According to the U.S. Small Business Administration (SBA), business equity was the second-largest share of nonfinancial assets in 2019 (after homeownership). Starting a business has the potential to help you improve your cash flow and build a wealth-building entity to pass down to your kids, creating a major financial advantage for your family.
- Prioritize Estate Planning: Like generational wealth, you may associate estate planning with high-net-worth individuals. But it’s a key financial step for anyone who wants to control what happens to their assets after they pass away. Estate planning helps you transfer your wealth according to your wishes after you die and helps your heirs minimize unnecessary taxes, other financial losses, and time spent in probate court. 5
