Ask the average person what their main reason for getting up every day and enduring the daily grind is, and there’s a good chance they’ll tell you:
“To provide for my family.”
Our families are our drive; their comfort and stability is our goal. Every individual wants the best for their family.
But all too often, we think about providing for them in the present without thinking ahead. One of my highest priorities as a financial life coach is to help people break out of the mindset of just putting food on the table today and start thinking about how to create generational wealth.
What is Generational Wealth?
If the phrase “generational wealth” gives you images of rich kids spending their parents’ money on Spring Break, you may not have much interest in it. Often the phrase evokes images of those who stand to inherit great wealth from millionaire parents. Think your Trumps or your Hiltons.
But generational wealth is not just the domain of the super rich. By simply investing as little as $50 a month in a Roth IRA, you can begin building a financial safety net that can grow to protect your family for generations.
This is what generational wealth is: money passed down through the generations to make life easier for each successive generation.
Of course, it’s never as simple as opening an account for your child when they’re born and letting them have it when they hit 18 years of age. That kind of thing won’t keep a roof over your grandkid’s head. I’m talking about a stable inheritance that can be relied on 50, 60, or 70 years from now. THAT is what I want to focus on.
How to Build Generational Wealth
Generational wealth can be acquired and built from many sources. Savings accounts are a basic way to begin, but if you really want to provide for the future, you’ll want a more sophisticated investing strategy.
Generational wealth is more than just reserves of money stashed about. It’s also about keeping your family finances healthy and knowing how to handle them. After all, there’s no point in leaving money to your kids if it’s all going to be spent paying off overhanging debt.
Let’s look at some ways you can set yourself up to pass on financial security to your family.
1. Pay off your debts
As I mentioned before: passing money down the generations is completely pointless if it is only used to pay off debt. When planning your generational wealth, your first step is to make sure you have your debt under control.
Do what you can to pay off any student debt, credit cards, or outstanding loans you have, and try to make bigger payments towards your mortgage if you can. The fewer lenders you have lurking behind you, the more secure you and your family will be in the years to come. For those struggling to create a debt payoff strategy, consulting with a finance coach can help provide a way out.
2. Pay more into your 401(k)
A 401(k) is an excellent way to put aside money for later years. You can never go wrong with putting as much as you can into your 401(k), as the money will sit nicely and grow for you without you ever having to think about it. Even if you can’t comfortably put more in now, consider increasing your contribution any time you get a raise. Since the money is something you didn’t have before, you will not feel its absence, so put at least half of any increases in your wages into your 401(k) to boost it.
3. Plan for your children’s education
There are several great saving options out there that you can contribute to in order to pay for your children’s education. Just as having no outstanding debt in your life is important to your children’s security, so is setting them up for success with educational opportunities. Consider 529 plans, college funds that grow tax-free and are exempt from taxes when you withdraw them. Savings bonds and Coverdell Education Savings Account also offer tax-free options for funding your child’s higher education.
4. Make investments that can be passed on
Stocks, crypto and real estate investments are all important parts of personal wealth building strategies, but they can also be used beyond yourself. Building a solid portfolio consisting of multiple assets can provide a steady income not only for yourself but for your kids. This is doubly true if you invest in properties that can provide you with a regular passive income which can then be turned into more property later.
5. Invest in a life insurance policy
No one wants to face their own mortality, but a life insurance policy can provide that extra level of protection. Not only can you be sure that all the arrangements around your death are already covered, but most policies will also offer a payout to designated family members.
How to Protect Your Generational Wealth
With so many options for creating abundant generational wealth, one might think they can invest shrewdly then sit back and see their wealth benefiting their posterity without complications.
Sadly, this is not the case.
The biggest problem with generational wealth is not whether or not you have money to pass down but what happens to that money once you do. It has been found that approximately 70% of families will burn through all their inheritance money by the second generation. This number shoots up to 90% for the third generation.
This is why it is important to establish parameters to ensure that your money will last beyond the next generation. The following tips can give you some ideas as to how to do that:
- Talk to your family about your finances and plans – keep them aware and respectful of the money they will acquire.
- Write a will – make sure that everyone knows where your money and investments are and what should be done with them.
- Engage your family – involve your family in your financial planning so they don’t fear the money and have an idea as to how to manage it well.
- Hire executors – when in doubt, hiring professional managers for your money will ensure it always goes where it should with minimal fuss.
Whether you’re born rich or working your way up from nothing, there’s no reason why you can’t secure your family’s future financial wellbeing. With some planning, careful consideration, and conversation, you can build a strong wealth that you can pass on, ensuring that your children and children’s children inherit the gift of financial security.