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Generational wealth is usually referred to as financial wealth that is passed down from one generation to another even though it can take other forms like traditions or heirlooms.
I'm currently in a position where I am trying to build wealth so that I can pass down wealth from generation to generation. I'll get into ways to build generational wealth later in the article but first I wanted to get into defining generational wealth…
What is Generational Wealth?
Generational wealth is acquired by building generational assets which can include real estate, stocks, businesses, and many other types of assets.
In the aspect of financial planning, generational wealth is a term that is geared toward passing down stable, significant financial resources for future generations.
Okay, now that we covered generation wealth, how can one grow it?
How Can I Build Generational Wealth?
To build generational wealth, generally, you need to have an income, whether as a job, career or a business.
Once you have set your earning capacity, then you can adjust your thinking to shift from an income-based mentality to an asset-based one which will help you to create wealth. I published another article recently about growing your wealth here that you may found beneficial.
Basically, you need to have the right mindset and the discipline to stick to your financial goals.
This is not a one-day activity and requires consistent and diligent action, and above all the belief in what you are trying to achieve. It goes without saying that you must spend less than you earn, so as to have some excess funds for investments.
However, because you want the wealth you are accumulating to last beyond one generation, you also need to empower your children with financial literacy especially budgeting and good money habits and invest in their future by setting up trusts and funds in their names.
Ways You Can Build Generational Wealth
There are many ways in which you can accumulate wealth and it will all depend on your goals and plan of action.
There are four tried and tested steps that you can take to build generational wealth as outlined below
You need a financial advisor. To navigate the complex waters of investing and financial intelligence, you should have a guide who has sufficient knowledge and experience to help you build your investment portfolio affordably. However, before you commit to a financial advisor, you need to have worked out your budget, the time period you have to invest, and clear goals and strategy. Educate yourself by doing online research, attending workshops or finding a mentor so that you have a clear strategy.
Invest in assets. Assets and this refers to stocks, bonds, real estate, commodities, and currency, tend to appreciate over time, though some assets like real estate are more lucrative than others as they bring greater returns than other stock. There are subclasses even within these assets that allow you to build equity that you can then pass onto your children.
Build a tax fortress. You need to protect your wealth from being depleted by taxes or creditors. Look for options that are tax friendly, for example, some retirement accounts are not taxed up to a certain maximum amount. You can open up a Simplified Employee Pension Individual Retirement Account, SEP- IRA, which allows tax-deductible contributions for entrepreneurs and freelancers. The money on this account is not taxable until withdrawal.
Diversify your portfolio. To build generational wealth, not only do you need to have multiple streams of income, but you also need to diversify your investment options so that if one is underperforming, another can cushion the loss. This requires you to constantly review your portfolio and then adjust your strategy accordingly. This also needs you to take on the element of risk as this sometimes means more returns.
Ways I'm Building Wealth
I'm a Millennial, so my way to wealth is through passive income ideas or residual income. To get you started, I want to get into what exactly residual income is.
So what exactly is residual income? Residual income refers to the amount of income you generate even after you have provided your product or services.
It is a stream of income you get after your work has been delivered. It's basically interchangeable with the term passive income.
For example, writers and artists release a book or a song on a particular day and a particular year but get paid for that piece of work for many years after. The royalties they get paid are their residual incomes.
Residual incomes are a great way to make money “passively”. This way you can have a source of income to rely on even when other sources of income are spent on bills.
To get you started, here are some of my favorite ways to help you earn generational wealth, the smart way.
1. Investing in the stock market
Investing in the stock market is a sure fire way to build wealth and grow your money over time in order to build generational wealth.
When you put your money in the stock market, directly or through safer options like mutual funds and index funds, while the value of your portfolio will fluctuate, your average return will be higher than what other safer options can provide.
Saving money from your paycheck each week is not going to make you wealthy. This is due to inflation which affects us all and erodes the value of your money. In order to beat inflation, you can invest your money. If you're a beginner then using robo advisor to help you invest your money can be beneficial.
Related: 13 Realistic Ways To Invest $100K Right Now
2. Invest in real estate
Real estate vs. stocks, what’s the difference? Ask a hundred financial advisors what the best two types of investments are, and you’ll hear the same answers over and over again: real estate and stocks, stocks and real estate.
But ask those same advisors which of the two is better, and it’s unlikely they’ll reach any kind of consensus. That’s because while both real estate and stocks are high quality investments that’ll almost certainly make you prosper, they each come with unique pros and cons, and are heavily dependent on circumstances.
Investing in real estate directly or by using real estate apps one proven way to build long-term wealth. The idea of investing in real estate may sound scary, even if you haven't even purchased your first home, but it's now possible for just about anyone.
Read more: Real Estate Investing for Beginners Guide
3. Build your own business
Starting your own business is another way to build wealth since you are not bound to a capped paycheck from a salaried job. Even the highest salary jobs may not allow you to pass generational wealth.
Building a business that you can pass on to the second generation is possible. For this to be successful, try and get your children to show an interest in the business at a young age. After all, they will have to know how the business operates for it continue down the line.
In case they don't show interest in the business that you've built, you could always liquidate your company and build generational wealth for them with the funds from the proceeds of the sale.
Read more: 80 Online Business Ideas for Beginners
4. Take advantage of life insurance
Millennials and life insurance, two things that you don’t usually hear about in the same sentence. According to a recent survey, only 10% of Millennials have enough life insurance to cover needs if they die, putting their family at risk.
The fact is, everyone needs life insurance not just Millennials. This is a simple enough concept that can help you pass your wealth down and protect your family in case of your untimely death.
As a Millennial myself, I always thought about life insurance as a confusing and costly process. But that is no longer the case with modern technology companies like Ladder.
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5. Invest in your child’s education
Another way to ensure that your children will be able to support themselves is by making sure they get education.
We all know college is a huge expense, but the cost is also going up every year. College tuition inflation is increasing at 6 percent per year. That compares to the average consumer inflation of 2 percent and wage inflation of 3 percent.
College costs have skyrocketed faster than any other expense (including healthcare!) over the past 30 years. Ouch! Luckily there is a savings solution specifically designed to prepare for these costs – 529 College Savings Plans.
The benefits to families of investing in a 529 plan are tremendous, but 70 percent of Americans don’t know about these tax-advantaged plans, and only 14 percent currently use them.
Read more: Free Colleges — 11 Colleges That Don’t Charge Tuition
6. Teach your children about personal finance
It is estimated that 70% of families lose their wealth in the second generation. And 90% lose it in the third!
There are a variety of reasons why this happens:
- Generations are taught not to talk about money
- The prior generations worry that the next generation will become lazy and entitled
So to combat this, it only makes sense to teach your children about why personal finance is important. It's no secret that simple budgeting skills are not taught in school and if they have no knowledge on the subject it's a possibility to overspend and lose their wealth.
In order for you to be in a position to teach, you must gain knowledge on the subject itself. Then you can make it a priority to pass down this knowledge to your kids. Teach them how to save money, budgeting skills, the value of a dollar, and how to invest.
Ready to Build Generational Wealth?
It’s a common misconception that when people hear about investing they believe that they need “wealth” in order to invest when actually the opposite is true. You don’t need millions of dollars or even tens of thousands of dollars in order to begin investing for your future.
The best time to start investing is when you are just starting out with modest savings. The reason for this is the magic of compound interest. Compound interest is when you earn money on a deposit (a percentage that varies depending on the type of account), and then you earn more interest on that interest from the initial deposit, and then this process keeps continuing for 10, 20 or 30 years until your money has greatly increased in value!
Example of Compound Interest: You invest $1000 as an initial deposit into an account that pays a 6% interest rate (slightly lower than the average of the stock market), and then you deposit $300/month (About 10% of $50k/year salary). After 10 years you would have $50k, then $141k after 20 years and $307k after 30 years. And this is even without increasing your savings relative to your rising salary!
The best part is that you can start doing this right now with investment options available to the average person.
“SO YOU’RE TELLING ME THAT THERE IS AN ACCOUNT OUT THERE THAT WILL ALLOW ME TO GROW MY MONEY THAT MUCH?”
And my answer to this question is YES.
And the best part is that you don’t have to buy expensive blue-chip stocks (Apple, Amazon, Google, etc.), a life insurance policy or an expensive rental property to generate this extra income.
All you have to do is deposit your extra savings each month and be patient as time is your best friend.
When you only small deposits from your savings each month, over a 10, 20 or 30 year period you can grow your savings into multiple six figures.
Pro-Tip: Do Research on Dividend-Paying Stocks
It’s been said that the average millionaire has seven streams of income/ Dividend stocks are usually always in the mix.
Dividend stocks are similar to regular shares of stock, but they pay you a small portion of the companies earnings monthly or quarterly.
So it’s wise to build a portfolio of dividend-paying stocks that will give you passive income, or give you passive income while you’re sleeping! Just don't forget to use a dividend tracker to monitor your dividends.
