Building Generational Wealth

This year, my husband and I kept our Christmas tree up until late March by converting it to a red Valentine’s Day tree in February and a green St. Patrick’s Day tree in March.

Back in March, I posted a photo of my tree full of green shamrocks and noted that my grandparents were Irish immigrants who came to America with dreams for a better life and very little money. Despite initial anti-Irish discrimination, over the course of three generations, my family built generational wealth.

Generational wealth is defined as financial assets passed down through successive generations of a family. Example: my grandparents, parents, and me. Transfers are often made through lifetime gifts and inheritances received by younger generations via wills, trusts, and beneficiary designations on life insurance and retirement savings accounts. It can also occur by teaching younger generations “how to fish” to create their own wealth.

 

How, exactly, do families build generational wealth to pass onto their heirs? Consider these 12 strategies:

 

Disciplined Spending- A path to wealth is living below your means and saving the difference. Studies have shown that many millionaires have frugal spending habits even though they could easily afford to spend more.

 

Education- I was first in my family to receive a college degree. My parents’ savings made this possible. Human capital investments via degrees, certifications, and other training generally increase income-earning potential.

 

Investments- Long-term investing, particularly in a diversified portfolio of stocks over multiple decades, will typically build wealth. Three key tips: start early, invest often, and do not “panic sell” during market downturns.

 

Real Estate- Some families build wealth through real estate: a primary residence and/or rental properties. Home equity grows over time through completed mortgage payments and increased home and/or land values.

 

Life Insurance- Life insurance helps protect dependents from wealth depletion when a family breadwinner dies, particularly in early adulthood. It provides cash to repay debts, build survivors’ human capital, and save.

 

Family Businesses- Entrepreneurship can build generational wealth. It did in my family. My grandparents made/sold Irish whiskey during Prohibition and I started Money Talk as a “side hustle,” turned encore career. My brother has been an entrepreneur for almost 50 years.

 

Financial Education- People generally learn the most about money from family members. This includes behaviors (e.g., saving and promptly repaying debt) and skills such as reconciling a checking account balance.

 

Role Modeling- In addition to talking with elders about money, younger generations learn about money through observation (e.g., ATM and credit card use, bill-paying, thrifty shopping habits, and charitable giving).

 

Multiple Income Streams- Three types of income can build generational wealth: active (wages, salaries, and commissions), passive (e.g., rental properties and royalties), and portfolio (e.g., interest/dividends on assets).

 

Antiques, Heirlooms, and Collectibles- Property that stays within a family for multiple generations can sometimes appreciate handsomely in value. Think coins, cards, comic books, art, toys, dolls, and classic cars.

 

Tax Diversification- It is smart for older generations to place assets in a combination of tax-deferred, tax-free, and taxable accounts to mitigate tax impacts from the transfer of wealth to younger generations.

 

Professional  Advisors- As wealth accumulates, people often reach out to financial planners, lawyers, and tax advisors to help them manage it and preserve as much as possible for successive generations.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.