We all dream of leaving behind a financial legacy to see our children through successful lives – to ensure their dreams and the dreams of their children can be made possible, through the hard work we endure in our day-to-day.
But the reality can be starkly disappointing. The majority of “generational wealth” disappears by the second generation (up to 70 percent), and fewer than one in ten third-generation heirs manage to sustain the capital their grandparents built past their own lifetime.
However, while generational wealth might feel like a myth, it is possible to sustain a fortune throughout multiple generations and ensure that your heirs continue to build a financial legacy for their loved ones in a way that protects them from misfortune and allows them to avoid the significant disadvantages of facing lifelong debt, or living paycheck-to-paycheck with no time for the future.
What is Generational Wealth?
Generational wealth is any appreciable amount of money left behind for the next generation, to be carried over and built upon over multiple lifetimes for the good of the family.
Generational wealth is not necessarily something to hoard – it does come into use, whether to pay off student debt or finance the creation of a new business. But the idea is to grow it over time, using the money to build something, reinvest in the family business, create new enterprises, and continue to build upon the foundation of the past for a better future.
Yet no matter how idyllic it sounds, the reality is that very few families manage to continue the successes of their parents, let alone multiple generations of ancestors.
Building generational wealth is not something you can do with a simple trick. If you’re creating your family’s fortune from the ground up, then it can take a lifetime to build the kind of estate that your successive generations might turn into a true fortune.
One mistake many people make when attempting to forge a better life for their family is thinking they alone can make a difference in the lives of their children. Even if you begin laying the foundations for generational wealth, it will be up to your kids and their kids to turn those foundations into something more.
That means building up their knowledge of wealth management, ensuring they remember what it means to be frugal while learning how to build a fortune from an inheritance, and perhaps most importantly, imprinting on them the importance of ultimately teaching their children (and your grandchildren) how to continue making the most of the advantages and opportunities they are given.
That last step is the most difficult of all, and a reason why 90 percent of families fail to carry generational wealth past the third generation – those born in wealth do not know what it means to live without it; they do not know how to cherish their privilege, let alone carry the knowledge and responsibility needed to preserve and grow it.
Generational Wealth: One Brick at A Time
There are no shortcuts to wealth, aside from wealth itself. It’s easier to earn more if you start with a sufficiently large income or source of capital. But if you are not an heir, and do not have the income needed to begin putting away a significant amount of savings, you need ways to increase that income.
To build generational wealth, it is not enough to earn just barely beyond your means. You must earn more than you would even be able to spend in retirement to ensure that you have something to leave behind when you die. That means:
- Cutting down on costs. Living a more frugal life is one way to improve your chances of building generational wealth. This is doubly important in the middle of a financial crisis. You can cut other costs, such as tax liabilities, by working with tax professionals to improve your returns and utilize tax-advantaged accounts.
- Seeking additional income. Second jobs and side-gigs are an option, but they can wear you down significantly. If applicable, consider passive income such as smaller investment properties or rentals. As a digital example, consider a blog or an e-book, especially if you have multiple years of experience in a field, and see an opportunity to share your knowledge.
- Investing your income wisely (and conservatively). Avoid bubbles and too-good-to-be-true financial scams. Stick to index funds with low costs, or a selection of stocks. You don’t need to be a Warren Buffett or a day trader to make a pretty penny on investments over multiple years. But you do need the patience to wait multiple years, and the means to put that kind of money away without the urge to withdraw it needlessly.
- Investing in your children’s education and knowledge. The key to generational wealth is the generational aspect. Your children and their children will need to grow old and pass away with the family fortune not only intact, but ideally expanded. It takes more than a financial advantage to carry that advantage forward for multiple generations. Aside from a formal education, make sure to teach your kids a good sense of money management and financial responsibility.
The Purpose of an Estate Plan
In an ideal world, you leave your kids and their kids, and their kids’ kids with enough money to turn the initial fortune into something greater.
However, we don’t always live in an ideal world. That doesn’t mean your dream of generational wealth must die.
An estate plan allows you to determine how and when your money is put to use after death. A simple will lets you appoint an heir to each asset in your estate, but something more complex, like a living trust, allows you to assign professional trustees to the management of a trust fund, for the purposes of growing it while your heirs build their own lives, before entrusting them with their inheritance.
Should you die early, you can withhold an inheritance from your children until they become old enough to care for it – not just 18, but perhaps 25, or even older. Alternatively, you can set conditions to fulfill before an heir is entitled to their share of the family fortune, such as finishing a higher education or breaking even with their first business.
Beneficiary designations are another useful way to connect an heir to their specific inheritance while bypassing the quagmire of probate, and the costs of a trust.
The right estate plan is key to building generational wealth. Simply leaving your money in the hands of your heirs with no greater plan or concept in mind leaves them directionless and lost without the wisdom that helped you put your plan into motion to begin with.
Ultimately, good communication is key – between yourself and your children, yourself and your grandchildren, and yourself and your estate planning attorney.