A step by step guide to building generational wealth

Generational wealth is not just about building a large stash of money, it's also about how you pass it on. Once you've paid off your debts and established various forms of income, the next step is to start to build generational wealth that can surpass your lifetime.

In this article, we explore what generational wealth is and how to start building it. As with any investment account, the earlier you start the better the end result. While building generational wealth is a great place to be, we encourage you to get your current financial situation in order and build your financial education before you start exploring this concept.

What is generational wealth?

Generational wealth, also called family wealth, is the transfer of assets from one generation to the next within a family. This may include multiple streams of income from financial investments like stocks and bonds, as well as valuable assets, real estate, and family businesses. These assets continue to generate financial value as opposed to just being a lump sum of cash.

It's important to note that when an individual is born into wealth, that wealth was created by a generation before them, whether that be decades or centuries before. This financial success can help eliminate financial struggles for generations to come, or if not handled correctly, could be eradicated by just one generation.

The key factor when it comes to passing on generational wealth

Creating wealth is not the hardest part, the hardest part is educating the next generations on how to manage this wealth. According to the Williams Group wealth consultancy, 70% of wealthy families lose their wealth by the second generation while a whopping 90% lose it by the third. 

Generational wealth is not about creating enough money to allow your children’s children to sit around all day, it’s about passing wealth down for generations to come to make the world a better place and empower the family tree. It's not about materialism or consumerism, it should be about financial education and philanthropy. Consider how important generational wealth is to you before embarking on building wealth for future generations.

The key steps to building generational wealth

There are two key components that need to come together in order to build generational wealth: firstly, building this wealth, and secondly, passing on this wealth. In this first section, we will cover the former. 

Creating generational wealth isn't going to happen overnight. It's a journey that necessitates time, purposeful planning, and commitment. There are no shortcuts when it comes to creating generational wealth, it's a marathon, not a sprint, no matter which financial assets or stock market you might choose to invest in.

It involves not only taking care of your personal finances through proper planning but also educating the next generation about financial literacy and personal finance. This legacy wealth could go on to fund a child's education or college education, or be used to build an impressive real estate portfolio or invest in family businesses.

It's not about inheriting a trust fund at a young age so that one can simply enjoy life, it's about learning how to be financially fit, understanding how to create wealth, and hopefully building a secure financial future for the next generation.

1. Build a solid financial foundation

First and foremost, you will need to build a solid financial foundation before you start to build generational wealth which means you need to get out of debt and establish an emergency fund (three to six months' worth of expenses).

Do not progress to step two until this step has been completed. In order to build wealth one needs a firm foundation, so set yourself up to weather any storms that might come your way before you embark on the journey to create generational wealth.

2. Start allocating 15% of your income to a retirement fund

Now that you are out of debt and have established an emergency fund, allocate at least 15% to your retirement fund. In this step, consistency is key. Determine what kind of investment account (whether using new-age financial assets or the stock market) you wish to use, consult a financial advisor if necessary, and start allocating 15% of your gross income to this tax-advantaged retirement account.

If you consistently do this for two to three decades you will have built enough wealth to live comfortably after retirement and pass some on. 

3. Build slowly and consistently

As we mentioned earlier, building generational wealth is a marathon, not a sprint. This is a long-term commitment that requires no rush and no pressure. Commit to consistently building your wealth for the rest of your life. 

4. Communicate with your family and educate them about money

Discuss your financial goals with your children and use the opportunity to share your knowledge about wealth. If your wealth creation involves investing in real estate, building a family business, or any avenue that requires active participation, ensure that you keep your descendants in the loop and provide them with the wisdom, knowledge, and skills to maintain and ideally continue to build generational wealth. 

By discussing money frequently, being open about mistakes you have made with finances, and demonstrating smart financial decisions in your own life, you can teach your children about the importance of managing their money wisely.

5. Officiate things by making them legal

When it comes to building generational wealth, a financial advisor is optional but including a lawyer is essential. This step ensures that the generational wealth you spent your lifetime building is distributed accordingly.

Ensure that you go through the necessary legal proceedings to make sure you're not only on the right side of the law but also that the generational wealth is passed on as per your intentions. 

How to pass on generational wealth

Now that you've put the processes in place to start to build generational wealth, the next step is to put in place the necessary steps to ensure a smooth handoff. Here are three key steps to ensure that your generational wealth remains a blessing and not a chaotic curse for those left behind. 

1. Create a will

No matter what earthly possessions or family wealth one has, a will is essential for everyone 18 years and older. This legal document outlines how your assets are distributed after you die. While consulting legal counsel is advised, there are plenty of templates and methods online for writing and establishing your will. Regardless of whether you create generational wealth or not, this step is important.

2. Establish an estate plan

Estate planning entails organizing your possessions and determining how they should be handled after you have departed. A will is a very important component, but if your net worth exceeds $1 million, consulting a professional could be wise to guarantee that all the details of your estate plan are in order. 

Expert estate planners can help with more complex situations, like a family business or intricate family wealth, as well as demonstrate tactics for diminishing federal taxes so you don't pay any more than necessary.

3. Put together a legacy drawer outlining your family wealth

Crafting your legacy drawer should be on everyone's to-do list, it is a place where you store important documentation and items that will become invaluable for your family (and family wealth) should anything happen. While there are many documents to consider keeping in this secure location, here are a few must-haves:

• Your will and estate plan
• Financial account information
• A copy of your monthly budget
• Life insurance policy
• Tax returns
• Account passwords
• Personal letters to loved ones
• Funeral instructions

Create lasting generational wealth

If you want to create lasting generational wealth and blessings for generations to come, it's time to put your head down and get started. Consider this a long-term journey that with the right investments and education will empower generations to come.

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