How to Build Generational Wealth and Why It Matters

Want to build wealth? You may already be behind the curve.

When it comes to building wealth, millennials lag behind older generations. Granted, the previous generation has had more time to build wealth, but baby boomers are ten times wealthier than millennials. Millennials hold just 4.6% of all wealth in the United States.

Building wealth isn't necessarily just about yourself. It’s also about the next generation. This article covers what generational wealth is, why it may be important for your finances, and how to build generational wealth.  

What is generational wealth?

CNBC defines generational wealth as "any kind of asset that families pass down to their children or grandchildren, whether in the form of cash, investment funds, stocks and bonds, properties or even entire companies."

You can take that definition one step further to include intangible assets as well. Generational wealth is not just about money. It also includes financial education, habits and values. It's about setting future generations up for financial success. 

Why is it important to build generational wealth? 

Building generational wealth is important because of the flexibility and comfort it provides you and your family. 

For one, improving your net worth can help keep you out of debt. If you have a steady cash flow and put money into savings accounts, you shouldn’t need to use debt to pay for things like unexpected medical bills. Because you're not borrowing money, you don’t need to pay interest. Instead, you can work with your financial advisor to invest the money that otherwise would have been spent on debt and interest. 

Additionally, building wealth puts the next generation in a better position for success. For instance, let's say that you save money in a 529 College Savings Plan for your child's education. If your child pursues a college education, they won't have to take on as much student loan debt. This can then put them in a better position to plan for their financial future, saving money earlier. 

Essentially, if you start building generational wealth today, you reduce the likelihood that you, the second and perhaps even the third generation, have to take on debt. Breaking the cycle of debt can be challenging. If you create generational wealth, you can set your loved ones up for future success. 

How to build generational wealth in 5 ways 

Ready to learn how to build generational wealth? Below are some tips to help get you started. 

Getting out of debt 

Debt is detrimental to building generational wealth. If you have debt, getting out of it should be a top priority. 

Start by creating financial goals. Perhaps aim to pay off your debts and build a rainy day or emergency fund. With a debt repayment plan under control, you can consider investing in the stock market and creating your financial legacy. 

Teaching financial literacy 

A recent poll found that 47% of respondents didn’t talk about money in their household when growing up. Another study found that “76% of college students wish they had more help preparing for their financial futures.” 

Financial literacy shouldn’t be something that you shy away from discussing with family members. Talking about things like income, debt, mortgages and life insurance policies could help them manage their money more responsibly. Consider teaching basic financial planning and don't be afraid of helping your children learn from any mistakes you’ve made. 

Starting a side hustle 

After paying your bills, the money that you have remaining may not be enough to build family wealth. It can help you get to retirement, but you may not leave behind much of a nest egg for your children. If you wish to build generational wealth, you’ll need to increase your income and the amount that you put into your investment accounts. 

One way of doing this is to make money via a side hustle. If your regular job pays the bills, you can save all of the money you earn from your secondary stream of income. If you save an extra $100 per week and put this money into a stock market investment every week for 10 years, you could have more than $71,000 saved, assuming a 6% rate of return. If the return is 8%, you'll have almost $80,000 saved. 

Similarly, you can also look at starting a family-owned business. Statistics show that 30% of family businesses make it to the second generation. You can put your children to work, teaching them lessons in responsibility, management, and accountability. 

Investing in real estate 

Another way to build generational wealth is through the real estate market. If you purchase a second home to be used as a rental property, the rent from your tenants can pay the: 

• Mortgage

• Taxes

• Upkeep

• Insurance 

You may need to pay a property management company to handle tenants and upkeep if you don’t want to do the work yourself. But, over time, you’ll eventually pay off the mortgage. At that point, the rent money from tenants is income in your pocket. You could use this cash surplus as a down payment on another rental property, depending on your financial situation. 

Furthermore, you’ll also have equity in the home itself. You can pass the home along to your beneficiaries so that it’s part of your estate. 

Finding passive income streams 

You can also build wealth by allowing your money to work for you. You can do so by generating passive income streams. These financial assets generate income without you having to do much work. 

One example of a passive income stream is a high-yield savings account. These accounts earn more interest than a standard bank account. The interest typically compounds as well, as the money you earn is added to your total balance. 

Other similar examples include investment accounts and retirement accounts. A financial planner can help you map out a strategy that meets your risk tolerance and long-term goals. 

Take steps to preserve your generational wealth 

If you have assets you would like to pass to your family members, consider speaking to a financial advisor and attorney. Both can help in drawing up an estate plan and will. Your will, a legally binding document, should clearly outline where you want financial assets to go after you pass away. 

Financial advisors can also help you protect your assets. They can instruct you on the best way to capitalize on gains and outline various tax advantages you should consider to preserve your assets further. 

Start building generational wealth today 

Building generational wealth takes time and patience. Unfortunately, there are far fewer millennials with wealth today compared to the previous generation. Working toward generational wealth is important, as it puts your family in a better position for success. Family members won’t have to take on as much debt, allowing them to build their financial accounts. 

If you want to build generational wealth, you're likely going to have to earn beyond your primary income. Consider side hustles and passive income streams to help earn additional money. You could also work to get out of debt and have open, honest conversations about money with your children. 

Lastly, if you’re looking for more financial tips, be sure to join Tally's† email list. Tally shares tips to help keep you financially savvy, putting you in a better position for fiscal success. 

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