Generational Wealth: What it is, Why it Matters and How to Build it!

Did you know that one of the top indicators of a child’s social class is the social class of their parents? Social mobility is at an all-time low in the US. Nearly half of the kids born into the lowest class will stay there for their entire lives, and only 4% will ever reach the highest class. These statistics really highlight exactly how important generational wealth is and how it impacts our lives.

What is Generational Wealth?

When you think of generational wealth, you probably think of pretentious sounding family names with billions of dollars, second homes in the Hampton’s, and children who wear little suits and go to private boarding school. The older generations pass their immense fortunes onto younger generations, and the elite wealthy families continue to grow and thrive. This type of wealth is unattainable for most people, but that’s not exactly what we mean by generational wealth.

Generational wealth is any form of inheritance or financial assistance from parents or other family members. It’s basically wealth transfer from one generation to the next, whether that be in the form of billions of dollars, a college education, a home, a car, or even a cell phone. Access to some form of generational wealth is a huge advantage for young adults just starting out in the world.

How is Generational Wealth Created?

Generational wealth is created in exactly the same way that regular wealth is created. Smart investing, asset building and frugal living are some great examples. Most people who build generational wealth do so with housing. Mom and dad by a home, and forty years later, the home is completely paid off and has appreciated nicely in value. They gift the home to their two children, who now have an asset they can sell.

Time is a huge component of building generational wealth. We all know that time in the market beats everything out, and when you’re considering gifting wealth to the next generation, you have even more time for assets to appreciate.

Building Wealth

To build generational wealth, you need to build wealth in general. Novel concept, I know. But that means it’s not as out of reach as you may have thought.  Here are 11 things you can start doing right now to help you build wealth for your own financial goals and for the financial security of future generations.

Get Out of Debt

Debt is a huge wealth killer. According to the Fool, over 16 million families in the US have a negative net worth. That means they owe more in total than they have. These families can’t pass anything on to their offspring other than debt.

Digging out is the first big step towards building generational wealth. Many people use the snowball method, which means that they put all their extra money towards paying off the debt with the lowest balance first. That psychological win of paying something off really motivates them to keep it up. Check out the baby steps for more information on why this might help you. 

Getting out of debt can be tough. If you have a ton of high-interest-rate loans that you are struggling to pay off, it might be best to consolidate them into one easy payment. Try companies like Upstart that specialize in personal loans for debt consolidation.

 

Establish an Emergency Fund

Financial emergencies can hit at any time. And if we aren’t prepared for them, we may end up relying on credit to resolve them. And sometimes, it can feel never-ending. Another emergency hits before you’ve even dug out from the last one.

An emergency fund can help. Having a cash reserve that’s specifically there to help you solve emergencies can offer a ton of peace of mind and prevent you from taking on more debt. Although some financial experts recommend saving $1000 for emergencies, I think you need more. I’ve hardly met an emergency that’s less than $500, and most of them are $1000 and beyond.

I actually have two separate emergency funds. One is specific to these types of emergencies (car bills, appliance dies, etc.), and the other is a long-term fund in case of job loss. This second emergency fund needs to have 3-6 months’ worth of living expenses (but I’d recommend 6 months to be safe).

Budget

How are you going to find money to put in your emergency fund? Well, you should start by making a budget if you don’t already have one. When you start being more intentional with your money by keeping track of it and telling it where to go (other than the other way around), you’ll find that you do actually have something to put in these accounts.

But don’t expect immediate results. Building a budget won’t automatically put thousands of dollars in your emergency account. It will accumulate slowly, and that’s okay. Building generational wealth is a long-haul game.

Automate your Savings

An easy way to start saving money is to automate your savings. I have money from every paycheck directly deposited into a variety of savings and investment accounts. This money is never seen and thus never accidentally included in my weekly spending money.

Start automating small amounts from your paycheck, and increase it every time you get a pay raise. You won’t miss money that you never had, and your savings will continue to grow.

Cut Spending

When you do your budget for the first time, you are going to have to make some difficult choices. In order to have extra money for the future and for wealth building, you’re going to have to find ways to cut back.

I’m never one to tell you not to enjoy your life. So, when it comes to cutting spending, it’s about cutting out things that don’t bring you real happiness. If going out to lunch every day is your one half-hour of sanity during your hectic work life – keep it. Don’t make yourself even more miserable by brown-bagging. But if you are just running to the local fast food joint, grabbing trash food to go, and bringing it back to your desk – is that ten dollars you just spent really improving your life? Couldn’t that be better spent saving and investing?

Cutting your spending is all about finding ways to save money that won’t hurt that bad. A great option is the trim app. It finds ways for you to save money on utilities, subscriptions, and other things. It doesn’t cost you anything to sign up – you only pay a percentage of the savings. It’s an amazing deal!

Practice Frugality

Being frugal isn’t exactly the same as cutting your spending. It’s all about finding great deals on things that you were going to buy anyway.  

Let’s take grocery shopping, for example. We need to eat to survive, so there’s only so much you can cut. Sure, you can practice extreme frugality and try to eat on $20 for the month, but I don’t really advise that. Instead, look for deals. Use a cashback app like Ibotta to save on things you were going to buy anyway. Clip coupons, or use an app like Honey.  Buy in bulk. There are tons of ways to save at the grocery store without impacting your quality of life.

Travel is another example. Experiences are the spice of life, and I always support spending money on travel. But, you don’t have to pay full price for airfare or hotels. Join a service like Scott’s Cheap Flights that gives you cheap flight alerts directly to your inbox. Use a budget travel site like Travelocity to compare hotel deals before booking.

Frugal doesn’t have to mean don’t spend money – just be smart about the way you spend it.

Invest for the Future

Budgeting and saving money are only half the battle. The other, more important half is investing that money. Although keeping money in a savings account (or under the mattress) is safe, it won’t do you any good. With interest rates at historical lows, inflation will eat away at any of your savings.

Investing is the best way to bridge that gap and build personal wealth. Your investment plan should include diversified assets, such as Vanguard’s total market fund. This index fund invests in the stock market as a whole, so it gives you instant diversification. It’s also not actively managed, which helps keep the fees incredibly low. I’m not affiliated with Vanguard in any way, and of course, you should do your research before making any commitment – but Vanguard is my favorite. Also, remember that investments are not FDIC-insured, so you do invest at your own risk. But with no risk, there is no reward, right?

You also need to ensure that you are investing for a secure retirement. One of the major things hurting Generation X is caring for elderly parents who can’t afford to care for themselves. Called the sandwich generation, these folks are unable to build wealth of their own because all of their assets are going to either their parents or their children.

Invest in Yourself

Investing isn’t limited to hedge funds and IRAs. Investing also includes investing in yourself. Take classes for personal development, like a cooking class or an antique class. Find groups to join in your local area of groups that share common interests. Get a gym membership and invest in your health. Focus on taking care of yourself. These things will lead you to a longer, healthier life and minimize the amount of time that you will need full-time care.

Increase your Income

Sometimes budgeting and saving money just aren’t enough. Sometimes there isn’t anything left to cut, and there are still bills to pay. And sometimes, you just want to be able to save and invest more.

In all of these situations, increasing your income is the way to go. You can do this by either increasing your skills at work and winning that promotion or by starting a side hustle.

There are a plethora of ways to increase your skills at work. Udemy and Linkedin both offer a wide array of professional-level courses in a variety of subjects. Code Academy offers classes on web development and other hard computer skills. These are great places to start when you’re looking to improve your skills.

If you want to start a side hustle instead, check out Launch your Side Hustle. This course is perfect for people who are just getting started on their side hustle journey – and for folks who dabbled in a side hustle but now want to take it seriously. Of course, you don’t necessarily need a class to get started. Just decide what you want and start working on it!

Recognize Assets vs. Liabilities

Recognizing the difference between assets and liabilities is not always easy. Unfortunately, financial education in the US is lacking, and we sometimes think things will be worth money that never are. I’m looking at you, beanie babies!

Identifying financial assets and using them to create individual wealth is a key component to building generational wealth. Some examples of assets include stocks, mutual funds, gold, precious metal, and real estate. Some examples of liabilities include cars, clothing, most “trendy” collectibles, and most of the stuff you buy at the store. Spend more money on assets than on liabilities.

Estate-Planning

The last component of building generational wealth is one that we don’t really like to talk about. Planning for our eventual departure from this world is uncomfortable, but it’s important to ensure that our family wealth stays in the family and goes to our heirs in the way we want it to.

Talk to a financial advisor about your estate plan. Ultra-high net worth individuals may want to set up trusts for any of their beneficiaries to ensure that all the money is being allocated correctly. Even those with few assets will benefit from ensuring that they have the basics covered. That includes reviewing your life insurance policy, creating and notarizing a will, and discussing any tax implications with an accountant.

It’s also important to ensure that your end-of-life care is taken care of so that any wealth that you created isn’t immediately siphoned away by a long-term care facility. Make sure you get disability and long-term care insurance while you are able so that your children won’t have to worry about how to pay for your care during the final stages of your life.

Using Your Wealth to Give Your Kids a Head Start

Generational wealth isn’t only about inheritance. There are a lot of smaller ways that parents can help their children achieve success in life. Obviously, a ton of money is a great start. But, many people are able to be successful because of their parents, and it’s not just in the form of cash payments. Here are some things that parents can do to promote generational wealth on a smaller scale.

Pay for kids phone plans

A small thing that most parents can do to give their children a small head start is paying their phone bills. My phone costs about $150 a month, and while that’s affordable for me, it might not be affordable for a younger millennial just starting out. Life is expensive, and taking on this one bill for a child can really help.

And before anyone says they don’t need a phone – I think that’s silly. In this day and age, we need a phone and internet connection almost as much as we need electricity. Pretty much everything in our lives is online now, from job applications to bill pay. A cell phone is becoming more of a necessity every day.

Keep Children on Health Insurance

Under the current health care law, children can remain on their parent’s health care plans until they are 26 years old. This is great news for kids because finding a job that offers health care benefits is getting harder and harder. Being able to stay on their parent’s plan will prevent them from having to pay for healthcare on the open market, saving them hundreds of dollars per month.

Buy First Car

The fact is that having reliable transportation to get you to and from work is a necessity in most parts of the United States. Not having one limits career opportunities to places within walking distance or forces people to spend hours of their time commuting via public transportation.

Paying for a first car and insurance is a huge load off of a teenager’s or young adults’ plate and can really help them improve their employment prospects.

Pay for College

One of the best ways you can help your kids have a secure financial life is by contributing to their college education.  Student loan debt is one of the biggest burdens that millennials face, and with rising tuition costs, it doesn’t seem like it will get any better.

But as a parent, you have time on your side. You have nearly 19 years for any investments toward college to grow. If you start a 529 college savings fund as soon as you know you’re going to have a kid, you can set that kid up for future success. A great option for that is College Backer. You can start saving before you even have a child, and you can create a gifting  page so that your families and friends can contribute as well. My grandparents would have deposited money in that bad boy every time I had a birthday had this existed when I was growing up – it’s a truly innovative way to help you pay for your child’s education. Check them out!

Free Room and Board

Do you know who can afford to complete unpaid internships? College grads who don’t have to worry about paying for their own living expenses. Top-tier companies still offer a plethora of internship opportunities, but only those students whose parents can afford to board them can afford to accept those opportunities.

Allowing your child to stay with you for free during college and for their first few years offers them amazing savings and career opportunities that will be out of reach to their peers. The long-term financial benefits of these opportunities cannot be overstated.

Help with Down Payment on a Home

The most affluent parents can help their kids with one of life’s biggest expenses – homeownership. Can you imagine how much easier purchasing a house would be if someone else gifted you the down payment? Bye-bye PMI, hello reasonable rates!

Some parents are even able to buy their kids starter homes or condos. Having your own place that is already paid for is a huge benefit for anyone starting out in life. It’s a way to transfer wealth to your kids that will be an asset to them for years to come.

Teaching Children Financial Literacy

A final way to build generational wealth is about knowledge. Even if you can’t afford to help your children with anything else on this list, teaching them financial literacy from an early age will give them a huge leg up. This will give them the ability to start building their own wealth early on.

One great way to help your kids learn financial literacy is by giving them a debit card for kids. These cards are generally attached to accounts in both of your names, and your kids can use them to learn how to be responsible with their money. As the adult on the account, you can monitor their purchases and help them make good financial decisions. 

The Privilege of Generational Wealth

As you probably noticed from the list – some of these methods of transferring wealth to the next generation are pipe dreams for a lot of people. I’m sure parents the world over would love to be able to gift their children starter homes, but that’s not realistic for most of us.

And I think it’s important to acknowledge that there are systematic policies in place that actively prevent certain communities from building this type of wealth and transferring it to their kids. These policies have worked to prevent people from building generational wealth, all but ensuring that the best opportunities are reserved for a select few.

What Policies Prevent People from Building Generational Wealth?

Redlining

Although technically illegal now, redlining was a common practice as little as thirty years ago. It prevented black families who were well qualified from purchasing homes in desirable neighborhoods. As we all know, a primary home is the middle class’s greatest asset, and preventing millions of people from even accessing it due to the color of their skin affected a family’s ability to create wealth for generations to come. The impacts are still being felt to this day.

Policing Practices

Black men are more likely to be stopped, arrested, charged, and convicted than white men for the same crimes. And guess what? You can’t build wealth while you are in prison. You also can’t help support your family. Racist law enforcement practices are a huge contributor to the lack of generational wealth for families of color.

Wage Gaps

The gender wage gap ensures that women do not get paid as much as men – and women of color make even less on average. These differences in wages make it difficult for women to even pay the bills, much less put money aside for wealth creation.

And More

There are many laws, social norms, and practices that actively prevent people from being able to build wealth and hand it off to the next generation. These range from racist and sexist hiring practices to school choice to inequality in lending.

Building Wealth isn’t as Easy as it Seems

So please, before you say how easy wealth creation is, remember that not everyone has had access to the same opportunities. It’s important for those of us who do have the opportunity to speak out against these unjust systems.

For those who have the opportunity, building generational wealth is one of the greatest gifts you can give your children. It will open opportunities to them that you may never even have dreamed of. So starting building it, but be sure to help others if you have the opportunity.