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

Giving your kids a leg up in life is more crucial than ever. You can do that by building generational wealth, which you can pass on to your children to enhance their lives and the lives of future generations. 

What is Generational Wealth?

Many assume generational wealth is limited to wealthy families with long heritages. The older generations pass their immense fortunes onto younger generations, and the elite wealthy families continue to grow and thrive. 

Generational wealth’s stigma as unattainable fortune prevents people from considering the impact of their finances on their kids and grandkids. It doesn’t have to be family wealth and influence dating back centuries. 

Generational wealth is any form of inheritance or financial assistance from parents or other family elders, like grandparents, aunts, and uncles. 

It’s a wealth transfer from generation to generation, which can take 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 starting in the world. 

Why Generational Wealth Matters

 Social mobility is at an all-time low in the US. One of the top indicators of a child’s social class is their parents’ social class. 

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 highlight generational wealth’s essential role in society and how it impacts young people’s lives. 

How is Generational Wealth Created?

Generational wealth is created like regular wealth: Smart investing, asset building, frugal living, and all the other essential components for financial security.

Members of the middle class often build their generational wealth through housing. Mom and Dad buy a home, and forty years later, the house 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 Last Generations

Building personal wealth is a fundamental component of building generational wealth, which most people can obtain in their lifetimes. 

The building blocks of generational wealth showcase that it’s not out of reach for most middle-class families.

These 11 actions will help you build wealth for your own financial goals and future generations’ financial security. 

1. Get Out of Debt

Debt destroys wealth. According to the Fool, over 16 million families in the US have a negative net worth, meaning 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 step towards building generational wealth, but it’s not easy. 

Gurus abound with various methods designed to help people tackle their debt. The snowball method focuses on the lowest balances, giving people the psychological win of paying something off quickly. In contrast, the avalanche method focuses on the highest interest rate debt first, saving more money in the long run. 

Some people have so many debt accounts with so many different payments each month that paying everything off seems impossible. A debt consolidation rate with a lower interest rate offers a single monthly payment, making it easier to keep up. Companies like Upstart specialize in personal loans for debt consolidation.

2. Establish an Emergency Fund

Financial emergencies can hit at any time. Preparing ahead of time is essential for handling one without relying on credit. 

Far too many people get caught in the cycle of emergency-credit-pay it-off-emergency. It’s impossible to build wealth when you’re constantly digging out from the last emergency and stressed out about the next one. 

An emergency fund can help break the cycle. Keeping a cash reserve earmarked for emergencies offers peace of mind and gives you a buffer so you don’t have to take on more debt. 

How Much in My Emergency Fund?

Although some financial experts recommend saving $1000 for emergencies, the reality is that with the rising cost of living, most emergencies will cost more than that. A car repair, roof leak, or trip to the emergency room can all cost more than $1000. 

Emergency funds should also provide a buffer for massive life-altering events like a layoff, pregnancy, or illness. You should have six months of living expenses saved in your emergency fund to prepare you for any of life’s unexpected twists. 

How To Fund an Emergency Savings Account

It’s far easier to say you should have six months of living expenses than to build it. The average American salary is around $60,000 per year, and our 2022 study of the cost of living showed that the average cost of living hovers around $56,000 per year (not including taxes!). 

The numbers show that life is too expensive for most people to afford necessities, much less to save money. 

However, there are several things you can do to lower your personal cost of living and fund your emergency account. As it turns out, they’re all also components of building generational wealth. 

3. Budgeting

Making a budget is a crucial step towards financial wellness. Budgeting helps you become more intentional with your money. You’re taking control of it by telling it where to go rather than letting it go where it wants. 

Budgeting can help you uncover little things you don’t need that you’re spending needlessly on. It can help you identify places to cut and ways to save more money, and you can funnel those savings directly into your emergency account. 

Don’t expect immediate results. It will accumulate slowly, and that’s okay. Building generational wealth is a long-haul game.

4. Automate your Savings

Automating your savings is one of the easiest ways to save. Send money from every paycheck directly to your savings and investment accounts. If you never see it in your checking account, you’ll never accidentally include it in your 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 you never had, and your savings will continue growing. 

5. Cut Spending

Your first budget will open your eyes and force you to make difficult choices. If you’re serious about growing wealth for future generations, you must find ways to cut back now. 

I’m never one to tell you not to enjoy your life. 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 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 severely impact your quality of life. 

6. Practice Frugality

Choosing frugality can help you cut spending in ways that don’t impact your life. Frugality enables you to find great deals on things you would buy anyway and makes you pause before splurging on an impulse buy. 

Consider grocery shopping as an example. We need to eat to survive, so you can cut only so much.

You could practice extreme frugality and force yourself to eat cheap rice and beans for every meal, but where is the joy in that?

Instead, look for deals. Use a cashback app like Ibotta to save on things you would buy anyway. Clip coupons or use an app like Honey.  Buy in bulk. Options for saving money at the grocery store without impacting your quality of life abound. 

Frugal doesn’t have to mean not spending money. It means you should be more intentional about how and why you spend it.

7. Invest for the Future

Budgeting and saving money are only half the battle. Determining what to do with that extra money is the second half. 

Although keeping money in a savings account (or under the mattress) is safe, it’s not an ideal location for all your money. Interest rates have risen recently, but the highest-yield savings accounts still won’t keep up with inflation. 

Investing is the best way to bridge that gap and build personal wealth. 

How Should I Invest?

When investing for your future and the financial security of your kids, you should consider both retirement and non-retirement brokerage accounts. Your kids won’t be able to build wealth if they spend all their earnings caring for you in your old age. 

Generation X is the poster child for why you need to consider retirement care. The so-called sandwich generation is stuck caring for elderly parents who can’t afford to care for themselves while trying to raise their kids. People caught in this trap can’t build wealth of their own because all of their assets are going to either their parents or their children.

A key component of generational wealth is ensuring your kids don’t have to spend their money caring for you. 

If your company offers a 401K with a match, make sure you put enough in to get the whole match. It’s free money. After a fully funded retirement account, consider investing in a well-diversified brokerage account. 

Investing is far more complex than it needs to be. Talk with a fee-based financial advisor for assistance in developing an investment plan that works for you, or check out our Beginners Guide to Investing for more information on making an informed investment decision. 

Risk with Investing

It’s vital to remember that investments are not FDIC-insured. Investments always come with risk. Though average returns linger around 7%, past performance never guarantees future results. 

8. 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. 

Investing in yourself offers several benefits. It leads to a longer, healthier life and minimizes the time you need full-time care. 

It also brings opportunities, allowing you to take chances, switch careers, try new professions, and ultimately make more money, another essential component to building generational wealth. 

9. 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. 

Whether you don’t have enough to go around or simply want more to invest, increasing your income is the way to go. The two best options for making more money are boosting your career and starting a side hustle. 

Making More in Your Career

If you want to earn more money, you have to develop the essential skills employers want. You can develop these skills through education, mentorship, and taking on extra projects at your current job.

Platforms like Udemy and Linkedin offer a wide array of professional-level courses in various subjects, letting you earn certificates and boost your soft skills.  Code Academy offers classes on web development and other hard computer skills. These online courses can help you switch careers into a profession that earns more. 

If you’re happy in your current field and want to move up, talk to your boss about joining special projects or finding a mentor to assist you with career growth. 

Start a Side Hustle

Technological advances make it easier than ever to make money outside of work. More and more people engage in side hustles to fill the budget gaps.

To join them, check out Launch Your Side Hustle, the ultimate course for starting your side hustle journey. 

 Of course, you don’t necessarily need a class to get started. Just decide what you want and start working on it – check out the list of ways to make money online for ideas on how to get started. 

10. Recognize Assets vs. Liabilities

Recognizing the difference between assets and liabilities can be challenging. Unfortunately, financial education in the US is lacking, and we sometimes think things will be worth money that never are.

 Remember the beanie baby crazy where millions were convinced their pile of tiny stuffed animals would be worth a fortune someday?

Identifying and using financial assets to create individual wealth is crucial to building generational wealth. 

Examples of assets include stocks, mutual funds, gold, precious metal, and real estate. In contrast, 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 to build lasting wealth. 

11. Estate-Planning

The last component of building generational wealth is one we don’t like to discuss.

Planning for our eventual departure from this world is uncomfortable, but it’s vital to ensure that our wealth stays in the family and goes to our heirs as we want it to.

Talk to a financial advisor about your estate plan. Individuals with ultra-high net worth may want to set up trusts for their beneficiaries to ensure all the money is correctly allocated.

Even those with few assets will benefit from ensuring the basics are covered. Review your life insurance policy, create and notarize a will, and discuss tax implications with an accountant.

Finally, consider your end-of-life care. The vast majority of Baby Boomers’ wealth will be siphoned away by long-term care facilities, leaving their children, Generation X and Millennials, with nothing. 

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

People assume generational wealth is about inheritance, but it covers far more.  Parents can help their children succeed in several smaller ways. 

Here are ways parents can promote generational wealth on a smaller scale.

Pay for Phone Plans

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

In today’s world, a phone is vital for everything from networking to finding a job. We need a phone and internet connection almost as much as electricity. Everything in our lives is online, from job applications to bill pay. A cell phone is becoming more of a necessity every day, and we can give our kids a tiny boost by paying this essential bill. 

Keep Children on Health Insurance

Under the current healthcare law, children can remain on their parent’s healthcare plans until they are 26. 

Letting your children stay on your plan through college while they’re getting their footing in the adult world will prevent them from having to pay for healthcare on the open market, saving them hundreds per month. It also keeps them safe if they need emergency care and opt out of health insurance to save money. 

Buy Their First Car

Reliable transportation to and from work is necessary in most parts of the United States. Not having one limits career opportunities to places within walking distance or forces people to spend hours commuting via public transportation.

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

Pay for College

One of the best ways to help your kids have a secure financial life is by contributing to their college education.  Student loan debt is one of the most significant burdens 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’ll have a kid, you can set that kid up for future success. 

Even small amounts can have a massive impact on your child’s future if you start early. 

Free Room and Board

Internships offer recent college grads fantastic networking opportunities, but the sad truth is that too many students can’t afford them. They can’t afford to work for free. They need to pay for life. 

Parents can help. College graduates who don’t have to worry about paying for their living expenses can afford to work for free for six months at prestigious companies that offer unpaid internships

Allowing your child to stay with you for free during college and for their first few years offers them incredible 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 a Down Payment on a Home

The most affluent parents can help their kids with one of life’s biggest expenses – homeownership. 

People with significant down payments of 20% or more don’t have to pay PMI (Primary Mortgage Insurance), reducing the overall cost of the home. With the rising cost of housing, most young adults can’t afford a 20% downpayment, but many of their parents can. The generous gift can help them get off to a great start with equity and reduced mortgage payments. 

Extremely wealthy parents should consider buying their children starter homes or condos. Housing is the number one expense for most people, so having a paid-off home is a massive boon to financial wellness. It’s a wealth transfer that will benefit your children and grandchildren. 

Teaching Children Financial Literacy

You can offer generational wealth without spending a penny. 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.

Education is the wealth that keeps giving, allowing them to build their own financial security from their first jobs. 

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 sound financial decisions. 

Another way to teach financial literacy is to model the good financial behaviors discussed here and include your children in your financial planning sessions. Let them see you make good choices, and they’ll learn to make good choices when they get out on their own. 

The Privilege of Generational Wealth

The harsh reality is that some of these methods of transferring wealth to the next generation are pipe dreams for many 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.

When discussing generational wealth, we must acknowledge that systematic policies stop 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. 

A primary home is the middle class’s greatest asset, and preventing millions of people from 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 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. 

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 wage differences make it difficult for women to pay the bills, much less put money aside for wealth creation.

Single mothers have fewer resources to create generational wealth because systematic policies related to wage gaps and motherhood penalties limit their ability to get ahead. 

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 – ranging from racist and sexist hiring practices to school choice to inequality in lending.

It’s vital to understand that policy hinders the ability to build generational wealth and consider the financial impacts on underrepresented communities when voting in each election cycle. 

Building Wealth isn’t as Easy as it Seems

When discussing wealth recreation, it’s vital to remember that not everyone has access to the same opportunities. It’s crucial for those of us who can speak out against these unjust systems to do so. 

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 start building it, but be sure to help others if you can.

Author: Melanie Allen

Title: Journalist

Expertise: Pursuing Your Passions, Travel, Wellness, Hobbies, Finance, Gaming, Happiness

Melanie Allen is an American journalist and happiness expert. She has bylines on MSN, the AP News Wire, Wealth of Geeks, Media Decision, and numerous media outlets across the nation and is a certified happiness life coach. She covers a wide range of topics centered around self-actualization and the quest for a fulfilling life. 

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