December 13, 2023

How to create generational wealth

Eight things anyone can do to leave a legacy for their loved ones. If you’re a parent, you’ve probably asked yourself what kind of financial legacy you’d like to leave for your child or children. Maybe you’ve even taken the important steps of buying life insurance to provide a financial safety net or creating a will to ensure your assets will be distributed according to your wishes.
But you might not have thought about how your children’s inheritance will be passed down to your grandchildren or how the lessons you teach your children could eventually be passed along to future generations. Generational wealth compounds, which means that anything you give your children could help them build a better life for your grandchildren, who in turn could pass along assets, skills and knowledge to your great-grandchildren. It’s the kind of legacy that could continue to generate wealth long beyond your lifespan.
What is generational wealth?
Generational wealth refers to the money, assets, skills and values you pass along to the next generation. Many parents hope to leave their children an inheritance, for example but even if you can’t leave your children money, you can still pass along skills, values and tools that your children can use to improve their lives, increase their opportunities and build wealth that might someday be passed down to your grandchildren.
This kind of wealth both asset-based and skills-based is especially important if your family is part of a group of people who have been historically marginalized or disenfranchised. Generational wealth benefits families because it gives them the opportunity to succeed despite socio-economic issues and barriers that could otherwise limit them. That said, you don’t need to pass down a significant inheritance in order to give your children the opportunity to succeed. You don’t need to leave a lot, if someone has the right tools launching into life.
Helping your children graduate from college without taking on student loan debt, for example, could give them a huge head start in life and those kinds of financial boosts can help your children create wealth that can be passed on from generation to generation.
What can you do to create generational wealth?
There are many ways to leave your children an inheritance and not all inheritances involve money. In addition to making your children the beneficiary on your investment accounts or your term life insurance plan, you can also give your children other life-changing tools and skills such as a good education or strong financial values.
Here are eight different ways of creating generational wealth.
1. Homeownership
Homeownership is the chief way we build wealth. The average person who owns a home, they have a leg up in many ways. Not only do homeowners get tax breaks that are unavailable to renters, but owning a home gives you equity and you can tap into that equity to start a business, ride out tough financial times or help fund your children’s college education. The lack of a house can be a serious financial drawback.
Investing in real estate can be a way that wealth is passed down from one generation to the next. However, we caution homeowners to be wary of treating their nest like a nest egg. The challenge with a home is two-fold. The first challenge is ensuring that your home appreciates in value over time which, if you remember the way the housing market crashed during the Great Recession, might not be entirely within your control.
The second challenge is ensuring you keep your home long enough to pass its value down to your children. We’re all living a lot longer, and it’s rare that we’re still living in the house that we thought would be an asset at the end-of-life period. Many people downsize to a smaller home before moving to a senior care centre, assisted living centre or nursing home and the value of the home is often put towards the high costs of end-of-life care.
2. Small-business ownership
Home isn’t the only major asset you can leave your children. If you run a small business, you have the ability to not only earn your own money and be your own boss, but also to pass the business along to your children as they get older and give them the opportunity to continue growing the family’s wealth.
If you look at millionaires, the vast majority of them have made their wealth through property ownership and business ownership. Your small business might not make you a millionaire, but it can still give you the opportunity to take control of your career and support your family and who knows? Maybe your children will be the ones who take the family business to the million-dollar level.
If you’re concerned about the risks involved in starting and building a business, keep in mind that there are also risks involved in working for someone else. Even though it may be difficult to launch and start an enterprise, it’s sometimes easier to create a business than it is to find a job. Starting a small business could change your family’s life not only right now, but also generations from now.
3. Investments
You don’t need to be Warren Buffett to pass along stock market returns, either. If you have a 401(k), you have money that could eventually become part of your children’s inheritance. Designate beneficiaries on any assets you might already have, no matter how small, for example, workplace retirement investment accounts. This is one more reason why you should always sign up for your employer’s retirement plan and always take advantage of any matched funds that your employer offers.
4. Education
Knowledge in itself is wealth, because once you know what something means and how it works, you are able to take the actions necessary to implement your knowledge. Helping your children with their homework when they’re young, for example, can turn into helping them apply for scholarships when they’re ready to go to college.
You can also pass along skills that can make your children’s lives easier and more affordable, such as the ability to cook, plan meals in advance and grocery shop on a budget. If you have a side hustle or small business, teach your children how you earn income because they might be able to use what they learn to start their own businesses in the future. Make sure they understand not only the tools of the trade, but also the skills involved in bookkeeping, marketing and client management.
5. Values
Many parents want to pass certain family values down to their children, like kindness, generosity or compassion. If you’re thinking about building generational wealth, you should consider passing down financial values as well. Children observe your behaviours and actions. Simply seeing the action of you budgeting, paying down debt and saving can be incredibly impactful to their financial decision-making in the future.
Train your children to save, and they will be wealthy relative to their needs. You can start by setting up the classic three-compartment piggy bank: one compartment for spending, one for saving and one for giving. From there, ask yourself the following questions: “What would be the coolest values for my kids to have when they are older? What values would set them up for success?”
Maybe you want to teach your kids the importance of hard work. Maybe you want to teach them the value of being their own boss. Maybe you want to teach them about financial independence and the ability to live a life that isn’t dependent on a job. Choose your values carefully, because they’ll become part of your children’s inheritance.
6. Life insurance
Life insurance is one of the easiest, no-brainer ways to help pass along wealth to the next generation. An affordable term life insurance policy can help protect your family from unnecessary financial strain, and the value of your life insurance policy can become part of your children’s inheritance. Why is an affordable life insurance policy, and estate planning in general, one of the key components of generational wealth? Because it allows you to set aside funds for your beneficiaries without having to save the money yourself.
7. Annual gifts
You don’t need to wait until your death to pass along generational wealth to your children. If you have the money to spare, giving it to your children while you’re still alive can help them buy their first home, pay off debt and set them up for a strong financial future.
That said, it’s a good idea to hold off making annual gifts to your children until you’ve saved enough money for your own retirement and end-of-life needs. You’re either on track to a comfortable retirement or you’re not. If you are, start annual giving. Read the rules about giving and gift taxes to ensure you aren’t getting yourself into a tax pickle, for example, parents can give children up to 17,000 each before gift taxes kick in.
8. Philanthropy
There’s one more way of passing along generational wealth and that’s by giving it to organizations that are designed to support, promote and educate the next generation. Making philanthropic contributions, whether as a bequest, an endowment or a recurring monthly donation, is an excellent way of ensuring that your money goes towards a good cause.
People without children often wonder what to do with their assets both during their life and after their death. Philanthropy can help you use your accumulated wealth to help others whether you’re making a charitable gift in addition to the gifts you’re passing along to family members, or whether you’re designating a charity or organization to be your primary inheritor. Remember, generational wealth isn’t just about giving your descendants an inheritance. It’s about using what you have to ensure that the next generation might have it a little bit better.
By understanding that wealth is not always correlated with money, and that you have the opportunity to share your skills and resources with both your family and your community, you’ll be better prepared to pass along your wealth to the people who need it most and since generational wealth compounds, your legacy might be the seed to someone else’s success, generations into the future.

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