- Generational wealth is the transfer of money, property, or other assets from one generation to the next
- The concept can be applied to both individuals and families, as well as businesses and organizations
- Generational wealth isn’t just for the rich. Anyone can start (at any time)
- Inheriting money or property from previous generations can generally help families to better weather tough economic times, pay for education, start businesses, and much more
- It’s often important to first pay down debt and live below your means before starting your investment journey
Have you ever wondered how the rich get richer? While there is no one-size-fits-all answer, generational wealth is frequently a key component of prosperity for the affluent.
All wealth starts somewhere… typically with someone who had little and gradually built a big enough nest egg to pass on to their heirs. This is usually how generational wealth is established.
Sam Walton is a prime example of someone who started with nothing and built a massive empire. He was a true rags-to-riches story. He worked hard, saved his money, and invested wisely.
As a result, he built a business (Walmart) that generated enough wealth for multiple generations. Today, his family is the wealthiest in the world.
While Walton’s story is truly remarkable, it should be viewed as an inspiration (rather than an expectation) for anyone looking to build a legacy that can live way past their expiration date.
In this post, we'll define what generational wealth is and provide actionable steps that you can take to start building it.
Let’s dive in.
What is generational wealth?
Generational wealth is the transfer of money, property, or other assets from one generation to the next. The concept can be applied to both individuals and families, as well as businesses and organizations.
Why is generational wealth important?
The benefits of building generational wealth can be numerous, but perhaps the most important is that it is designed to allow families to maintain their standard of living and financial security from one generation to the next.
Inheriting money or property from previous generations can generally help families to better weather tough economic times, pay for education, start businesses, and much more.
What’s more, generational wealth can also help create a safety net that can be used in case of unexpected expenses or financial emergencies.
Lastly, building generational wealth can be a way to give back to the community, as families that have accumulated wealth can often use it to help less fortunate others.
Things to keep in mind as you grow older and continue to build your wealth
As you get older and continue to grow your wealth, there are a few things to keep in mind that can help you maintain your financial security.
One of the most important is to make sure that you have a diversified portfolio that includes a mix of different types of assets. This will help protect you from economic downturns and market fluctuations.
Another thing to keep in mind is to create a financial plan that includes short-term and long-term goals. This can help you stay on track as you work to build your wealth over time.
Finally, it’s important to remember that building generational wealth takes time. There’s no need to rush the process—focus on making smart financial decisions and saving regularly, and you should be well on your way to creating a lasting source of wealth for your family.
How to build generational wealth
Whether you're lucky enough to have received an inheritance or starting from scratch, certain strategies can improve your chances of success—no matter what situation you are in.
- Start with paying off your debt. The importance of paying off debt cannot be overstated. Not only does it usually free up money that can be used to grow your assets, but it also helps to improve your credit score and increase your financial security. When you are burdened with debt, it can be difficult to make ends meet, let alone save for the future. However, by paying off your debt, you can begin to build a stronger foundation for your finances.
- Live below your means. A goal should be to try and spend less than you earn and invest the difference. When you live below your means, you may be able to save money and invest for the future. You may not be able to live as lavishly as you'd like in the present, but by sacrificing now, you'll set yourself up for a better potential future.
- Invest in assets, not liabilities. A liability is something that costs you money (like a car payment), while an asset is something that generates income (like a rental property). By investing in assets, you may be able to generate passive income that can help build wealth over time.
- Diversify your investments. This means putting your money into investments that usually perform differently so that you're not too exposed to any one security. Broadly diversified portfolios often increase the chance you will meet your financial goals.
- Teach financial literacy to your children. If you can instill sound financial principles in your children at an early age, they'll be more likely to practice them when they're older and make decisions that will benefit the entire family. By teaching financial literacy, you'll help ensure that your family has a better chance for prosperity for generations to come.
Building generational wealth isn’t just for the rich; everyone starts somewhere (key word: start). An important thing you should consider doing first is to trim your debt and live reasonably. After that, you can begin to focus on growing your nest egg.
A CFP® Professional at Facet can help you put together a plan that’s designed to get you on track to building generational wealth.