As a parent, you’ll do almost anything to give your kids a leg up in life. You might want them to have opportunities you never did, even if that means making sacrifices now.
Thankfully, there’s one possible way to accomplish that goal: build generational wealth. By leaving a financial legacy for your children, you’ll give them a boost that will last their lives.
Fortunately, creating generational wealth isn’t as cryptic or difficult as it might seem – and you don’t need to be a millionaire to get started. If you’re interested in creating long-term wealth for your descendants, keep reading to learn more.
What is generational wealth?
Generational wealth is the concept of leaving behind assets for your children, grandchildren or any other individual of your choosing. Those beneficiaries can use the assets to pay off debt, invest, or save.
They can also use those funds to start a business, pursue an advanced degree, or save for their own children to use. Having inherited wealth is like starting Monopoly with Park Place already in hand – you’re more likely to get ahead in life.
There’s no singular concept of generational wealth. Tara Unverzagt, Certified Financial Planner (CFP) of South Bay Financial Partners, recommends figuring out what you actually want to leave behind before implementing any specific strategy.
“Does it mean giving your children $1 million when you die?,” she said. “Or does it mean giving them an education and avenue to live a wealthy life with a high income and the ability to spend a lot of money?”
How to build generational wealth
There are many ways to build generational wealth, even for middle-class families. Here are some strategies to consider.
Educate your children about personal finance
Even if you can’t afford to leave your children with a million-dollar investment portfolio, you can teach them personal finance skills that they’ll carry with them forever.
Start with a lesson in compound interest, which refers to when you earn interest on both the money you’ve saved and the interest that has accrued over time. Compound interest is one of the most important concepts that parents can teach their children – mainly because it rewards those who start investing early.
Here’s how compound interest works. Let’s say you start saving $1,000 per year at age 25 and earn 9% interest compounding daily. At 65, after 40 years, you’ll have $393,774. But if you had waited until age 35 to start investing, you would need to save roughly $2,556 a year at 9% interest compounding daily to reach the same total. That’s more than double the annual amount.
As soon as your child starts working, show them how to invest their money in an Individual Retirement Account (IRA). There is no minimum age to open and contribute to an IRA, as long as the contributor has money earned from a job.
“If you’ve got extra money, you could match whatever they put in as long as you don’t go over the annual IRA limit or the amount of money they earned,” said Mike Hunsberger, CFP® of Next Mission Financial Planning.
Build financial awareness
There’s a saying that it takes one generation to make money, one generation to maintain it, and one generation to spend it.
No matter how much money you can leave your kids, you should build finance education into your day-to-day life. Talk about your budget, savings habits and investing strategies. It’s not enough to discuss this a couple of times – it should be a regular part of your life.
“The best way to start on the path of creating generational wealth is to build great money habits yourself,” said Brittany Wolff, CFP® of Wolff Finance. “Children learn not only by what you teach them verbally, but also by what they see you do.”
Establish an investment account early
One of the easiest ways to create lifelong wealth for your children is to start investing for them as soon as possible. Parents can open an investment account for their children at birth and set them up for life.
For example, if a parent invests $3,000 in an S&P 500 index fund when the child is born, the account will be worth $1,040,952 after 65 years. That money will ensure a comfortable retirement without the need to contribute a single cent.
If you don’t want your kids to inherit the full amount all at once, you can put the funds in a trust and have them disbursed at specific times. This can make it easier for them to manage the money responsibly – even if you’re not around.
“Most people don’t want their minor children to take possession of a large net worth out of trust,” Unverzagt said.
Leave them your house
One of the most common ways to establish generational wealth is to leave behind property, like your family home. Your kids can then keep the house or sell it. And since property values increase by 4% annually, your home could be worth more than you realize by the time your kids take possession.
If you have multiple kids, make sure to leave instructions in the will on how they can divide the house if one wants to keep it and others want to sell.
Get life insurance
If you have children, you can protect them – and your future wealth – by getting a life insurance policy. If you pass away in your prime earning years, your offspring will be protected if you have a life insurance policy in place.
Speaking with a financial planner can help you determine the correct amount of life insurance to buy. The amount will vary based on your income, expenses and your spouse’s salary.
Meet with a professional
When you’re leaving behind money, it pays to predetermine how you want the assets to be distributed. One reason for this is that if your estate is worth more than $12,920,000 (in 2023) million, your heirs will have to pay estate taxes. But there are ways to mitigate or eliminate the taxes if you speak with a professional beforehand. There are many ways to distribute the funds to reduce the future tax liability.
Even if your inheritance won’t result in estate taxes, it can still be useful to speak with an estate attorney to discuss your options, like creating a trust for your kids that ensures they use the money based on your wishes.