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What Is Generational Wealth, and How Do You Build It?

By Kelly Boyer Sagert · April 17, 2023 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Generational Wealth, and How Do You Build It?

Whether you want to retire a few years early or feel more financially secure, building your wealth can help you meet your financial goals. But what if you want to build generational wealth, or the type of lasting wealth that can be passed down to your children and grandchildren? While there is no one-size-fits-all path, there are some steps you may consider taking to start accumulating generational wealth.

What Is Generational Wealth?

Generational wealth refers to anything with monetary value that’s passed from one generation to the next. This might include cash, property, investments, jewelry, family businesses, or other financial assets. Typically, this type of wealth sets up future generations to financially benefit from what previous generations built.

Over the past 30 years, the generational wealth gap in the United States has been widening. What is a generational wealth gap? This simply refers to the difference between the wealth one generation accumulates relative to the wealth another generation accumulates. Factors such as income, education, race and ethnicity, age, and generation could all impact how much wealth someone builds and how much they’re able to pass down to the next generation.

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Why Is Generational Wealth Important?

Whether you have new money or old money, building lasting wealth can help your family remain financially stable in the long term. This in turn could help give future generations a leg up in life. After all, when you don’t have to live paycheck to paycheck or stay in an unsatisfactory job, you tend to have more options in life. If you’re the one passing on the wealth, you can have the satisfaction of knowing you’ve helped give your children and grandchildren that level of freedom.

Pros and Cons of Generational Wealth

Generational wealth comes with clear advantages along with some potential drawbacks.

Pros

•   Future generations can enjoy some degree of financial security.

•   Generational wealth can provide support and resources for family members who are just starting out.

•   The extra financial assistance can help create room for innovation and free up family members to pursue their dreams.

•   It’s an opportunity to solidify your legacy.

Cons

•   Those who inherit wealth often have a responsibility to manage the money so there’s enough for the next generation.

•   Anticipating an inheritance could cause some people to lose the motivation to work hard and build their own wealth.

•   Some families lack a clear plan for transferring wealth from one generation to the next.

Whether you’re building wealth or managing it,

How to Start Building Generational Wealth

When it comes to building lasting wealth, there’s no strategy or template that will work for everyone. A spending app can give insights into your financial picture, which can help you keep your finances on track. Here are other steps you can take to better position yourself and your family.

Focus on Education

Generally speaking, education increases your earnings and reduces unemployment. But having a financial education is important, too, especially if you want to create and grow generational wealth. Discuss financial topics with your children and younger family members and pass on what you know. That way, they can be better prepared to manage the wealth they inherit.

It’s Never Too Early to Start Saving

Accumulating financial assets takes time and planning, so consider starting early. Building wealth in your 30s, for example, is possible and something you can continue to build upon as you get older. It’s also a smart idea to save consistently. By setting aside a certain amount on a regular basis, you can make the most of compound interest, which is interest that’s earned on the initial principal and the interest that accrues on it.

In addition to your paycheck, you may be able to passively earn money. This is money you make without active involvement. If that’s an option you want to explore, it can be quite useful to know how to manage passive income streams.

Make a Plan With Family Members

Considering working with other family members to build and preserve generational wealth? It’s a good move to discuss short- and long-term goals and strategies with them so you’re all on the same page. As part of those discussions, you may also want to decide how the money will be allocated.

Consider Home Ownership

Home ownership for generational wealth is another strategy to explore. When you buy a home and its value rises, you can sell it for a higher price and possibly use that money to move into a larger home or invest in other assets. Not planning to sell any time soon? You could still benefit from price appreciation, as it adds to your home equity and overall financial assets.

Explore Investment Opportunities

Investing could help your money grow over time, even if you start out small. Your investment strategy will depend on a number of factors, including your goals, how much you have to invest, your tolerance for risk, and your age.

Although no two situations are ever alike, there are nevertheless best investment strategies for each generation. People who dream of an early retirement, for instance, may subscribe to the “financial independence, retire early” (F.I.R.E.) movement. Achieving this goal may call for a more concentrated investment strategy.

Recommended: Pros & Cons of the F.I.R.E Movement

Protect Your Wealth

Having a team of trusted financial, tax, and legal experts on your side can help you protect your growing wealth and maximize the amount you’re able to pass along. You may decide to create a trust or estate plan, for example, which details how you want your financial assets to be distributed and invested and designates a trustee.

What Are Some Challenges to Building Generational Wealth?

Not surprisingly, building and maintaining generational wealth doesn’t typically happen overnight. It’s often the rest of years of hard work and planning, and it helps to understand how to strategically save, invest, and spend. Depending on how much you already know, achieving this level of financial literacy can take time.

Another potential challenge is creating a clear plan for how the wealth will be transferred from one generation to the next. Some families avoid having conversations about money, and there’s a chance not everyone shares the same vision for how the wealth should be distributed.

In addition, disparities in pay among different racial and ethnic groups and genders could impact each generation’s ability to grow and maintain generational wealth. According to the Department of Labor, White and Asian-Pacific Islander workers earn more on average than Black, Hispanic/Latino, Native American/American Indian, and multiracial workers.

How to Pass Down Generational Wealth

There are steps you can take to ensure your financial assets are handed down the way you want. Creating an estate plan, for example, can help ensure the assets are distributed according to your wishes. Establishing a trust lets you set the terms over how assets are managed and can help your heirs bypass the probate process and potentially lower their tax burden. When you’re creating an estate plan or a trust, you will likely want to enlist the help of a professional, such as a trust attorney. These professionals can help ensure the right legal documents have been created and signed and will be easily accessible to your heirs when the time comes.

Recommended: The Difference Between Will and Estate Planning

The Takeaway

What is considered generational wealth? As the name implies, it’s financial assets, such as cash, jewelry, real estate, investments, and more that are passed down from one generation to the next. Generational wealth can give heirs a sense of financial security and more freedom to pursue their dreams, though it often comes with a responsibility to manage the money so there’s enough for the next generation. There are potential ways to start building your wealth, such as focusing on education and financial literacy, saving consistently, exploring investment opportunities, considering home ownership, and taking steps to protect what you’ve earned.

As you’re creating your savings plan, you may find it helpful to use a money tracker app. The SoFi app lets you connect all of your accounts in one convenient dashboard. From there, you can see all of your balances, spending breakdowns, and credit score monitoring, and get other financial insights to help you build your wealth.

Stay up to date on your finances by seeing exactly how your money comes and goes.

FAQ

How do you build generational wealth?

Although no two paths to generational wealth are exactly the same, strategies often include a focus on education to prepare for a higher-paying job and to gain financial literacy, saving early and consistently, investing in a home or other real estate, and making sound investments. It’s also a good idea to work with a professional to create an estate plan or trust so your financial assets are more efficiently passed along to the next generation.

What are examples of generational wealth?

Generational wealth can include cash, investments, jewelry, and other financial assets. This can but doesn’t have to include a family business.

How does a family start building generational wealth?

As a family, it can make sense to discuss goals for generational wealth and brainstorm strategies to achieve them. You may also want to talk about how the wealth will be distributed and make sure everyone is on the same page. It’s also important for you and the next generation of your family to understand how to strategically save, invest, and spend, so whatever wealth that’s passed down can continue to grow.


Photo credit: iStock/kate_sept2004

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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