Creating sustainable wealth is the next course of action to take if you have been able to overcome generational poverty. You should prioritize generational wealth when accumulating wealth. Now that you are out of poverty, have a job, and are not worried about paying off debt, it is time to concentrate on making future plans.
Every day, over 10,000 baby boomers turn 65, and during the course of the following 20 to 30 years, trillions of dollars’ worth of wealth will be passed down to one or more succeeding generations. Building generational wealth is a prerequisite for your participation in this transfer. The path your family or descendants take will impact future generations if you are successful.
What is Generational Wealth?
Generational wealth is defined as “assets passed down from one generation of a family to the next” by Investopedia. These assets may consist of real estate, family companies, equities, bonds, and other investments.
Generational wealth is wealth that gets transferred from one generation of a family to the next. It may consist of valuable assets such as cash, real estate, securities, collectibles like antique musical instruments and paintings or ownership of a family business. Generational wealth may also take the form of education, contacts, ability to take greater risks and lucrative employment within a family business.
It can occur on the death of a parent or other family member, or during the life of both people. While many households can expect to receive some sort of generational wealth, a small number of transfers within wealthy families accounts for a majority of the total value of generational wealth transfers.
The average value of generational wealth transfers as measured by the Federal Reserve comes to $350 billion per year. In a typical year, about 2 million households get either inheritances or sizeable gifts, according to the Fed’s Survey of Consumer Finances.
The reasons why families want to build generational wealth may differ, but the bottom line is that they want their money to help others long after they are gone. Here are a few of the most common reasons why families consider building generational wealth:
- Eliminate financial struggles that many families face
- Pursue careers based on interests versus paychecks
- Engage in charitable giving
- Make education attainable for all members of the family
- Cover medical needs for disability and illness
Example of Generational Wealth
An accurate example of a family with generational wealth is the French Hermès family. As a collective, the family has a net worth of $112 billion, and the source: is luxury design. Leather bags, luxury goods, jewelry, perfumes, watches, you name it; the Hermès produce it. But then, since we’ve agreed that if wealth exists in a family, someone must have worked for it, how did the Hermès family become this wealthy? How are they able to transfer this wealth from one generation to another?
With the Hermès family wealth, there are a lot of names and dates but let’s focus on the basics. It all started in 1837 when a man called Thierry Hermès established a workshop in Paris to produce leather materials specifically for the European nobility: the lords and ladies. Thierry did a good job at this and even won awards for his amazing products. 43 years later, his son, Charles-Emile took over the business. He found the shop a new office and also trained his own sons in the business.
Read Also: Best Content Creation Tools
During this time, the company not only catered to the European nobility but to wealthy individuals from North Africa, Asia, and the Americas. When Charles-Emile retired, his two sons (who were the grandsons of the original founder Thierry Hermès) took over. During their time, the company made accessories for the Prince of Wales. This was in 1918 – 81 years after the company was founded.
The two sons also trained their three sons-in-law to be business partners and in 1924, they set up shop in the United States of America. In 1898, Dumas became the head of the company. He was one of the trained sons-in-law. His son, Jean-Louis was also introduced into the company. Jean Louis went abroad to engage in buyer-training programs in New York.
In 1978, he became the chairman of Hermès. In 1993, the company went public. Three years later, they opened a store in Beijing, China. Jean-Louis retired in 2006 and was replaced by Patrick Thomas, the first non-Hermès family to ever head the company, over a century after the company was founded.
In 2016, the company opened a shop in Dubai, its largest so far. Three years ago, the Hermès brand was 33rd on the Forbes List of World Most Valuable Brands. And it all started with one man, back then in 1837 before the invention of the internet or the telephone, before the First and Second World Wars; that’s how far ago it was. Today, the Hermès family is the fourth richest family in the whole world. That right there, is what is called generational wealth.
Why Build Generational Wealth
Generational wealth is important because it can offer a significant financial advantage to your family. For example, if your children or grandchildren received a financial advantage early on in their life, this could help them pay for their university or college education alleviating the need for student loan debt, or be used for a down payment on a home. This creates a significant advantage to young adults starting their life in the real world.
Generational wealth is selfless. It is your building for your children and their children’s children. Think about it: if you battled financial struggles and had to figure out a lot of things on your own without any financial help, it’s probably because your parents did not have much, to begin with. Maybe they had enough to manage a family but not enough to get you started with yours.
You choosing to build generational wealth is saying: I want those who come after me to have something good to start with. I don’t want them to have to start afresh from zero dollars. So generational wealth is basically accumulating assets for your descendants.
How to Build Generational Wealth
The following are simple strategies you can use to start building generational wealth for your family and loved ones.
1. Handle your own personal finance
If you are still figuring out your own personal finances, then maybe you want to focus on that for now. While it is important to plan for those coming after you, you can’t do that properly if you are not financially fit. Do you have substantial savings, solid investments, an emergency fund, or a retirement plan? If any of these is missing, then you should fix that first. Building generational wealth is important but it is not as urgent as fixing your personal finances. But if you have all that sorted already and you are ready to take the next step, great!
2. Decide what you want to leave behind
Generational wealth is not a sack of cash. It could be anything of increasing financial value. Depending on your capabilities, your interests, your environment and your financial standing, you need to decide what you want to leave behind for the generations coming after you. Is it mutual funds investments? Real estate? A company? Here are a few of the things you can choose from.
- Mutual funds
Investing in mutual funds and stocks is an average person’s best shot at generational wealth. All you need is to start early, be consistent and just wait. While there are other options to build wealth, if you want something that will not require much from you: just money and patience, then mutual funds is the answer.
You do not have to actively follow the news and monitor the market as you have fund managers handling that for you. The very idea of mutual funds is designed for long-term investments. Since that is exactly what generational wealth is about, then you really should start investing in mutual funds now.
Investing in the stock market is another great way to build generational wealth. A stock is a collection of shares owned by an individual investor which indicates partial ownership of the assets and earnings of a company. As long as the company remains and generates profit, the value of your stocks also appreciates. So how do you go about it? Do your research. Pick out companies with competent leadership, great finances, and a promising future. Invest your money and play the long game.
If you do it right, the value of your stock will increase with time. Here’s a good example: the value of Netflix stock in January 2013 was $19. Four years later, the value was $137.21. This simply shows how much value you can get if you invest in the right stocks and wait it out.
- Real estate
What’s that one asset that never depreciates in value? Land. From basic economics right from secondary school, we know that land does not depreciate. It is called a fixed non-depreciable asset for this reason. Accumulating acres of land is a good way to ensure that your children are set for life. However real estate is not just land.
According to Investopedia, real estate is “defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or man-made.” So how can you also invest in real estate? You could start with the easiest: buying acres of land and accumulating them for your children.
Another option is to actually become a homeowner. Buying a house or building one can also be a form of generational wealth. With real estate, however, it’s best to start small and think long-term. From buying your first house to setting up your own shopping complex for rent, to building a hotel, to accumulating acres of land; it’s a gradual step towards family wealth.
At the start of this article, we took a deep dive into the Hermès family and saw how one man set up his generation for riches. You also can do the same with our own business or company. Handing over a profitable family business to your children is a good way to set them up for life. This is especially good if the said children have a keen interest in running the business and they have been incorporated early into the operations just like the Hermès family and they also buy into your long-term vision for the family.
- Life insurance
Have you ever considered getting life insurance? Life insurance is a “contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.”
In simple terms, you pay a certain sum of money periodically or at once to an insurance company and when you die, the insurance company pays a certain amount which is called death benefits to your beneficiaries – in this case, your children or whomever you are building generational wealth for. Getting life insurance is one of the many options you have to build generational wealth.
Perhaps the easiest way to set up your children for a good financial future is to educate them. Giving your children the traditional education from primary to tertiary level is a good way to ensure that they will be able to stand on their own. They will qualify for good-paying jobs and be able to build their own wealth while yours would only serve as support.
In addition to traditional education, a solid personal finance education is compulsory if your plan to build generational wealth must succeed. This is because when you die, the state of your wealth falls on to the living generation and if they are ill-equipped to manage it, you may have built for nothing. It may result in the case of the prodigal son. Educating your children is key to building generational wealth.
3. Draw out a wealth plan
Now that you have seen your options and chosen the paths you want to take in building generational wealth, the next thing you need is a plan. When it comes to financial matters, a plan is always essential. How much of your income will go into your generational wealth budget? Will you divide your resources equally among the many options listed above or you give certain percentages? Will you bring your children along now or let them discover when you die?
A solid wealth plan will answer all these. You may need to consult a financial advisor as you make these plans and do your own research. Once you have your wealth plan, set periodic goals and strategies on how to achieve the ultimate goal. Integrate your plans into your annual budget.
4. Make all things legal
While consulting a financial advisor is necessary but not compulsory, consulting a lawyer is absolutely compulsory if you are building wealth for generations. You will most likely not be alive to witness how your wealth will be distributed or put to use. Your only way to ensure that things are done according to your plan is to go through the legal route. The moment you start taking solid actions, consult a lawyer and go through all the legal proceedings necessary to make sure you are on the right side of the law.
5. Build gradually and steadily
Remember, this is a long-term game and it is never-ending. Hence, no pressure, no rush. Build gradually and watch your family’s wealth grow with time.
6. Discuss with your family
To prevent a prodigal son scenario, discuss your plans with your descendants. If you are building the wealth for them, then it is a good idea that you keep them in the loop especially if you are building a family business, investing in real estate or going through any other route that will require their active participation.
7. Do not leave debt behind
In your quest to build generational wealth, ensure that you do not leave debt behind. The last thing you want your children to do is settling debt with all the assets you’ve accumulated all along. Tie all loose ends and build on a debt-free foundation.
8. Instill a spirit of responsibility and discipline
This is one of the most important things you need to do to ensure that the wealth survives the immediate generation after you. The goal of generational wealth is not just for a decade or a century; it is to ensure that you build so much wealth that the next generation just builds on it. And on and on it continues such that anyone born into your family is born with a solid foundation. This won’t be possible if those coming after you don’t get along with the program. So start by instilling in them a spirit of responsibility and discipline.
For this to work, they also need to be committed to the cause of building generational wealth for the family. Generational wealth is a collective. It’s called family wealth or legacy wealth for a reason so it’s hard building it when other members of your family are not on the same page with you.