Creating generational wealth is a coveted goal in a country where the American Dream of financial independence is deeply ingrained. It’s about more than simply accumulating wealth; it’s about passing on a legacy of economic security to future generations. The assets can include real estate, investments, businesses, and other valuable possessions like collectibles or royalties from natural resources.
We have researched various online forums to compile a list of 12 ways to build generational wealth.
Build Strong Financial Foundation
When you start saving and investing early, your money gets more time to grow. Using the rule of 72 as a powerful tool for estimating investment growth, we can infer that an investment compounding at a 10% annual rate will double approximately every seven years. You can also diversify investments across asset classes like bonds, real estate, stocks, and alternative investments.
Invest in Education
Investing in education is crucial if you want to build generational wealth. Through a Family Dynasty 529 plan, families can effectively plan for long-term educational expenses across generations.
Formal education can enhance career prospects by providing specialized knowledge, developing critical thinking skills, and offering networking opportunities. Education can also lead to more specialized professional qualifications and credentials, making individuals more competitive in the job market.
Buy a House
Renting or buying a home is usually the most significant expense. Home values often increase, and building equity and owning a home forces you to save to protect your property. The average selling price for houses increased from $340,600 in Q2 of 2014 to $501,700 in Q2 of 2024. Also, you can use a home equity line of credit (HELOC) to borrow money against your home’s value.
Start Long-Term Investing
The power of compound interest is incredible. With a 10% return, $100,000 can grow to over $1.6 million in 28 years. Long-term investing is less risky than short-term investing, which can be affected by market fluctuations. Long-term investments can also help you save on taxes. Aim to invest 10-15% of your yearly income, but adjust this based on your financial situation.
Roth IRA to Grow Tax-free Money
A Roth IRA can be a good way of saving for retirement since the money you put in grows tax-free. Creating a Roth IRA can give you 7% to 10% returns if you invest in stocks. Therefore, the earlier you start, the more money you’ll have. You can use a company like Fidelity or a robo-advisor like Betterment to invest in your Roth IRA.
Pay attention to 401(k) Plan Terms
A 401(k) is a retirement account offered by your employer, where they pay a percentage of your pre-tax income. The 401(k) plan uses automatic savings, and your employer might match your contributions, depending on the terms of the employment contract. Since you must contribute a certain amount to get the match, ensure the 401(k) offers many investment choices and low fees.
Invest in Index Funds
When you keep your money in a savings account, you miss out on more significant returns from the stock market. Investing has risks, but index funds are an excellent way to start. An index fund is a group of stocks and bonds that follow a specific market index, such as the S&P 500, which gives annual 10-11% returns. If you invest $100 and $300 per month in an index fund for 25 years, you could have over $399,000.
Invest in Real Estate & Commodities
Investing in real estate and natural resources like industrial metals is a great way to build long-term income, as they fluctuate less than stocks and bonds. While real estate can provide rental income and increase value over time, industrial metals and other commodities become profitable as the demand for them grows with time. They also have tax benefits like deductions for depreciation and other expenses, which can help pass assets to heirs.
Tax-efficient Strategies
Even though taxes are unavoidable, you don’t necessarily have to lose a chunk of your income paying taxes. You can invest in health savings or tax-deferred accounts to minimize the taxes levied on your portfolio. It can sometimes get tricky, so the smart decision would be to consult a financial advisor and list out the tax benefits that you can maximize for long-term growth.
Build in Emergency Fund
An emergency fund is essential for building generational wealth. It helps you avoid debt and withdrawing from retirement accounts. Save aggressively if you find ways to cut costs or earn extra income, and avoid withdrawing money from the account unless it’s a true emergency. Keeping 3 to 6 months worth of expenses in an emergency fund is ideal to fall back on if there’s a sudden expense you need to incur.
Involve Kids in Money Conservation
It’s important to teach your children about money and finances from a young age. The more you involve them in conversations around money, the more it’ll help them understand financial basics and make good money decisions later in life. You can seed the thought of money by playing games like Monopoly or poker with them, giving them an allowance, and letting them invest a small amount of money. It will help them learn about spending, saving, and investing.
Create a Business to Pass Down
Having a family business is a great way to generate generational wealth. About 30% of family-owned businesses have the second generation as leaders, while 90% of all businesses in America are family-owned. This shows that such businesses can be a powerful way to build generational wealth. Not only does it guarantee a steady flow of income for years to come, but selling them can also generate significant wealth.
