What is Generational Wealth and How Do You Build It?

Article Summary:

Generational wealth refers to any financial assets passed down to children, grandchildren, or other relatives. This could include stock market investments, a real estate portfolio, cash, or a family business. Generational wealth can also encompass other items of monetary value such as art, jewelry, or antiques.

There’s no doubt that those who inherit generational wealth have a significant financial advantage over people who have to start from scratch. If you begin with a financial cushion, it allows you to avoid things such as student loans or other debts that slow down your ability to accumulate wealth, which you might eventually be able to pass down yourself.

However, anyone can begin to build generational wealth by making small changes that will steadily multiply and grow. This will help to secure your and your family’s financial future and, theoretically, future generations as well.

Today we’ll discuss what generational wealth means, why it’s important, and ways to start building generational wealth right now. We’ll also talk about ways to maintain generational wealth throughout your life and for those it gets passed down to.

What is generational wealth?

So, what exactly constitutes generational wealth? Generational wealth, also known as legacy wealth or family wealth, is essentially anything of monetary value that gets passed down to your heirs. For example, if your grandmother passed down any stocks and bonds, her jewel-encrusted tiara, or her Renoir painting, those would be considered generational wealth.

Generational wealth also encompasses assets such as cash in financial accounts, real estate holdings, investment funds, and family businesses, to name a few. The idea is that you can live off the money from various assets, like stock dividends, rental income from real estate, and profits from family firms without ever having to sell off the underlying asset itself.

When generational wealth diminishes, it’s often because assets are sold off and not replaced with another income-generating source.

Why is generational wealth important?

Having generational wealth is a way of transferring wealth to your family, which can allow them to have a degree of financial independence that might otherwise be impossible.

For instance, if you have the benefit of growing up with generational wealth, you might graduate college with no student loans. You may even receive a new car as a graduation gift and perhaps some assistance with your first apartment or home. All of these advantages more easily position a person to become successful.

On the other hand, if you graduate college with a pile of student loans to pay back, you’re already starting at a disadvantage. Not to mention the financial pressure that comes with that kind of costly debt. It’s a lot easier to generate wealth if you don’t have to dig yourself out of debt right after graduating.

From easily paying for a child’s education to never getting into credit card debt, the financial support that comes from this kind of long-term wealth can make all the difference in a person’s financial life. If you need help strategically building wealth, consider consulting a wealth management advisor to help you with this process.

Generational wealth and the racial wealth gap

It’s not breaking news that white families tend, on average, to have more money than other racial groups in this country. According to a 2019 Federal Reserve study, a typical white family is eight times wealthier than your average African American family and five times wealthier than a typical Hispanic family.

It also follows that generational wealth is more widespread in the white community as compared to other races or ethnicities. Much of this disparity can be attributed to systemic barriers such as inequality in areas of employment, banking, and housing. Each of these areas can help or hinder efforts to build wealth.

Building generational wealth

No matter who you are, having or building generational wealth is not a guarantee or an easy task to accomplish. However, everyone can take the same steps to save money, purchase real estate, build investment accounts, accumulate wealth in retirement funds, and hopefully leave something behind for future generations.

Start with financial literacy

If one of your goals in life is to build generational wealth, many experts would agree that educating yourself in financial literacy is an important stepping stone. Knowing how to save, budget, invest, and handle credit are just some of the tools that help to build generational wealth for your family’s financial future.

It should also be argued that imparting financial literacy to your offspring is not only a way to continue to build but also to maintain generational wealth. If you don’t teach young people from an early age how to handle their personal finances, you can hardly expect them to manage a large windfall of an inheritance properly.

Invest in real estate

Investing in the real estate market can be one of the best ways to create generational wealth. It’s a more tangible investment than others and can also be an immediate source of money as a rental property or if the property is sold. Family members could also leverage the equity in the home for other investment purposes, such as purchasing a rental property or making improvements to increase the value of the real estate.

There are also several tax advantages that come with owning real estate, such as deductions for property taxes and interest. Plus, there are additional tax deductions associated with collecting passive income from a rental property that can be taken advantage of, such as costs incurred to repair and maintain the property.

When you invest in real estate, you’re ensuring that at least a portion of your wealth passed down is in one of the most secure investments possible.

Stock market investing

Investing your money wisely should be an important part of your plan for building wealth. Investing in the stock market used to be more complicated and expensive, not to mention intimidating. But with the advent of mobile apps and expanding competition, investing has gotten much easier and less costly for investors at all levels of experience.

You can invest in the stock market by purchasing or trading stocks, bonds, certificates of deposit (CDs), and index funds, for example. For newer investors, index funds such as a mutual fund or an exchange-traded fund (ETF) are particularly good choices for two reasons: They’re much easier to pick than individual stocks, and the risk is spread out over many different stocks, rather than just one.

A stumbling block for some people (and a common misconception of investing) is that you need a lot more money to do it than the average person has to spare. This is absolutely not true, especially in this day and age where you can buy fractional shares and download apps that allow you to start investing with pennies.

Some mobile apps connect to your bank accounts and credit cards and round up your bill payment to the nearest dollar. That spare change is then added to your investment account. The downside to these apps is you don’t have nearly as many investment options as you do with a traditional brokerage account, which should be your next step in investing for your family’s financial future.

Save money strategically

Saving money is more than just putting some extra cash in a savings account. While that should be an important part of your personal finance goals, there are other ways to save money in your efforts to build generational wealth.

You don’t create generational wealth just by making money; you need to save it strategically as well. Saving aggressively for retirement is one way to do that, so as to free yourself from the need to tap those assets you’ve worked so hard to acquire.

If the company you work for has a 401(k), for example, max out your contributions to that as much as you can — even better if the firm offers matching contributions up to a certain percentage. Also be sure to make use of other tax-advantaged accounts such as IRAs.

As you aim to build generational wealth, and start making money from your investments, be sure to save some of that money in a way to ensure a comfortable retirement for yourself. The better you plan for retirement, the better positioned you’ll be to leave a brighter financial future for your children or other family.

Pro Tip

Keep in mind, that the emergency or rainy day fund you’re keeping in a savings account at your regular bank could better serve you in a high-yield savings account. Look for online accounts that offer substantially better interest rates than traditional brick-and-mortar banks.

Make an estate plan

An estate plan is an essential part of the process to ensure the smooth transition of your wealth from one generation to the next. In a nutshell, estate planning is the process by which you arrange for the passing down of your assets and other belongings upon your death by making out a will.

The goal should be to preserve as much of the wealth as possible for the next generation. Estate taxes can be hefty. However, there are a number of ways to protect those assets, such as trusts, which will help to retain the maximum amount of wealth.

A life insurance policy can be another important way to preserve your assets and further safeguard your family’s financial future. Unlike many financial accounts and assets that need to be sorted through in court after a death (known as probate), life insurance goes directly to the beneficiaries. It’s a way for a family to get by after a death and before the will is sorted out without going into debt or tapping into other assets.

Pro Tip

Talk to a tax professional about the advantages of planning for the disbursement of your estate after your death, and how to best preserve your wealth for the next generation.


How do I know if I have generational wealth?

You might not even realize you have generational wealth until someone dies and you inherit a pile of money. Whether it’s because many people don’t like to talk about money, or they don’t necessarily want their heirs to know what they’ve got coming to them, generational wealth can sometimes come as a surprise.

What is the key to generational wealth?

The key to building legacy wealth is to both acquire assets and have enough money saved for retirement so that you don’t need to touch any of the assets. Ideally, you can enjoy income streams from those assets, like dividends from stocks or rental incomes, without ever needing to sell. This way you’re building wealth and creating a portfolio to pass on to the next generation.

How long does generational wealth last?

It only takes one generation — one irresponsible generation — to burn through a family’s generational wealth. Gambling, drug and alcohol addictions, and excessive spending on consumables can all take a toll on the family money. Plus, other things can go wrong, such as large medical expenses or handling a family business that nobody is prepared to take over.

Family businesses can end up being mismanaged or taken advantage of, occasionally resulting in bankruptcy. If there isn’t a descendant who can successfully run the business, it’s probably better to sell it and use the funds for other types of investments that will help preserve the family wealth.

Key Takeaways

  • Generational wealth refers to any financial assets such as real estate, stock holdings, or other investments that are passed down to future generations.
  • Creating generational wealth is best accomplished through multiple channels, like investing in the stock market, real estate, or a family business.
  • There is a large racial gap in the way that wealth is distributed throughout this country, making it exponentially harder for some racial groups to build generational wealth.
  • Maintaining generational wealth can be tricky. However, financially educating the next generation and having a comprehensive estate plan can help.
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