How to Build Generational Wealth

Generational wealth is the preservation and transfer of assets from one generation to the next. Providing your children or grandchildren with even a small financial safety net as they become adults may make it easier for them to achieve milestones, including going to college or purchasing a house.

“The goal behind amassing generational wealth is to take care of your children and grandchildren to make sure they have a better life than you have,” says Kelly LaVigne, senior director advanced markets at Allianz Life. “That provides a real comfort.”

Creating and sustaining generational wealth is no small task, but taking the following steps can help:

Talk About Money With Your Children

It’s important to make sure your children know and understand the money decisions that you’re making over time.

Communicating your money values to your kids can help them understand why you’re focused on generational wealth and help them build the skills to protect that wealth when they become its owners.

“The best savers out there are the ones who, from a young age, had parents who made sure that every time they made money, they committed to putting some of it into a savings account,” says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan.

Build an Emergency Fund

Having at least three months’ worth of expenses in a liquid account will give you more flexibility if an unexpected expense arises or you lose your job. By tapping into your emergency fund, you can let your long-term savings continue to grow untouched.

Prioritize Additional Saving

Building enough wealth that it can last across generations requires consistently living below your means (and saving your excess income). Start by maxing out your retirement accounts, then you can move on to investing in outside brokerage accounts and other assets that might gain value over time.

“The most dominant determinant of your success in building generational wealth is not your investment decisions, but your behavioral decisions,” says Michael Tanney, senior managing director of New York-based Magnus Financial Group.

“Behavioral choices are as simple as saving instead of spending and being cognizant of programs that maximize the compounding growth of money, such as a company match on retirement or putting money into a Roth versus a traditional retirement account,” he adds.

Think About the Long Term

Your children or grandchildren may not own or use your assets for many decades. You have to create an investing plan that looks decades into the future and takes into account factors such as inflation, which can erode the value of your assets over time.

Separate your investments into “buckets,” with separate accounts and strategies for the funds you need in the near term versus those that will fund long-term goals, such as those earmarked to help future generations, says Lisa Featherngill, national director of wealth planning at Comerica Bank.

“With long-term money that has a multigenerational focus, you’re not as concerned about liquidity, because you don’t need to access it for spending,” she says. “You can take more risks with the potential for higher returns because you have a longer time frame.”

Have an Estate Plan

Having an estate plan – including a will and powers of attorney – ensures that your assets will get distributed the way you want after you pass away. Estate planning professionals can also help you set up a plan that minimizes the amount of taxes your heirs might owe on their inheritance.

Your estate plan might also include financial vehicles like trusts or life insurance that can further help you make progress toward goals of building generational wealth.