I have had so many conversations recently about “generational wealth.” Between clients, friends, and family bringing it to my attention, I know that there is so much talk about what generational wealth is and how people can build it.
At the end of the day, I know most of us have one goal in mind: to make sure that our children and families are as comfortable in life as possible. So let’s talk about it!
There’s a general sense that most parents want better for their kids than they had. Now, of course, I recognize that this isn’t the case for anyone. There are many people who provide for their kids during childhood but want them to make their own way in the world as adults.
Neither way is right, and neither way is wrong. They’re simply just different ways of existing. But if you fall into the first category and want to build wealth to pass down to your kids, family, or even causes that are important to you, you’re probably trying to figure out what generational wealth is.
DISCLAIMER: There are so many factors to generational wealth. As a white woman, I also recognize that there are many elements I can’t relate to or understand. This is just one perspective from a Certified Financial Planner™ and is not meant to reduce anyone’s experience to a “simple” fix.
What is generational wealth?
When I hear this term, I first think about the opposite. So what is the opposite of generational wealth?
Generational poverty.
Generational poverty is the cyclical struggle with money, generation after generation. It’s children who are born into poverty, grow up in it, have their own children in poverty, and then their children go on to live in poverty.
Generational poverty is incredibly hard to break out of. There are so many different societal and political factors that affect people’s ability to break the cycle. But aside from the systemic issues that those in poverty bear NO responsibility for, there’s actually been extensive research done on the mindset of those living in poverty.
Those with generational wealth versus those struggling in generational poverty often have vastly different mindsets when it comes to money.
The mindset of generational wealth
Yes, this is about money. But in truth, money is a mindset. And I can tell you that the people who have asked me about generational wealth have all come from vastly different socioeconomic backgrounds.
But how do we uncover the mindset of generational wealth and take it on so that we can build wealth?
Decide what generational wealth means for you
Get totally honest with yourself here. If you were living in your absolute dream world, what would you be leaving your kids? What sort of life would you want them to continue having after you’re gone?
And beyond that… what kind of life do you want to provide them with while you’re still here? One of the things I see couples speak about (and sometimes disagree on) the most is college.
How much money should they be putting toward their child’s education? Some clients want their children to learn how to make wise financial decisions and don’t pay for their college, while other clients want to set their kids up with education to give them the best chance possible.
The truth is that there is such a wide spectrum to the idea of what generational wealth means and looks like for every individual. But at the core, we all want to pass something down to the next generation.
The mindset is subjective
At the end of the day, your definition of generational wealth is going to be subjective and based on your lived experience. We might have similar ideas, or we might not.
Really, what it comes down to is this: what are we teaching our kids about wealth? What are the money values we want to have as a family?
I don’t care how much money you have. When we’re talking about generational wealth, I’m always going to start with asking what, exactly, you want to teach your children about money.
And once you know what you want to teach them… how do you communicate that to them? Teaching your children how to think about money is a generational wealth transfer in and of itself.
Teaching them how to think
I’m always extremely open with my kids when it comes to budgeting and net worth. And I encourage my clients to do the same. I’ve even had clients bring their teenagers into financial planning meetings, where we’re discussing intimate financial details, in order to teach their children how to think and plan with money.
This is so incredibly powerful. None of these things I’ve just listed are dollar amounts. Instead, they’re intangible lessons and mindsets that will create a generation of conscientious earners and spenders. Even if you haven’t passed down a dollar amount to them, the knowledge you’re passing down is its own form of generational wealth.
Methods of building generational wealth
This is where we really get down to one question: Generational wealth is important to you, but what does that mean?
Give yourself examples of where you’ve seen this type of wealth in your life. Walk yourself through examples of what you want your kids and grandkids lives to look like.
Again, answers are going to be across the spectrum. Most people will likely have a different idea of what this life looks like.
The number one way: Homeownership
Once you’ve decided on what generational wealth looks like for you, the key is to figure out which steps you need to take to get there. And the number one way to build any sort of wealth: home ownership.
Depending on your situation, what you can afford and where is going to look different. But for the vast majority of people in this country, the best way to build wealth is to own real estate. Yes, a 401k is great. Investing in the stock market is great.
But owning property is, and likely always will be, the number one way.
Other ways to build wealth
Of course, homeownership isn’t the sole way to build wealth. Savvy investments, rental properties, and owning businesses can all give you the same outcome.
These are just a handful of examples. The truth is that there are SO many ways to build wealth and create money.
What it really comes down to is deciding what way works best and feels most aligned for you… and then sticking with it.
The truth about the generational wall
It’s incredibly difficult to have generational wealth that lasts for more than 2-3 generations. Now, I know that’s not what you were thinking of when we started this whole discussion. When people bring up generational wealth, they tend to think of it as lasting for dozens of generations, like the royal family’s wealth (but even they’ve had their financial struggles).
Unfortunately, the truth of the situation is that the generational wealth you’re building now likely won’t last beyond your grandchildren.
Let me give you an example.
Let’s say you have a million-dollar-a-year business. Now, let’s say you have 4 kids.
Each of those kids will get $250k per year. But then, with every generation, you divide that number even further. In the next generation, that $250k is divided among 4 kids again. And then again.
It quickly becomes $52,500 per year. And then $13,125. And so on. This generational expansion will mitigate the wealth as it goes through.
That’s why it’s so important to really examine what you want for the next generation when you think of wealth. Do you want them to work to build their own wealth? To have the freedom to do whatever they want in life?
Thinking through this process is incredibly powerful and incredibly important.
Money is the easiest measuring stick, but at the end of the day, what’s going to stick around are the lessons you taught your children, that they then pass down.
So, yes, build generational wealth in your finances. But also… build it in your mindset. Know that how you relate to your money today IS the generational wealth that you’re passing on.
Do you want to pass on budgeting mastery within your generational wealth? Of course! All you gotta do is grab my signature BudgetingBlocks™ right here.