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How to Build Generational Wealth

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Generation $

Some people start with an advantage that lets them enjoy a life free of debt of all sorts, including from student loans while investing and trying entrepreneurship with less worry about whether the gamble will ruin their lives and hurt their loved ones — and that advantage comes from their parents, and their parents. (And sometimes from their parents.) If you’re the ones deciding to create this generational wealth for your kids or grandchildren and those who will follow, know that there are slow and steady ways to get to that place and have something of value to hand off as an inheritance. Fostering some financial intelligence plays a role too. We talked with some experts to find out how. 


Related: 18 Ways to Build Wealth During a Recession


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Income Comes First

If you're building wealth from scratch, start with the basics: an income. That’ll make the money that you can start investing. "You can't reasonably expect to build wealth if you aren't making enough money,” says Sean MacIntyre, the man behind the “Finance Daddy” of DIYwealth.com. “There are only two ways to increase your income: Work more hours or get paid more per hour.” Later, when you begin investing in stocks, real estate, or other assets, your money can begin making money on its own.


Related: The Most Satisfying Jobs That Also Pay Well

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Follow the Personal Finance Basics

Be fiscally conservative and follow a budget —  "Control your spending, pay off debts, and invest in appreciating assets,” says Matthew Roberts, chief operating officer at My Choice. “If you are unaware of where your money goes and cannot control how much you spend, it is difficult to grow your finances." Live on 70% of your income, invest 20%, and donate 10%, advises Jeremy Mercer of Mercer Co. Some more of Mercer’s basics: “You shouldn't use credit cards unless it is for a car or a house. You should always have six months of living expenses in your account, but never more."


Related: Steps to Creating a Monthly Budget

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Start Now

Build financial legacy goals into your yearly budget as well as a long-term financial plan, and get started immediately. If you wanted a kitchen remodel in a year or two, you'd probably already be thinking about what it might cost and how to save for the project; building generational wealth works the same, says Adam Ng, the CEO and Founder of Trusted Malaysia. "Wealth compounds over time, so the earlier you get started, the more time will be to your advantage."


Related: 31 Simple Ways to Save Money Every Day of the Month

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Don’t Trust the Finance Industry to Do Your Work

Set up regular, automated transfers and investments rather than relying on financial planners, fiduciaries, stockbrokers, or wealth managers to work in your best interest, because banks and asset managers are businesses that want your money — it's how they make a profit. “There's an old joke about this … A Wall Street broker was taking a man on a tour of New York, showing off the yachts owned by all the bankers and brokers. The man asked, ‘Where are all the customers' yachts?’ Of course, there were none, even though they followed Wall Street's advice,” MacIntyre says. Finance businesses will “say and promise an awful lot to get your money. Their fees will cut into your wealth over time."


Related: Mistakes You’re Probably Making with Your Savings Account

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Follow the Rules of Investing

Once you have some money set aside to do it, invest — carefully. "If you want to obey the basic law of investing, 'Buy low and sell high,' you have to be willing to buy when markets fall to lows or before something goes mainstream, when every part of your brain is screaming in terror at the prospect," MacIntyre says. For example, “the best time to buy real estate was at the height of the great financial crisis or amid the pandemic; the worst time was when everyone was buying a house. The best time to buy stocks was at the bottom of every crash and panicked selloff; the worst was when everyone was cashing in on tech and meme stocks.” Remember that every market rises and falls over the years and decades. Keep a 10- to 20-year horizon, not a one-week or one-year horizon, says Chris Kampitsis from The SKG Team at Barnum Financial Group.


Related: Investments Better Than Bitcoin

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Buy a House, and Other Real Estate

Real estate is one of the best ways to build wealth. “Become a homeowner and start building a real estate portfolio. Real estate is a phenomenal hedge against inflation, and properties tend to appreciate in the long run,” says Marina Vaamonde, owner and founder of HouseCashin. "Everyone needs a roof over their heads, so there'll always be a demand for housing."


Related: Buying a Home? Take Note of These Outdated Bits of Advice to Ignore

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Accrue Rental Property

Buying real estate to rent out means essentially that other people are paying off your mortgage in addition to providing an income stream. “As your equity grows, this gives you the ability to purchase additional properties and create a compounding effect,” Kampitsis says. Of course, there are drawbacks — maintenance, bad tenants, and natural disasters among them. “Still, it is not coincidental that many of the country's wealthiest families have intergenerational real estate holdings," Kampitsis says.


Related: Tips for Turning Your House Into a Rental Property

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Take Care of Yourself

The best gift you can give children is your own financial security. Make sure that you are financially secure and communicate that to your children. “I don't know how many conversations I have with younger individuals who have no idea if they will need to help support their parents or not. Typically, this is because there isn't any discussion around money. Help give your children peace of mind knowing that you will be okay," says Danielle Harrison, financial planner and founder of Harrison Financial Planning


Related: How to Protect Yourself from Financial Ruin in Retirement

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Get Life Insurance

Buying a life insurance policy lets you pass on assets to children or grandchildren in the event of your death — a lump sum payment they can use to pay off debts, invest, or pursue other goals, says Krishna Rungta, founder of Guru99. But do it sooner rather than later to lock in low rates, and pay every bill from your insurer without fail to guarantee that the money will be there when it’s needed.


Related: Ways to Save on Life Insurance


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Don’t Let Cash Be Idle

It’s a mistake to keep savings sitting in an account somewhere for your children to inherit when you die, so don’t get scared off by the risks and potential for loss in taking some out of that account to invest. "One of the most important parts of building generational wealth is being proactive,” says Yoel Gabay, CEO, and founder of FreedomCareNY. “The value of money keeps changing, and the best way to ensure that your wealth lasts or grows is to invest.”


Related: 50 Best Money-Saving Tips

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Start a Business

Build a business that can be passed on from generation to generation, not forgetting the tax advantages that come when it is passed on: “You can also transfer the money you receive after you have retired and sold the company to the next generation," says Tim Connon, founder of Paramount Quote Insurance Advisors.


Related: Places Where the Rich Hide Money From the IRS

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Raise Great Kids

To hand off wealth, you need a family that’s on the same page. "There is no intergenerational wealth without other generations. Raising good children, spending time with them, teaching them the value of hard work and the power of money — what is the point [of work] if you don't have a family to share the wealth? What is the point if you aren't proud of the people your children are growing up to become? You have to give your family the most valuable of all assets: your time and your attention. Be present. Leave the work at work," Kampitsis says.

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Give Kids a Taste of the Family Business

A lot of generational wealth comes from a family business. Get kids working on the business at an early age, “as this can give them a better understanding of how to optimize and make the most out of this business,” says Christopher Sioco, COO of Parachor Consulting. If your children aren’t interested in the business, you can always sell it outside the family, which will also “gain a massive chunk of funds which can pass down to your next generation."


Related: Giant Companies You Didn't Know Are Family-Owned

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Foster Independence

Family members shouldn’t rely on another family member like they’re a bank. “This dependence can stunt the efforts of younger generations if they know that someone will be there to help out at every step. They must understand the expectation is to create their own path,” Harrison says. "Start early educating your children and grandchildren about smart financial moves. Inform them about your values and help them to understand how they made their wealth. Many individuals started with nothing and were able to amass a hefty nest egg through their hard work. It is valuable for your family to understand this."


Related: How to Teach Your Children Financial Responsibility


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Work for the Right Company

If you go the corporate route instead of running a family business, at least find the right company: Will it help you get your MBA? Does it offer and give stock options or restricted stock units? Does the stock tend to appreciate, which is important to growing wealth? Does it have a great 401(k) match or pension? “All of my clients who achieved great wealth through corporate America did not do it because of their salary, but because of their incentive compensation through some stock plan,” Kampitsis says. Don't underestimate the emphasis of a good employer match on those funds. People who stay their entire careers at a company that offers zero matches or a 1% match are at a severe disadvantage from those who saved the same amount but got a much bigger match.


Related: Workplaces Accused of Having a Toxic Culture

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Climb the Ladder

Work hard to get promoted at a corporate job, including putting in the hours and getting an additional degree such as an MBA. “It would be best if you climbed that corporate ladder,” Kampitsis says. “The real rewards in corporate America come to those who can break through the difficult rung of the middle manager. When you do, the game changes considerably."


Related: Secret Tips to Get Your Dream Job

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Double Down on the Roth

See if your employer offers a Roth IRA, Roth 401(k), and the backdoor Roth conversion and mega Roth conversion, techniques some people are eligible for. "Go big on Roth. Through retirement plans, take the tax hit today and focus on Roth contributions to build big wealth for tomorrow,” Kampitsis says. “The more you can add to accounts that have tax-free withdrawals later in life or at death, the bigger the wealth transfer opportunity."


Related: Types of Retirement Accounts to Help Build Your Nest Egg

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Get Grandkids Off the Student Loan Hook

Ideally, grandparents should help with educational costs. There are several ways it can be advantageous for them, including by funding a 529 college savings plan. Payments made directly to the child's school are exempt from the federal gift tax. “Walking away with little to no student loans can make a vast difference and set [kids] up for success. It can be incredibly empowering starting a career knowing you aren't saddled with debt," Harrison says. A 529 plan is good for retirees who have benefited from appreciating retirement accounts, because they can use their tax-free required minimum distributions, says Gary Grewal, CPA, business owner, and author of “Financial Fives.”


Related: What to Give Your Grandchildren to Make Them Rich

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Explain the Plan

It’s important to communicate your long-range wealth goals with other generations — maybe at family meetings where the basic goals and plans are presented with the help of a financial adviser. “Having the advisor present not only can help answer questions but lends an air of professionalism to any meeting," says Robert Wermuth, CFP at Legacy Planning.


Related: Family Money Issues You Don't Want to Talk About But Really Should

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Have a Will …

Since the goal is to leave a legacy, not a mess, have wills in place in case of death: Meet with a lawyer and prepare estate plans with wills, health care directives, and financial powers of attorney. Talk with executors, prepare them for the job, and let the family know where important documents are kept. Sixty percent of Americans haven’t taken these steps. “The biggest dangers and problems that cause stress in the family are when you haven't taken the time to prepare for the unexpected and there is no will,” says David Edey, a certified executor adviser and author of “Executor Help: How to Settle an Estate, Pick an Executor and Avoid Family Fights.” As he says, "You don't want to leave the family traumatized, in chaos, and disorganized.”


Related: Reasons You Should Have a Will Sooner Than You Think

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… and Have a Trust

On top of having a will, do an estate plan that dictates the how, when, and why the income or principal gets distributed. That can mean in safe amounts, or at ages that the recipients are mature enough to use it wisely. "You can build all the wealth in the world, but if your children blow it on luxury toys and partying, what was the point?” Kampitsis says. “As people's wealth complexity increases, they need more than a will.”


Related: Celebrity Parents Who Don't Spoil Their Kids

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Build a Financial Team

You can spend your time doing the things that make the most money if you delegate the rest. “Enlist an excellent CPA and a skilled and trusted attorney,” Kampitsis says, but look also for a mentor who’s been where you are, and to whom you can turn for advice.


Related: Financial Advice for Households Making Under $75,000

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Use Custodial Accounts

Look beyond the most basic ways to pass wealth onward, including using Uniform Transfers to Minors Act and Universal Gifts to Minors Act accounts that let you shift financial assets to a minor at a certain age without establishing a trust. "One of the most impactful things Americans can do is to open a custodial account, such as a UTMA or UGMA, which enables appreciating assets to grow, such as stocks, index funds, and cash from birthdays to be deposited for the benefit of the child," Grewal says. “Most average families can gift assets as they see fit without going over the estate tax exclusion.”


Related: Warren Buffett Is Worth $100 Billion and Still Pays Less in Taxes Than You

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Do Some Philanthropy

Surveys of the wealthiest show they would rather pass on their values than their money, says Mitchell S. Kraus, founder and wealth manager of Capital Intelligence Associates. “A common tool the wealthy use to discuss values is having the family give money out as a unit. They discuss who to give, how much to give and why those causes are important,” Kraus says. “The wealthiest families will use private foundations, but most smaller donors can use a donor-advised fund and get the same outcomes. The families can discuss investments, risk, return, and preferred withdrawal rates in a setting that is usually not confrontational."


Related: Companies That Are Doing Good Deeds With Your Dollars