Updated: 2 days ago
You may have heard the term ‘generational wealth’ and thought, ‘Wow, that sounds important'. But at the same time, you might have pushed it to the back of your mind because you have more pressing issues.
For instance, you might be focused on getting out of debt, saving money, or pursuing other financial goals. It may be that creating generational wealth is not on your immediate priority list while you tackle your current finances. But with that being said, you can still build it into your long-term financial goals.
Not quite sure what transitioning generational wealth means exactly? Don’t worry! I'll be sharing exactly what it is and how to build it for your family.
So, what is generational wealth?
It is basically wealth that is passed down from one generation to the next. You may also hear this called family wealth or legacy wealth.
If you are able to leave something behind for your children or grandchildren, then you are contributing to the growth of generational wealth in your family.
Of course, you may leave many things such as good memories and healthy genetics behind for your family. However, I'm specifically referring to the financial resources that you are able to leave behind.
This wealth can come in many forms such as real estate assets, stock market investments, or a financial education to carry forward into the future.
Why is generational wealth important?
If you are starting from scratch with your finances or starting out with a large debt burden, then you should realize the importance of generational wealth.
What if your parents had the ability to fund your college education? This single action could have a tremendous effect on your financial future. Instead of playing catch up to pay down your student loan debt, you could be saving for your first home or your future retirement.
As you continue your personal finance journey, you have likely discovered that it is not always easy to recover from your financial mistakes. What if your parents had been able to offer solid financial guidance as you stumbled your way through? It could have prevented spending beyond your means or started you on a budgeting habit much sooner.
The more you think about your own financial life, the more you realize how important generational wealth can be. If you have kids or plan to have kids, then you may start to think about how their financial futures will play out. Imagine how differently things could turn out if you take the time to educate them on personal finance and set up vehicles to add security to their financial future now.
How to build generational wealth
The concept of building generational wealth is easy.
You simply have to acquire assets or save cash that you don’t intend to spend in retirement. Then you pass those assets along to your children when you pass away.
This sounds easy in concept but can be difficult to put into practice. If you are struggling to build your savings, then saving for the next generation can sound overwhelming. And that is completely understandable!
It is critically important to nail down your own retirement savings plan and other financial goals before you start to save for generational wealth. Once you have a handle on your current finances to fund your golden years, then it is time to start saving beyond that.
How should you start to save for generational wealth? Here are some of the best ways to start preparing to leave a legacy of wealth behind for your children and grandchildren.
1. Invest in the stock market
The stock market can be a great way to build wealth over the long-term. If you are aiming to build generational wealth, then it is a great option because it has the potential to continue growing for decades.
Investing in the stock market might sound scary if you’ve never tried it. However, it is an important way to build wealth in your lifetime and beyond.
As a stock market beginner, the best place to start is with low-cost index funds. These funds can offer low fees and long-term growth. If you want to learn more about stock market investing, we have a course to help you get started.
2. Invest in real estate
Real estate is another major way to build wealth for the long-term. With the potential for steady cash flows in addition to increasing values over time, real estate can be a reliable path to wealth.
The idea of building a real estate empire can be intimidating. But it doesn’t have to be! You may have already waded into the world of real estate through the purchase of your first home. If you continue to buy properties one at a time throughout your life, then you might be surprised at how quickly your real estate portfolio can grow.
Consider this as an option for building wealth for your kids.
3. Build a business to pass down
Family businesses have the potential for great success. More than 30% of family-owned businesses transition to the second generation. Imagine being able to hand over the keys of a successful business to your children.
Although not all family businesses make it to the second generation, it is possible that yours can. If your interests and abilities align with your children’s, then it is very possible they will want to take over the business you build.
For a great chance of a successful transition, you should include your child in the business from a young age. They need to know how the business operates and how to successfully continue in this business.
Don’t expect them to take over if they show no interest in the business you’ve built. If they are unable or unwilling to take over the operations, then you could consider selling the business to fund generational wealth in another form.
4. Take advantage of life insurance
Life insurance provides the opportunity to protect your family in the event of your untimely death. Without your income, your children might be forced into less than ideal financial circumstances.
If you make the effort to invest in life insurance now, then it could prevent financial tragedy for your children. Plus, they will already have enough to cope with if they lose you.
Aren’t sure what life insurance coverage should look like for your family? Take our course to find out more about life insurance and how you can use this financial tool to safeguard your family’s financial future.
5. Invest in your child’s education
In many cases, education can provide a way for your children to support themselves. With a college degree, many frequently have the opportunity to pursue high paying jobs that can help them navigate their own finances.
Anyone with an education will always have that education. Although other things in life can come and go, no one can take away your education. If you have the ability to help your children make it through college without any debt, then you are helping to set them up for a brighter financial future than many of their peers.
In 2016, the average student loan debt for college graduates was $37,172. It is possible that the number will climb even higher in the future. Imagine the amount of financial pressure you will be able to lift from your children’s shoulders with the ability to pay for their education.
6. Teach your children about personal finance
It is estimated that 70% of families lose their wealth in the second generation. And 90% lose it in the third!
With statistics like that, it can seem pointless to save for a legacy of wealth. However, in many cases, the loss of generational wealth can be prevented through financial education. After all, it is easy to lose generational wealth if your kids have no personal finance knowledge.
That would be like asking your child to maintain a classic antique car after you pass away without teaching them any mechanical skills. It is likely that the car would eventually break down.
In a similar way, if you teach your kids nothing about personal finance, then it is likely the wealth you leave for them will dwindle throughout their lifetime.
Since you are interested in passing on family wealth, then you likely have a fairly good understanding of personal finance. Make it a priority to pass this knowledge down to your kids. This knowledge will be the best way to build and protect generational wealth.
There are many ways to broach the topic of money with your kids. You can buy children’s books about money, teach them through games, or show them by allowing them to listen as you talk through financial decisions. You can even help them to set up their own bank accounts from a young age to instill the importance of saving for the future. Our course on teaching kids healthy financial habits is a great place to find resources to share money knowledge with your kids.
How to pass on generational wealth
After you build the assets, you’ll need to create a plan to pass them along to the next generation. Here’s what you will need to do to ensure a smooth ride for your assets as they transition to the next generation.
Create an estate plan
An estate plan is absolutely essential to securing an easy transition of your assets. The larger your estate, the more complicated this plan will become. At any stage, I would recommend consulting an attorney about how to create your estate plan.
The plan will vary widely based on your goals and assets. With the expertise of a legal professional, you can craft a plan that will allow for your assets to move through to your kids with minimal headaches.
To find out more about the importance of estate planning, check out our podcast episode on this topic!
Write a will
A will may be included in your estate plan but it is important to create one even if you don’t have an estate plan. The will should include your exact wishes. The more specific you can be about your plans for any assets you have accumulated, the better.
Without a will, it is not uncommon for things to get ugly between surviving family members. Emotions are high because they’ve already lost you. You can prevent a lot of ugliness and financial trauma with clear guidelines in your will.
Set up custodial accounts
Custodial accounts are important vehicles for any financial legacy that you hope to build. Custodial accounts are investment accounts that you can control for your children until they are no longer minors. In most states, they receive control of the account at age 18, but in some states, they will have to wait until they are 21.
You can fund these accounts for your children for future financial goals such as paying for college or buying their first home. However, they may have to pay taxes on this money as they withdraw it.
Another option is a 529 plan. It is a tax-advantaged savings account that is tied to paying for your child’s education costs. These plans are state-sponsored ways to efficiently save for your child’s future.
There are pros and cons to each option, but you’ll need to determine which is best for you and your family.
Name beneficiaries for your accounts
A simple way to ensure that your accounts pass easily to the next generation is to name them as beneficiaries on your accounts. In most accounts, you can name a beneficiary.
If you were to pass away, the beneficiary would receive the funds with minimal effort. It may only take a few minutes to add your intended beneficiaries to your accounts but it can save countless hours for your family later on.
The bottom line
Building wealth to last for generations is no easy feat but it is an admiral undertaking. After you have your own financial situation under control, safeguarding your family’s future is the next step.
Take the time to implement a wealth-building strategy that works for your family. Not everyone wants to invest in real estate or build a business, so find something that works for your situation.
Whatever strategy you choose, make sure to pass down your financial know-how to your children. Armed with the personal finance knowledge you can provide, your kids will already be one step ahead of the game as they make their way into the world.
Economic History of the Medici Family Immigrants from the countryside, the Medici family amassed wealth and used it to dramatically rise to power in Florence, Italy. The Medici moved to Florence in the twelfth century from the Mugello, an area in northern Tuscany. They joined the moneylending business early and were not particularly wealthy in comparison to established families of the late middle ages. But they were soon some of the richest bankers in Europe and used their money to influence the financial world, patronize flourishing Renaissance art, and transform the political landscape of Florence.
Medici Family Banking Empire
Early modern Florence was an important financial center with many firms specializing in international commerce and banking. The Medici bank became one of the most famous and successful of these institutions, although not the first Florentine bank to amass large amounts of wealth. Early modern Florentine banks were not focused on the needs of local clients, such as accepting deposits and extending loans, although they may have offered these services at their Florentine locations. Instead they chiefly focused on foreign exchange. By establishing branches in major trading centers across Europe, the Medici bank tapped into foreign trade networks and offered exchange and transfer of credit for clients.
The Medici banking success was not immediate. In the early fourteenth century, the Medici were working as local bankers, but it was not until later in the century that Vieri di Cambio opened a bank in Rome to do business for the Catholic Church. In 1397, his successor, Giovanni di Bicci, transferred the headquarters of his own bank to Florence, where it continued to prosper. During the fifteenth century, Cosimo de’Medici turned Bicci’s bank into the largest in Florence.
In 1466, the Medici bank became involved in the trade of alum, which was essential in the cloth industry of the time. Merchants imported it from the Levant before mines were discovered at Tolfa, north of Rome on the western coast of Italy. The Medici bank was given the papal monopoly over the Tolfa mines. When further sources of alum were discovered on the Italian peninsula, Lorenzo de’ Medici used devious means to suppress these sources of competition, even sending 12,000 soldiers to brutally sack Volterra, a city subject to Florence. In 1476, Sixtus VI shifted the Tolfa alum monopoly to the bank of the rival Pazzi family, but Innocent VIII later restored it to the Medici bank.
Despite its success, the Medici bank began to go downhill in the later fifteenth century due to a combination of outside factors and poor decisions by Medici leaders. There was a diminishing supply of English wool (an important commodity for trade at the time), the Medici traded heavily on equity, and it was common for banks at the time to operate with tenuous cash reserves. By the time Cosimo de’ Medici died in 1464, several branches of the bank were facing financial difficulties and the establishment overall was profiting less. Cosimo’s less-talented successors were unable to stop the nose-dive taken by the bank, possibly because as unofficial rulers of Florence they made decisions that were politically rather than financially advantageous.
In 1478, the Pazzi family attacked Lorenzo and Giuliano de’ Medici during Sunday mass, successfully killing Giuliano but not Lorenzo. The failure of the plot may have inspired the Medici’s other enemies to take further action to financially harm the bank. By 1494, the bank was virtually bankrupt and Lorenzo’s son, sometimes called “Piero the Unfortunate,” made catastrophic political decisions that led to the Medici’s expulsion from Florence and loss of all their Florentine property.
Medici Family’s Political Control of Florence
The Medici sought influential government positions from the beginning of their time in the Florentine Republic, but they gained more complete control of the city after their success in the financial industry. One of the early Medici, Ardingo de’ Medici, served on the illustrious signoria council at the end of the thirteenth century and his family quickly followed suit. Medici were part of the signoria twenty-eight times over the next fifty years. But this was just the beginning of the Medici family’s influence in politics.
Cosimo de’ Medici, who brought the Medici bank to prominence, used his financial success to gain control of the Florentine Republic. He did not officially make himself a prince because fifteenth-century Florentines were devoted to having a republic and would have revolted. Instead, he used behind-the-scenes negotiation and bribery to control political affairs and elections. The family’s influence was carried on by Cosimo’s son, Piero (r.1464-1469), and grandson, sometimes called “Lorenzo the Magnificent” (r.1469-1492).
From 1492 to 1537, the Medici relationship with Florence was turbulent, as they were banished twice but managed to regain their influence. But the turbulence was followed by the reign of Cosimo I as Grand Duke of Florence beginning in 1537, making Medici control of the city official. The Medici continued ruling as grand dukes until 1737.
Patrons of Art and Science
The Medici also used their wealth to finance the unparalleled flourishing of art and culture in Renaissance Florence. Cosimo de’ Medici was the patron of many artists and architects, including Donatello, Luca della Robbia, Filippo Brunelleschi, and Michelozzo di Bartolomeo. He supported Florentine scholars and helped purchase literary and philosophical manuscripts in Latin and Greek. Lorenzo also supported Florentine artists such as Sandro Botticelli, Leonardo da Vinci, Andrea del Verrocchio, and Michelangelo.
He gave more attention to building villas, collecting artifacts such as gems, and commissioning statues, while he continued to grow the family’s collection of books and manuscripts. The Medici rulers of the sixteenth and early seventeenth centuries carried on this elaborate patronage with vast architectural and landscaping projects, such as the Uffizi and the Boboli Gardens, and by commissioning theatrical and musical productions. Cosimo II de’ Medici supported the development of early modern science, particularly by his support of Galileo Galilei as Court Mathematician and Philosopher.
There is a basic formula for building wealth: make more money than you spend, avoid debt, and invest your savings wisely.
The first step is to earn enough money, which is easier if you're doing work you enjoy, are good at, and pays well.
The second step is to save enough money, which can require disciplined budgeting and planning.
According to this basic method of wealth-building, taking on a bit of risk and making prudent investments is the third step.
The Rise and Fall of the Medici Family