All of us want to give our children the best, and often that includes financial security after we’re gone. In a nation where even people making six figures may be living paycheck to paycheck, creating not just a nest egg for your kids but a sustainable inheritance can prove intimidating. But fortunately, building wealth that can live on and grow for generations to come isn’t as difficult as one may imagine.
GOBankingRates consulted some financial experts to get their insights on the best ways to treat your money for it to keep on giving for many years to come.
Adopt a Big-Growth Mindset
“Building generational wealth starts with a big-growth mindset,” said Shawn Laib, an investment expert with The Truth About Insurance. “This means that you have to pursue a field that has the potential for huge gains over a long period. Entrepreneurial ventures are the only way to give yourself a chance to reach this milestone. Think about what interests you that could be built into something bigger over a long period.”
If this sounds a bit too vague to you, look to examples of famed legacy families who only become more massive in value as time goes on.
“A great example is the Walton family, who started Walmart,” Laib said. “Try to think of a sales concept like they did that will outlast whatever generation we are currently living in.”
Have a Clear Plan for Your Money
“Throughout your career, whether you earn fluctuating income, or a steady paycheck from a large employer, it is important to build a plan for how you will save, spend and give your money each year,” said Julian Schubach, VP, wealth management at ODI Financial. “With a sound plan in place each year, you can focus on automating your contributions to different goals. As we say to clients, it’s best to be prepared ahead of time as opposed to trying to figure out what to do with the money once it has already accumulated without a clear plan.”
Invest, Invest, Invest — ASAP
“The most important step a person can take to build generational wealth is to invest, invest, and invest– as early and as much as possible,” said Leah Bourne, managing editor at The Money Manual. “Creating a diversified portfolio in the stock market, and leaving the money there to grow over time is the average person’s best shot at generating enough wealth that they’ll be able to leave money to family members.”
Remember that an early start is key because money compounds over time.
“Most Americans are not saving and investing enough money to cover their needs in retirement,” Bourne said. “To create generational wealth you need to go above and beyond. But if you start early you are going to give yourself a major leg up.”
Buy Real Estate as Investments
“Real Estate continues to be a great vehicle for building generational wealth, in large part due to the power of 1031 exchanges,” said Matthew Vitlin, MBA, a financial advisor. “It is a nuanced topic, but in short 1031 exchanges allow for a smaller initial investment in an investment property to be rolled into a larger investment property without having to pay income taxes at that time.”
Violin further broke down the concept, saying, “You buy a building for $250k and sell it for $500k, and you don’t have to pay taxes on the $250k in profit so long as you invest that money in another building soon after. This means that you can continually punt the tax bill down the road as long as you are alive. If done correctly and for long enough, you can start with a 4-6 figure investment that has turned into a 7-8 figure investment decades down the line.
“And once you pass, the value of the property is brought up to the value as of the day you died, potentially wiping out millions of income tax liability — through estate taxes may still apply,” Violin said.
Be Tax Aware When Putting a Savings Plan in Place
“The biggest expense most people will pay in their lives is their tax bill [so] implementing strategies to mitigate your current and long term tax bill will greatly help with wealth accumulation,” said Lauren M. King, MBA, CFP, managing partner at Compass Advisors. “In current years, taking advantage of qualified retirement plans through your employer, for example, a 401(k), plan will reduce your current year taxes. If you are self-employed there are many opportunities to greatly save on current year taxes through putting a retirement plan in place.”
King added that thinking about your future tax bill will greatly impact your ability to leave a legacy for future generations.
Have a Solid Estate Plan (Including a Will and a Trust)
“There is no substitute to having legal documents that spell out the who, what, where, when and how’s of your wishes for your heirs,” said V. Henry Astarjian, managing director at Waterstone Advisors, LLC. “You cannot pass on generational wealth if no one knows how you want your estate handled when you are no longer here. Good trusts and estates attorney can be invaluable for this.”
Get Life Insurance
“Many enlightened families have discovered the benefits of using life insurance as a foundation to provide protection and to build wealth within their families,” said Paul LaPiana, CFP, head of product with MassMutual. “Life insurance provides unique benefits to both the insured and the insured’s family or descendants. Policies can provide cash values to cover emergencies or to help supplement retirement income [and] can be designed to provide future long-term care benefits or provide a resource to pay for chronic care needs. An irrevocable trust can also protect these gifts from future potential creditors, predators or financial mismanagement through controls to protect the wealth for the current generation as well as future generations.”