Building wealth is challenging. Building generational wealth? Even harder.
Generational wealth means passing down assets like cash, property, businesses, and other valuables to the next generation. Done right, it ensures financial security and opens doors for your heirs. But it’s not without its pitfalls. Generational wealth can perpetuate inequalities, sap motivation, and spark family conflicts.
Strategies for building generational wealth
Your strategy depends on how much wealth you want to pass on. Many who have built significant, lasting fortunes started successful businesses. While there are exceptions, this is the norm among the wealthiest families.
Take the Walton family, for example. They founded Walmart and amassed a fortune exceeding $200 billion. Many billionaires on Forbes’ 400 list also built their wealth through businesses. Even those who inherited wealth often did so from a successful business.
Creating a successful business is tough and time-consuming. But if vast wealth is your goal, this is often the way.
For non-business owners
We help many families grow and preserve their wealth, often with a family steward at the helm. Here are some simple steps to build generational wealth:
- Start early: Encourage your children or grandchildren to start investing young. The earlier they start, the more time their money has to grow.
- Save and invest wisely: Invest in a diversified, low-cost portfolio of global companies. This method, backed by over a century of data, is a reliable way to build wealth.
- Consider tax implications: Understand the tax implications when passing down wealth. Estate or inheritance taxes can take a big chunk out of what you leave behind. Consult legal and financial professionals to minimise these taxes.
These steps can make life easier for your future heirs.
Common pitfalls
Charlie Munger said it best: “The first rule of compounding is to never interrupt it unnecessarily.” Here are some common pitfalls that can erode generational wealth and how to avoid them:
- Family disputes: Conflicts over wealth can lead to costly legal battles and strained relationships. Foster open communication and work towards preserving the family’s wealth and legacy.
- Poor financial management: Without proper financial education and planning, wealth can quickly dwindle. Teach your family sound financial habits and ensure they understand the dangers of overspending.
- Inadequate estate planning: Create a comprehensive estate plan with wills and trusts to avoid unintended consequences. This helps minimise estate taxes, probate fees, and other expenses.
- Marital issues and divorce: Divorce can significantly impact your family’s finances. Protect your family’s wealth from such life changes.
- Growing family: As your family grows, maintaining generational wealth becomes more challenging as it gets divided among more members.
- Lack of diversification: Don’t put all your eggs in one basket. Diversify your investments to mitigate risks from economic downturns or industry disruptions.
Generational wealth can also be impacted by market volatility. The Vanderbilt family learned this the hard way during the Great Depression. Despite their vast assets, excessive spending led to significant losses.
Preparing heirs for wealth
Generational wealth can provide stability and opportunities but also pose challenges like loss of work ethic, relationship difficulties, and pressure to maintain wealth.
As a family steward, guide your heirs towards strong values, a solid work ethic, and an understanding of money’s role in society. Educate them on these topics to prepare them for their inheritance.
Instil values of financial education, philanthropy, and a sense of purpose beyond wealth. This not only benefits your heirs but also contributes positively to society.
Generational wealth is a double-edged sword. The challenge lies in creating and preserving it. The key is balancing financial support with guiding your heirs to lead fulfilling lives.
