Generational wealth is basically wealth that is passed down from one generation to the next. 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.
If you are starting from scratch with your finances or starting out with a large debt burden, then you are in the best position to know the importance of generational wealth because you more acutely feel the pinch of not having it and the advantage that it would have given you if you did.
What if your parents taught you about personal finance? What if you had the ability to fund your college education? What if you learned about investment earlier? What if you were already exposed to your parents’ networks? Instead of playing catch-up with life, you could be having a well constructed wealth portfolio, having your first home, your future retirement plans well underway and probably a much better life overall.
The more you think about your own financial life, the more you realise how important generational wealth can be. If you have children or plan to have them, then you may start to think about how their financial futures will play out.
The idea of building generational wealth is simple to conceptualise. 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 younger generations when you pass away. Simple! But is it really this simple?
This sounds easy 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!
The truth is, building generational wealth is not an easy task and it is very intimidating not just because of what we think it is but also because of the weight of that duty. However, let’s not skip steps. Before we even start anything, there is a mindset shift that has to happen before even taking any action towards building generational wealth.
There are 3 things you need to think about, and I would like you to spend some time with them. They might help you manage your expectations of what it means to build generational wealth.
1. Duty
For you to build generational wealth, especially if you are the first one to undertake this task in your family, what you have done is chosen to carry a heavy duty on your shoulders. Understand and applaud yourself for this but know that duties with such huge rewards come with sacrifices and obligations that are usually thankless. The fruits of your efforts will be realised much later (maybe even after you’re dead) and people might not understand what it took and fail to appreciate it and you have to be okay with that.
2. Time
Building generational wealth takes time. For some, it might take their whole life. Be patient. A tree will grow at its own pace. It won’t grow twice as fast if you add twice as much water. It will take the time it will take.
3. You might not benefit
This brings me to my next point. It is possible you might not benefit from this process except with the satisfaction that you contributed. The point is to create wealth for those that come after and you should accommodate the possibility that you might not see prosperity that you imagine. You might not be the one who dances on a yacht in Dubai. Keep your eye on the prize.
“Blessed is he who plants trees under whose shade he will never sit. Let the old men plant trees, though they may never expect to eat the fruit of them. Ambition impels men to do that which will not benefit them, except in their own consciousness.”
- Indian Proverb
4. Start where you are
Many people think that for it to count as generational wealth, it has to be billions of dollars. It doesn't! If you leave KES 500,000, it counts. Be brave and diligent enough to do what needs to be done and trust that what you have done will be added upon by those in whom you have bestowed your trust. Each subsequent generation will add more. You can think big and start small.
5. It’s not about anyone else
It's not about building wealth to show off, instead, it's about building wealth to secure a legacy. Many who have done this, have gone about it quietly (stealth wealth). Block out the noise and go about your business.
1. Financial planning and budgeting
Building generational wealth starts with you. It is critically important to nail down your own financial planning before catering to the next generation. Once you have a handle on your current finances and your needs for your golden years, then it is time to start saving beyond that. Taking care of your finances IS part of building generational wealth. This means, having financial goals, a budget and savings plan for emergencies.
2. Investments
Learn that saving money is not for saving’s sake. After you have accumulated the amount of money you need for your 6-12 month emergency fund, continuing to save is counterproductive as your savings will be eroded by inflation. From there, your savings should go towards investments.
Construct your investment portfolio keeping these in mind:
a. Liquidity
b. Risk profile for the investment
c. Your risk appetite
d. Tax implications
e. Return
f. Time horizon
g. Initial investment
3. 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 a life insurance policy now, then it could prevent financial tragedy for those you leave behind. Your death won't be less painful but it will help ease the worry.
4. Estate planning
An estate plan is absolutely essential to securing an easy transition of your assets. It is basically a plan of what will be done with the entirety of your estate and states who is in charge of ensuring the plan is effected. The larger your estate, the more complicated this plan will become. We would recommend consulting a lawyer about how to create your estate plan.
Include a will in your estate plan, but it is important to create one even if you don’t have an estate plan yet. 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.
5. 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.
6. Educate your children
There are 2 aspects to this. The first one is on formal education. Plan adequately for your child’s education. Even though things are rapidly changing, the importance of formal education cannot be downplayed. People that are educated have better prospects in terms of their search for gainful employment that is highly rewarding.
The other aspect is more about informal education, which I think is most important. Children have the advantage of time but you have the advantage of experience. You have seen more, you have made more mistakes, you have triumphs and failures and a tonne of lessons to take from them. Take time to teach these lessons to your children so that they don’t make the same mistakes.
More importantly, teach them how to think and where to search for the answers you don’t have. This way you leave your child more equipped and capable of dealing with success and failure in life. Importantly, you will be confident in leaving your wealth to people with steady hands, capable of steering their lot towards prosperity.
Even as they are young, make it a habit of talking about some of these things with your children. They are learning more than you know.
Creating generational wealth is not easy but it isn’t as difficult as many people believe. It starts with living below your means so you can save and invest more money. The strategies above are available to everyone as it requires you to act from where you stand. By implementing one or more of these strategies at a time, you can build generational wealth and financial success for your family.
Remember that you don’t have to do it alone. Involve your spouse(s), children and trusted friends and advisors. Engage the process and you will meet the people you need along the way.
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