How To Build Generational Wealth (Complete Guide & FAQs)

how to build generational wealth

How To Build Generational Wealth (Complete Guide & FAQs)

How To Build Generational Wealth: Being born with a silver spoon in your mouth is usually used as an insult aimed at members of high society families.

People born into wealth seemed to have everything given to them since birth, but what many people quickly forget is the sacrifice and hard work that the family’s founder went through, to create that lifestyle and privileges.

These founders toiled and sacrificed to create something that they can pass onto future generations by creating generational wealth. A common theme amongst every parent is that they all dream of creating a life for their children where they would be happy, healthy and never lack anything.

A life where all their needs would be met and fulfilled. This is also what wealthy family founders intended for their family and generations to come. To allow their families to have an easier time and to have a better life than the previous generation.

What is Generational Wealth? How is it different from personal wealth?

Generational wealth is a concept where a family passes on a significant amount of assets onto future generations. The family’s generational wealth or more commonly known as the family fortune is built up through years of work and sacrifice.

In contrast, there are many millionaires and billionaires around the world that are self-made. This means that they relied upon their hard work to grow their fortunes.

When it comes to this group of people, the vast majority of them gained their fortunes through the same hard work and sacrifice that the founders of a family fortune went through.

Then there are the lucky few that stumble into their wealth, such as the winners of a national lottery; though history has proven that many of these lottery winners won’t keep their fortunes for long.

Like the lottery winners, some millionaires and billionaires will eventually lose all their wealth, some due to illegal business activities and others to bad investments.

One of the primary constants of personal wealth and fortune is that many people don’t plan for the long term, while those who envision that future generations use their wealth do think beyond their life.

Who has Generational Wealth?

The names of the families that have generational wealth read like a list of who’s who of the rich and powerful. One of the most notable families that have generational wealth is the Rothschild family. The family rose to prominence in the 1760s when Mayer Amschel Rothschild established his banking business.

Rothschild family then had the next generation expand their business to five different European courts. As time went on, the family’s wealth began to grow, becoming one of the largest familial fortunes in the modern world.

There are also examples of individuals that created generational wealth so that future generations, no matter who they were, could use it if they match a set of criteria.

Benjamin Franklin, one of the American founding fathers, left the city of Philadelphia and Boston $2,000 to split. Though that amount of money was considered significant even back then, Franklins demanded that the cities would not get the money for 200 years. When the cities received the capital in 1990, the trust had grown to $6.5 million.

A more controversial example would be the Rhodes Scholarship that began sending postgraduates to Oxford college back in 1902. The scholarship was founded after the death of Cecil John Rhodes, who created the Rhodes Trust with his 1899 will.

The scholarship was established to strengthen the internal unity of the then British Empire and foster diplomatic ties between Great Britain and America.

How Can You Make Generational Wealth?

how to build generational wealth

The most important thing to remember about generational wealth is that it can not be built in a single generation, (outside of a select few rare occurrences). You may not have much money, but it’s possible to create generational wealth, as it is merely that act of passing on some of your generation’s windfall to the next.

While most people try to do this in their wills, giving money to their inheritors, this money tends to end within a single generation. Real generational wealth will go from the first generation of inheritors to the second, then the third, and so on.

The only way to ensure a long line of inheritors, generational wealth has to be a “gown” and not only be distributed. The key to growing generational wealth lies in long-term investing. Generational wealth is built upon the idea of slow and steady winning the race.

Once a family has a significant amount of assets built up, if they want to ensure that the assets be preserved for future generations, they will focus on lower risk investments for most of their assets. These investments are usually split between long term financial investments and physical assets.

Unlike financial assets like stocks, bonds, and loans, physical assets tend to be very stable in the long term. These tangible assets can range in value from a couple of bucks to millions of dollars.

How Long Does Generational Wealth Take?

The purchase of land, commercial real estate, or mineral rites can be significant long-term investments for a family to grow their wealth. Though the acquisition of those assets will cost a family a substantial amount of capital, other forms of physical assets cost less.

A family can purchase gold bullion or other precious metals. A family may invest in less tangible physical assets such as collectables, for example, fine art. Or a collection of rare books. These are assets that may appreciate in value in the long run, but they will not diminish in value.

One of the tools used not only by families that want to create generational wealth but also by individuals, is the trust fund. A trust fund’s most basic operation relies upon the concept of compound interest and wise long-term investment.

Compound interest is a more advanced version of basic interest. Basic interest earns a set amount of money, based upon the principal investments, over a period that the investment remains in place. Compound interest grows the amount of money earned during that same period based upon the principal investment as well as the previous interest payments.

This means that compound interest has the potential to grow nearly exponentially. Another tool that trust funds use is the acquisition of bonds as they will pay out interest payments in the years before they become mature. As bonds tend to be both long term and the low risk they are popular with trust funds that want to invest conservatively.

Outside of a direct trust fund, generational wealth can be built upon a family-owned company or family-owned property. In these cases, as new members of the family are born, they are given shares in the family-owned business.

Unlike other types of stocks, these shares would come with strict conditions that once the shareholder dies, the shares would then revert to the family. This cycle can continue until the family loses the business.

What are some of the benefits of having generational wealth? Why is generational wealth worth the hard work and sacrifice?

1. A Better Starting Position

One of the benefits of a family having generational wealth is that it allows for the family members to have a better starting position than the previous generation.

While they say that wealth cannot buy happiness, it can allow for a more excellent opportunity. To some, it seems like this is not fair, but this view ignores the sacrifice of the previous generations that made this generational wealth possible.

Many families that have generational wealth will set up individual trust funds for the members of the family. This will take the burden off the younger generation that will allow them to follow their dreams instead of having to work a 9-5 grind. This has allowed for several “Trust fund babies” to set up charities and general philanthropies that they usually would not be able to set up.

2. Disbursement of Scholarships

As stated, before one of the most used benefits of generational wealth is the disbursement of scholarships. This form of generational wealth is one that many college students not only used but rely upon to have their college dreams become a reality.

Many state-sponsored scholarships started just like the Rhodes Scholarship, as a private endowment meant to allow a more significant number of potential college students to have the necessary funds to enroll.

As time went on and college became more and more standard, many states began to supplement the initial endowment with funds that were generated through a state lottery.

3. Grants

Like the scholarship, there is also a grant. A grant is a form of generational wealth that was endowed to solve a problem. There are as many grants out there as there are problems.

Grants allow for researchers to have access to funds to resolve or make headway into that problem. There is even a grant called the McArthur Grant that rewards people of a certain intelligence level for doing whatever they want.

What are some of the potential dangers to your newly built generational wealth?

1. Greed

Greed is the number one potential danger to any family’s generational wealth. Keeping money and saving it requires all members of a family to sacrifice a little so future generations can have some wealth as well.

One of the biggest threats to any family’s fortune is the greed of an individual or a cabal of family members. For most people being able to live a good life with minimum work is excellent, but there are some that once they have a taste of something, they want more and more.

It is these people that can destroy wealth that was meant for entire families. This happens in several ways. The simplest is that they steal the money. They want to hoard all of the fortunes for themselves by any means necessary.

Though this sounds cliché, there have been cases where members of affluent families have killed to secure a more significant portion of the family fortune

2. Bad Decisions & Investments

Another threat to a family’s generational wealth comes in the form of stupid decisions and bad investments. A country won by a warrior father, can be lost by an egoistic son. This is probably the best analogy concerning generational wealth.

Unless a family has a continuous series of a competent wealth manager, there is a possibility that the family can lose all their wealth. There is a troupe – cliché about the spoiled brats that were born with a silver spoon in their mouth that eventually ruin the family when they take charge.

While some philanthropists come from wealthy families and do a lot of good, there exist their opposites. The people that incorrectly believe just because they come from an affluent family, they are better than everyone else.

The same way that they look down on others, they think that they are smarter and better than everyone else. It is this arrogance that will lead them to squander the family fortune.

As they will not listen to the advice of professionals that they believe are under them. When people think about Ponzi schemes and their victims, they tend to think about the millionaires and billionaires that got greedy.

The groups that they forget about are the many trust funds that are tricked out of vast amounts of money. Trust fund managers act a lot like pension managers meaning that they have a fiduciary responsibility for their investors.

This means that in some cases, even against the manager’s better judgment, they must invest a little into a Ponzi scheme because the investment is made known to them. If they do not, then they can be liable under “Faithless servant” statues.

3. Family Growth

The exponential growth of the family can lead to decreased inheritances as the family fortune shrinks. Remember the Rothschild family from earlier, well even though the exact size of the modern fortune is unknown.

The growth of the family over the years has produced a significant number of inheritors that most likely put a strain on the family fortune. No matter how big an estate is, there is only a set amount of money and assets that can be divided up and passed around before there is nothing left.

The critical thing about generational wealth is that it is there not for the present generation but the future generation. This means that no matter how many family members there are, some money has to be invested in the next generation. If you want future generations of your family to have a better life, then hard work and sacrifice with a lot of long-term planning is required.

Final Thought

By investing your fortune into low-risk long term investments, you can be able to make generational wealth for your family. With this family fortune, they will be able to do the things that they want at an earlier age.

Though there are potential pitfalls, with careful planning, a family fortune can last for generations to come. Well, that’s it for this article, I hope you enjoyed it and gained some value.

If you liked it, kindly subscribe to Waptutors Academy below if you haven’t. With that said, have a great day! and I’ll see you guys in the next one.

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