24 Jun Building Generational Wealth: 5 Secrets of Wealthy Families

Building generational wealth starts with you. Making smart financial decisions and setting up a sound estate plan will help you set future generations up for success. But you also need to instill strong financial and family values if you want your legacy to continue to grow. These five long-term wealth strategies will help you build a sound foundation for your family’s financial future.

Five Long-Term Strategies for Building Generational Wealth

1: Manage Debts Wisely 

Going into debt can be a good thing, as long as you are making wise investments. For example, investing in higher education or your first home will set you up for success in the future. Plus, making regular payments on your student loans or mortgage will actually improve your credit score.

Just don’t take on more debt than you can handle. In order to be eligible for most loans or mortgages, you need to maintain a debt-to-income ratio of 35% or less. This means that no more than 35% of your gross income (before taxes) should be allocated toward your minimum payments.

2: Own Your House

Buying a home is one of the best ways to build generational wealth. Your home is a valuable asset that you can leave to your children or grandchildren. They will be able to live in your house rent-free, or they can rent it out to another family and enjoy the passive income.

Because real estate almost always appreciates in value, you might even consider buying a second family home, a vacation home, or rental properties. But if you decide to become a landlord, be sure to set up an LLC to keep your rental properties separate from your personal assets. This will reduce your taxes and keep your other assets safe from lawsuits.

3: Make Long-Term Investments 

It may be tempting to invest in stocks or shares with potentially high payouts, but when it comes to building generational wealth, long-term investments are best. By investing in certificates of deposit (CDs), high-yield savings accounts, or mutual funds, you can take advantage of compound interest and watch your savings grow.

There is far less risk involved with long-term investments. Plus, the capital gains tax on long-term investments is usually much lower. But no matter where you choose to invest, plan to allocate about 10% to 15% of your income to investments if you want to accumulate wealth for future generations.

4: Set Up a Trust 

Careful estate planning will help you protect your assets and minimize taxes, so you can pass as much wealth as possible on to the next generation. One of the biggest ways that estate planning can help you build generational wealth is through establishing a trust. In fact, setting up a trust for your child is a move every parent should make.

A trust will help you avoid unnecessary expenses like probate fees and inheritance taxes that drain your family’s wealth. Trusts can also help protect your children’s inheritance against financial troubles like bankruptcies, lawsuits, and divorce. You can even place your family home in a trust, or use a trust to ensure the seamless transfer of your family business. 

5: Teach Financial Values

One of the most important steps in building generational wealth is teaching your children or grandchildren how to handle money. Most kids never learn how to manage their finances and make smart investments, which is why so many young people end up severely in debt. Teaching good financial habits is one of the best ways to make sure that the wealth you pass down will continue for generations.

But if your children are still very young, or if you’re not entirely confident in your grown-up children’s ability to handle wealth, put their inheritance in a trust. This way you can specify exactly when and how they receive their inheritance. You can also appoint an independent third party as trustee, and they will manage and distribute the assets according to your instructions. 

Estate Planning Services for Your Family in the Phoenix Valley

As a multi-generational family business, we understand the importance of preserving your wealth for the future. At Phelps LaClair, we’re dedicated to helping Arizona families create and manage sound estate plans. We can help you leave a lasting legacy for future generations—give us a call to schedule a free consultation today.

Photo by Ty Downs on Unsplash used with permission under the Creative Commons license for commercial use 6/21/2024.